Bloomberg Wealth with David Rubenstein: Marc Andreessen

We are a hundred percent confident every time we make the investment that is going to be a big company. We are wrong. A lot of the time for most forms of investing the mistakes are the investments you make where you lose money. Right in our world is the investments you don't make. He made his first fortune by founding companies such as Netscape and Off Square but Marc Andreessen made his name by launching Andreessen Horowitz the powerhouse Silicon Valley venture capital firm. We sort of thought it was time to go back to the wealth if you will and basically build a firm that was actually built by founders who sort of understood the process. In 2009 Marc and partner Ben Horowitz started their firm with just three hundred million dollars. Fast forward to today. It's a top firm with 18 billion dollars in assets under management. Certainly the time of year founder. They claim they've built multiple hugely important companies in the past and understand not only to build it but the actual ease the plight of the entrepreneur. And that's what attracted a lot of entrepreneurs to well to ask them to invest. Pick a big tech name. And chances are Andreessen Horowitz has invested in it. Twitter Facebook Air B and B Coinbase A firm and the list goes on. There's plenty of very smart people in Silicon Valley and among the very very few but just different levels of intellectual capacity. And he is always giddily optimistic. He's one of these people that you talked to about your problems and come out thinking like wow. Actually I had it so great. Mark may be optimistic but he also knows he can't win every time. We're trying to the moon shots. Every once in a while we're going to have rockets blocking the launch pad. Let's suppose an entrepreneur says I've read about Andreessen Horowitz and I read about Marc Andreessen. I'd like them to back my company. How did they get you to back their company. They call you up they knock on the door they send you an email. What's the best way for somebody to contact you. So it's a people business right. It's a very deep personal people connection business like a venture capital investment is the closest thing to a marriage. That's not a marriage. Right. Because. Because it's a 10 or 15 or 20 year relationship. And so you're really trying hard. And I think this applies in both directions to really trying hard to figure out exactly who these people are. Are they the kind of people you know are we the kind of people that want to be in partnership with for a decade and vice versa. Typically that starts with the warm introduction. It starts with a way to kind of establish a personal connection you know kind of between people where you people vouching for each other. And then there's that then and there's a process that follows up. Suppose somebody is a terrific entrepreneur on paper. He or she looks great but they've really never done this before. They seem to have good education. They seem to have the drive. What's the likelihood that you would back somebody who has never done a deal before. So if they've never if they've never founded a company before and if they just have a plan it's very unlikely that they raise sort of Top End venture capital. However once in a while you get somebody who's not done it before but they've already built the product. Right. And so the classic example is would be Facebook. Mark Zuckerberg had already built Facebook at Harvard right. By the time he started a company. I was an example. This I had already built the Mosaic browser by the time I started Netscape. And so at first time founder who has a product the Googles and other example the Google guys have built a Google search engine at Stanford. And so if you've already built the product then you have a calling card to be able to raise money for a venture because you already have something that's real. And so the best thing to do as a first time founder is actually is actually build a product. Now there's a chicken and egg thing there which is you might need the money to build the product and that's where people get stuck. Let's suppose somebody comes to you and he or she is well dressed. They've come to you from recommendation by somebody that's good. And they've actually built the product. Right. When you look at their deal. Do you say we need to make 10 times your money 20 times their money 30 times their money to go forward. How do you assess what kind of profitability you want in order decide how much you're gonna put in and when you're gonna do it. Yeah. So we do some quantitative modelling especially later stage. But the big question is could you view a path by which this could be a big important independent franchise company for a very long time to come. Like is this kind of the kernel of something that could grow into being something very important and very large. And if you think that's the case then kind of the math falls out of that right. Almost every time that happens you end up making a lot of money. So so that's really the question. And I would really drill into this concept. We focus a lot on that kind of importance like does this matter. Like this product in the lives in the life of its users or customers. Like is it really going to be fundamental. Is it gonna matter. Is everybody in whatever market they're going to need this product. Are people going to find it inconceivable to live without this product. If we have that then it's very easy to build a spreadsheet. If we don't have that and it's just basically like oh we think Microsoft to buy this company in two years or something then we would not do that deal. So let's suppose a proposal comes in and you see the fingerprints of benchmark on it where the fingerprints of Sequoia or another firm Excel. And you say look you've been turned down by somebody else. We're not interested or they have to come to you first for you even to consider it. So I would say there's no no no no. So there's a there's a general sense of heat. Right. So that there's a general sense is the way we describe it basically as each Top End venture firm has its own bar. So it has its own set of criteria for it kind of whether she thinks that deal should be done or not. And then the top two venture firms as a group have kind of a collective bar which is kind of is a top tier venture from going to fund this company or not. And it's actually easier to answer that second question than it is. The first question I get after you've been in the business for a while you tend to have a sense of like OK this is going to get funded by a top venture capital firm or it's not if it is going to get funded by Top End venture capital firm. And if my firm doesn't think it's a. Good idea. You do wonder like who's right. Right because the other firms are quite smart. And so this is one of the regular discussions that we have which was like OK if another one of these top in is interested in it that might be a very it might be a very positive substantive signal. If the other Top End firms have looked at it and I'll pass it that might be a substantive negative signal. That said some of the best deals in history have been passed on by a very large number of people. And one of the class examples Uber was passed on by a very large number of venture capital firms. Uber was actually available to be invested in on the site called Angel List where literally anybody with a checkbook can invest. And so every once in a while you get these outliers. And it's fundamentally a game of outliers like the money is made on the aberrations. And so I'd say you want to be generally open minded and humble about your conclusions about what all these different signals mean. So it used to be the case that venture capitalists that say the Silicon Valley ones would look at something called a series. A what is a series. A investment. Yes a series a typically means first institutional money. And so it's it's sort of like the first step towards sort of being a serious business with sort of a serious lead investor with a serious board of directors with a serious amount of money. You know we're basically like there's a real commitment being made around to everybody by everybody around the table that they're going to really devote a time and a lot of time and effort to making this thing work. OK. Showing typical firm like yours does a series a round you expect to do a series B and then a series C and then typically you go public maybe after series C is that generally the way it used to work. Well so the joke is that every the goal of every Silicon Valley startup is to get all the way to Series Z and then every once in a while an accident happens and they go public. That's a joke. Our goal whenever we back these companies is we want these companies to become long lived enduring independent standalone institutions that usually results in them going public at some point. Sometimes they go public after two rounds of financing or three rounds of financing. Sometimes these days they'll actually stay private for longer and they'll raise five or six or seven rounds of private financing. One of the things that returns have gotten bigger that the winds have gotten bigger. A lot of what's happening is the markets have gotten bigger. Right. And so you have this gigantic addressable market for these companies. I've got five billion people on the planet now with smartphones. Right. That are network together. And so you get one of these companies that has mass appeal. They can get really big. It takes a long time to get that big. It takes a lot of money to get that big. But they have a lot of running. I mean we have tech companies now that are worth more than a trillion dollars which was inconceivable when I started in the industry. It was just like an impossible thing to visualize. And so some of these companies just end up raising a lot more money than the historical norms that suggest and they stay private for longer. And then you know later later on they go public. Why do some people not want to go public. So the public market is a complex and it can be a very hostile environment. Over time I think it's fair to say the public market has gotten shorter and shorter term in nature. The sort of the marginal investor in the public market is very interested in short term performance and the number of investors in the public market that really want to invest for a 10 or 20 year period is not that big. And so you can end up with basically this very tightly compressed timeframe as a public company where people are really on you about what you're doing for them kind of this quarter or this year. And so some of these more aggressive entrepreneurs that have a 10 or 20 year vision just kind of think that they basically want more flexibility in how they build their business. It's possible there's another cyclical boom and bust cycle are planned for that cycle which they basically do to just keep going. The world of venture capital has blown off in 2021. There's never been another year like it in the first six months. Startup investment was two hundred and ninety two billion dollars according to CB Insights. That's just 10 billion short of the capital deployed in all of last year. Which holds the current record. The US has accounted for almost half of that investment. And no surprise at the top of the charts Silicon Valley was still the dominant startup market. But a number of other locations in the US also set records. Los Angeles Chicago Austin Seattle Denver and Dallas. And there were some familiar names among the leading dealmakers. Tiger Global Management was by far the most active investor. He completed an average of more than one deal per business day. Tiger was followed by Andreessen Horowitz and Sequoia Capital China. All that investing has led to a whole new herd of unicorns startups valued at a minimum of a billion dollars in the first six months of the year. Two hundred and fifty companies had joined the Crunch Space Unicorn Board. That's compared to one hundred sixty one unicorns. For all of 2020. So the venture capital world has been booming. I've never seen anything like this. Is this because people who are venture capitalist are smarter than they used to be. Or because of covered. Everybody is just putting money in the venture things. Why is it so much incredible profits that are being realized by venture capitalists now. Well two possibilities. One possibility is where we've all gotten carried away again. So we've gotten ahead of ourselves again the same way we did in the late 90s. And I think things are just too hot and that's a possibility. The other possibility is where this our society is going through a real technological transformation. And it was already going through a transformation before covered. And I think there is a good argument that Colbert has accelerated that transformation. A lot of digital businesses have really accelerated through coded. And it feels like the world is going to change in some pretty fundamental ways coming out of it. And so in that case you have these new tech companies basically driving this change and realizing the benefits. You worry that because the economy might soften at some point of interest rates are raised or just because of the business cycle the wonderful world of venture capital will slow down a bit. And is that a worry for you. So it's a cyclical business for sure. It has a history of boom bust cycles you know basically just like any other sector of the economy. That said I guess I would say we we do not have a great track record in our industry at predicting these cycles. And I think most of what we think most of how we either perform or fail to perform is micro not macro which which is to say it's based on the success or failure of individual companies. And if you just look at the history of venture capital and startups many of the best companies have been formed during the hot periods but also many of the companies have been formed during the cold periods. Right. And there are pros and cons. Those periods. And so look it's possible there's another cyclical boom and bust cycle you know are planned for that cycle would basically be to just keep going keep working with our existing companies help them through it keep investing in new companies all the way through and basically bet on these sort of micro level fundamental technological and economic changes that continue to happen. It seems as if there are no losses anymore in the old days. Venture capitalists would say maybe they'd make money on 10 percent of the deals and they lose money on 90 percent or that's roughly how people might have looked at it. Now you seem to make money on everything. Is anything ever fail anymore. I can't confirm that that is not the case. We made a commitment. We made this history. We made a commitment to our investors when we first raised our fund and said look we're going to try to we're trying to get to the moon. We're trying to do the moon shots. You know not every once in a while we're going to have rockets blew up on the launch pad put a big crater on the ground. And so I am pleased to say we do both of those. The statistical kind of layout of Top End venture capital if you look at like the 50 year history of it is it's actually about a 50 50 success rate. This is for kind of top decile venture capital. So you kind of wait where you want to be. But it's basically 50 percent of the companies make money. 50 percent of companies lose money. And then of course you need the 50 percent of companies that make money to make more money than the ones who lose lose money. And that's that's the general statistical breakdown. But it used to be the case of a venture capitalist did a very successful deal. The venture capitalist might make for 10 15 times its money her money his money. Now you seem to make 500 times your money in some cases subs for example a deal that your firm did. Coinbase seems to be one of the most successful venture deals of all time. Was that obvious to you when you made the initial investment. No these are not. So we are a 100 percent confident every time we make the investment that is going to be a big company. We are wrong a lot of the time. You know it's these companies are very contingent. And we'd like to say there's lot of path dependence in the system. There's a lot of twists and turns along the way. I look at a huge part of it as the competence and capabilities of the founders and then ultimately the CEO of the company. And of course they you know they deserve 99 percent of the credit when it works out. Now historically venture capital is used to price deals. It you know hoping they get a good rate of return. But a firm like Softbank has come in with enormous amounts of money and paid higher prices than I think even you would pay or other venture capital. Has that helped the business hurt the business or is it too early to say. Yeah. So I'm I'm a market fundamentalist. I have great respect for anybody who's fielding money. You know where they are where they're taking responsibility for the results. And I you know I don't and I don't like to I don't like to prejudge. I think Softbank has made some has made some actually very good investments. I would say some. Times that amount of money is very helpful to a company which is it really helps them kind of bootstrap and get big and scale. Sometimes too much money is very damaging for a company right. And it can you can you can you can really kind of screw up a company. And I think that's also happening. So what about Silicon Valley versus other parts of United States. It seems as if all the big deals are coming out of Silicon Valley. Coinbase I mentioned Snowflake Palance here. These are very successful IPO that were based out of Silicon Valley firms or they put the initial money in. What about Boston. Boston. New York City. Are they able to catch up with you or Silicon Valley so far ahead that nobody can catch up. Yeah. So I think this is a real pre covered postcode thing that's happening right now. So it's a freak show. But Silicon Valley had a very powerful lock in particular on the talent. I think covered in the post covered world that that looks like it's changing pretty dramatically because we've all gotten just so much more used to this whole idea of remote working distributed companies. And so now you see a lot more emotion activity happening outside outside the valley. And by the way not just in other cities. Right. So it's possible that there's a new Silicon Valley in Boston Miami or whatever. It's also possible Silicon Valley likes to say just moves to the cloud. Right. It's also possible these companies kind of shift to running online and maybe they run without a central location. So our company Coinbase is an example. Just went public without a headquarters address. Right. They literally declare they took the hit they took the headquarters address out of their S-1 when they went public to make the point that it's now a virtual company not primarily to physically instantiate a company. So let's talk about the rest of the world for a moment. What about China and India. Are they great potential rivals of Silicon Valley or they're not really going to be to compete with what you do. Yeah. No I don't think they're doing very well. You know China trend has been very impressive for the last 20 years or so. They've done very well. You know like anybody they have their own challenges. Like you know they don't they don't have a perfect system either. So they have their own issues. India has a whole bunch of companies that are doing really well or scaling. I would say both of those countries have very vibrant ecosystems with a lot of very talented. You invest there. We don't invest as much there. We. This is all another pretty cold post-Soviet thing. We historically view venture capital as sort of a craft business where you're very hands on with people who you get to know very well and you partner with for a very long time. And so in the past we were very worried about trying to do that kind of remotely. But again like in this new world we have to revisit that assumption because maybe remote is the default. And I think that's one of the big open questions for how this whole industry is going to work. Now one area that your firm has specialized in though you've done many different areas but is crypto currencies. Many people think that crypto currencies are not a real thing and not a great asset category. But you are a big investor in Coinbase among other things. But I remember I coming out here a couple of years ago you told me you're going look at block chain and things related to that. You obviously have done that. What is it about crypto currencies that you think makes it an enduring investment proposition. Yes a crypto currency is one of these things. It's a little bit like the parable of the blind men and the elephant which is like people touch it from different sides and people get kind of I think distracted and carried away and get kind of energized on these different topics. We view it as a fundamental is a technological transformation. So there's a fundamental technological breakthrough that has actually happened. And it's it's an area computer science called distributed consensus. So it's the ability for a lot of basically people and software on the Internet to be able to be able to form trust relationships in an untrusted environment. Money is one application of being able to have distribute consensus but it's only one of those applications. There are many other applications many other things that people are going to be able to do with this technology. And many of the smartest people in computer science are going into this field and they're and they're pushing it forward at a really rapid rate. So to us it looks like it's just the eighth or ninth fundamental architectural change breakthrough technological transformation happening in the tech industry. I mean when we take it very seriously because of that. So your view is not whether Bitcoin is good or not or worth X or Y. It's just that the whole technology that underlying Bitcoin is going to transform the world. These are new kinds of computers. So this is the thing that gets very subtle. These are new kinds of bitcoin as an Internet computer. Bitcoin is the Internet computer that's spread out across hundreds and thousands of physical computers all over the world. It's a full it's a transaction processing system that runs without any sort of central location. It's like a giant distributed mainframe and it processes transactions. And out of that transaction processing comes the ability to exchange money. Out of that process comes this token that the Bitcoin token the coin that's a representation of value of the underlying system. But it's it's a complete transaction processing system. Like it's it's it's a new kind of financial system. When people invent something usually even if they're shy they might say well I did something nice. How come the inventor of bitcoin hasn't surfaced publicly. So this is one of the most amazing things I've ever seen in my life which is I would go to save stuff for the most people about something this profoundly breakthrough. They actually don't realize how important it is at the time that they invented and whoever this person or person thing a government agency whoever invented this thing like they knew the importance of what it was in the very beginning such that they knew it was important to basically hide their hide their identity. And it's just it's incredibly remarkable that they knew that. It's like Babe Ruth calling a homerun. It's just like amazing that they did that. And then it's doubly amazing that they've been able whoever they are they've been able to maintain the secret all this time. The way this market tends to work is there are a set of investors that the best entrepreneurs want to take money from. And then there's a lot of other investors that they don't and that that ends up being the kind of big hands of the market. If somebody wants to invest in venture capital I guess they could call you up and say I want to put money in your fund but it's not that easy to get in your funds because funds in Silicon Valley that are well known are often oversubscribed very quickly. But how does a professional investor get into one of your funds or how does the average person who's sitting watching this show saying I want to invest with Andreessen Horowitz. If I can't I'll go with some other firm but I want to be in a good venture firm. How do you know what a good venture firm is and how do you get into one of those. Yes. Generally they're the ones who can't get into the general. The general rule is it's a bad idea to do this. It is the individual capital firms that are kind of open for outside money or are generally the ones who don't invest. And so. So generally speaking it's a bad idea. There is a platform that is worth looking at for people who want to learn more on this. We are not involved in this. And this is not we're not on this. You can't invest in us through this. I'm just this is just an industry observation. There's a platform called ángeles where basically angel investors are able to basically take money from people who want to follow their deals. It's worth looking at. People should go in very cautiously. It's a very speculative area. But it is it is a thing to explore. That's a pose. I'm watching this. I say I hear what you're saying but I'm going to I'm going to try to find some venture firm. I'll go. It may not be Andreessen Horowitz or Sequoia but it'll be OK. I'll try to learn. What should somebody look for in a venture fund that they're going to invest. And what are the there's a track record quality to the people. How much money the people in the firm are putting into the deals. What is should they look for. Yes. So the big thing is the best entrepreneurs get to pick their investors right. It's the reverse of how most investment markets work. Right. So the best entrepreneurs get to select who invests which capital firm invests in. So what you want to pay a lot a lot of attention to is this sort of difference we'd describe between sort of this phenomenon of adverse selection versus positive selection. Right. So so adverse selection is the deal that I can get into is not the one I want to be. A positive selection is basically an investor whose brand is magnetic such that the best entrepreneurs will want to be associated with an investor. And the way this market tends to work is there are a set of investors that the best entrepreneurs want to take money from. And then there's a lot of other investors that they don't and that that ends up being the kind of big hinge in the market. The standard way venture firms work is you commit capital let's say over a five year investment period something like that. Is that right. More or less. Yeah exactly right. And then the fund is typically ISE maybe 10 years or so 15 these days or longer. So often 15. Often the tail extends out to 20 years. These companies take a long time to develop. And somebody that invests in a venture fund today should be trying to get rates of return of 20 percent. Would you say or more top end venture a sort of 3x x net of fees. You know you ideally you're hoping for more than that. You're hoping for 5 X or more. You know you're illiquid the entire time. Right. So you would you would hope to get paid for the liquidity. And today to you maybe to a 20 to 40 percent if things go well is sort of baseline. Let's take another subject. Such a post. Somebody says I don't want to invest in Andreessen Horowitz. I want to be Marc Andreessen. How does somebody become a venture capitalist. What are the skill sets for good. Venture capitalist. It is high degree of intelligence hard work a lot of luck. Dress the right part. Don't wear a tie. What what are the things that make one a good venture capital. So this is super highly successful. V.S. historically are very idiosyncratic people from very different backgrounds. Mike Morris is a former newspaper reporter John Dawes of former chip salesman. You've got people with very different different Pryor has more of this kind of blue chip investment background. You have people with very different backgrounds experiences. And so I think it's it's some set of skills a subset of knowledge and that there seems to be a taste component to it that's that's really hard to measure and really hard to predict. Let me ask you a few lightning round questions if I could. What's the best investment advice you've ever received. Warren Buffett probably put all your eggs in one basket and watch that basket. Really know what you're doing really deeply understand the nature of what you're investing in. I think what's the most common investment mistake that you observe. I think it's the opposite of that. I think it's people basically they read about something in the paper or see it on TV and take a flyer without deeply understanding it. If I gave you one hundred thousand dollars tomorrow what would you do with it. I'll put an S&P 500 index. Don't get fancy. And what mistake have you made. In hindsight that you wish you hadn't made in the investment world. Oh so this is a very interesting aspect of venture capital. For most for most funds investing the mistakes are the investments you make where you lose money. Right in our world is the investments you don't make. Right. Because if I make an investment in venture capital I can make an investment. I can lose that. I can lose one X. Right. If but if I don't make an investment and it goes up a thousand X then I have to read about it every day for the next 30 years and think about all the money that I didn't make that I could have made. And so all of the big mistakes in my world are mistakes of commission. They're there missed their mistakes and not make an investment. So the pleasure of being a successful venture capitalist is what you enjoy. Building a company from scratch at least helping somebody build it is at the great pleasure being a venture capitalist. Yeah you gotta be good to be a part of you could be part of the team. You know with with basically when these things work. It's amazing right. It is tremendous when these things really really change the world. You know what the other part is. You know the downside is you don't get to run the companies. Right. And you're not. You're a backseat driver right. You don't get to. You're not the person doing all the work. You get to take all the credit. The advantage is you get to see all the new things. Right. And so you do get a front row seat at this kind of amazing show of all these incredible people with all these new ideas. And that ends up being I think a pretty pretty viable part of.

Channel: David Rubenstein

Views: 99,646

Rating: 4.8871679 out of 5

Keywords: investing, bitcoin, wealth, venture capital, silicon valley, marc andreessen

Id: c3pX1R7Fwwc

Length: 24min 5sec (1445 seconds)

Published: Wed Aug 04 2021