Marc Andreessen-A Panorama of Venture Capital and Beyond (

mark Andreasen is a pioneer of a software category that is in use by more than a billion people what is that category browser how many of you started with a netscape browser learned to love it and those of you who didn't it was a beautiful beautiful thing that mark created in addition he's one of the very rare individuals who've actually created two billion dollar companies in terms of market cap now Sarah Lacy has written a book called once you're lucky twice you're good that goes into a little bit of the story of Mark and a few other people who've done this if you're curious about you can read about it there but another little known fact is that this is Mark's second visit to ETL on April 7th of 2000 Arkin Drazen was here well actually was in German and he was happy to be reminded of that you may or may not go into why that is important to him in terms of family matters at home but mark we're thrilled at your back at Stanford and let's give him a warm round of applause so I just checked online April 7 2000 I was the speaker who was closest to the exact top of the Nasdaq and so last time you had me it was perfect timing of a market top absolutely perfect I don't know what that means about what's happening right now ten years from now we'll look back and we'll say aha so anyway I just wanted to basically I don't have anything prepared so I just wanted to basically launch straight into Q&A just to sort of background for people who might not have caught up with what I'm doing my most recent thing is I started a new venture capital firm with several friends and colleagues last summer actually we have four of my friends and colleagues from the firm who are here somewhere in the crowd over there there we go there's the contingent and so later on if you want to talk to any of these folks so Ronnie runs all of our partnership and networking efforts fred is our new analyst this is week number one for Fred and then Dave and Ellen work on our recruiting we actually run an in-house essentially recruiting function for our startup companies and so they work on that and sorry oh okay great got yep and so we would be delighted and obviously yeah I'd be delighted talk to folks afterwards but we'd be delighted to talk to you so we started a venture capital firm last summer actually another story of timing we raised that venture capital fund in starting in March of last year March of 2009 which was the exact low of the economic crisis the credit crisis so there's something in what we do that we hit either the highs or lows I don't exactly know what it is but we raised the $300 fine last last summer opened up we've been in business for about nine months now we do Silicon Valley tech investing our biggest deal so far as Skype although we've backed a whole series of other interesting companies and then boards I'm on at the moment include Facebook eBay and Hewlett Packard and then I continue to be very involved in my company Ming which is a social networking company here locally and so which is sort of that as a general background let me just throw it open for questions to see what people want to talk about mark question for you on moving from being an entrepreneur to venture capital I'm gonna be doing a similar thing I'm wondering what your perspective is a working with venture capitalists who don't have any entrepreneurial background which unfortunately represents a large chunk how you deal with board conflict in advising folks in that scenario okay so the question is as an entrepreneur turned venture capitalist myself how do you work with other venture capitalists who may not have entrepreneurial experience or in some cases operating experience yeah well we like to observe that um in California you need a license to drive a car or buy a gun but not to be a venture capitalist and so it is true the issues arise and if you talk to a cross-section of entrepreneurs you'll generally you'll get you get various stories in terms of their directors who may not have a deep operational background of some of the issues that arise so let me just give a few general thoughts without naming names so first of all I would say that if you look at the folks who are the best venture capitalists over time some of them have very deep operating backgrounds and have been entrepreneurs themselves and actually some of them have not so some of the very best of venture capitalists as an example might Moritz had a background as a journalist before he became a VC John doar had a background have worked at in engineering and sales that Intel and I get it Monsanto before that actually with Monsanto had a chip business back in the early eighties and so you know he had experience in business but had not himself started a company actually interestingly Tom Perkins had the actual original one of the original cofounders of kleiner perkins but but John had not and you know and then in contrast of course Vinod Khosla had been himself a very successful entrepreneur as another example and then Don Valentine another great VC had been a very experienced operator of in the in the chip business so you get this very interesting cross-section of sort of success cases and so one of the things I tried to do is not just kind of say upfront I don't think there's necessarily a predictor that just because somebody has an operating background or has been an entrepreneur that they're gonna be a good VC or conversely that if you don't you're not gonna be a good VC that said you know part of the reason we became venture capitalists my business partner Ben Horowitz and I became venture capitalist after starting the running companies ourselves was because we think it can be quite helpful and additive to a start-up when their investors and board members have actually done it before and have actually been through the experiences and of course we go on to say that this is completely irrelevant in the case where your company just instantaneously succeeds and everything is up into the right and everything is glorious then anybody can be a good board member you know it's when the times get tough and things get difficult it helps a lot to have been through a layoff or a restructuring or a forced sale or recap but you know all the other things that you restart and all the other things you end up going through as an entrepreneur and so you know I do think that's helpful and important the characteristic of the venture capital industry right now is that you know we're on the sort of fourth or fifth generation of VCS in some of the older firms and so there are certainly plenty of VCS who have finance backgrounds as contrasted to operating backgrounds or as contrasted to entrepreneurial backgrounds so I think there's a real opportunity for I mean speaking I'm sort of talking my own book as I say on Wall Street I think there's a real opportunity for VCS who have an operating an entrepreneurial background to add a lot of value in these companies and so we spend time basically you know when we go into a situation with the other investors already and trying to do they have that background if not how are they you know when they when they when they get into the thing so I think itself will be a flip side of I would say though the the danger and we we got a talking to it from all of our friends in venture capital before we became VCS and they were very rigorous with us on this point so I think I'll repeat it is the danger of an operator who becomes a VC is that he stopped he continues to want to be an operator and so then he tries to operate the companies that he's in from the board and of course that's lethal like that's just a prescription for disaster and so the best professional investors we've found over the years are very good at understanding what's going on and they're very good at helping but they have our remove from the day-to-day operations because the minute they don't from the minute they get to hands-on things start to go seriously wrong so the question is on sort of the hotness right now of the application market especially on platforms like iPhone and Android and there's a tremendous amount of investment going into companies building applications on these new platforms like iPhone and Android so we have up maybe a little bit of a contrarian point of view on sort of the general sort of assumption behind the question if you will how much revenue can actually generate so our answer this kind of thing is always it depends which is my favorite answer of all time I can always start answer that depends and then talk for half an hour people think I've said something so it really depends so it's a little bit like the early days to us it looks a little bit like the early days of the PC industry where you know in the early days the PC industry you would open up a magazine like PC magazine and there would be ads for thousands and thousands of different software applications you know doing all kinds of different things games and learning tools and type typing instructors and file your recipes all this stuff most of the companies that produce those applications are long gone because those weren't significant categories they'd weren't you couldn't build a real business around them on the other hand you had companies like Microsoft and Lotus and Adobe and others that were building applications like Photoshop or Lotus 1-2-3 or Microsoft Word that turn into Empires so I I really think on this kind of thing that the the the answer is it depends and so in a nutshell like we wouldn't invest in an app company because it's an app company but we also wouldn't avoid it because it's an app company we would look very carefully at the specific thing of what it does and by the way let me generalize out and say that's the same answer I give to almost any question involving a particular category so people say well location-based services are really hot you know what are you doing there or people say ecommerce is hot again like with all these new group buying services what are you gonna invest there and our answer is we are gonna do absolutely nothing in the category because the worst thing you can do is go into a category and just like trying to find something to invest in because if the good ones are already taken then you invest in the bad one you lose all your money it's like it's a bad formula and there are VCS who do that and we don't recommend it so on the other hand if we get the opportunity to invest in a very special company with a special founding team and product idea and market and strategy then we'll do that in almost any category in fact one of our favorite things to do is actually invest in categories that other people believe to be dead and so for example we're very excited about investing in enterprise software people say well that's ridiculous enterprise software is dead you know that nobody can do that anymore and it turns out between 2002 and 2008 the sort of most recent period where these things were measured the top performing sector and all the venture capitals enterprise software precisely because everybody thought it was dead and so the companies that got funded had practically no competition and the people who made the investments actually could invest very cheap because very few people wanted to fund those companies so we're absolutely delighted to go into sectors that are people view as dead we're also happy to go into sectors that are brand-new as long as there's a specific company with something magical what sort of criteria you used when you decided to actually start a business I guess to get a lot of ideas if you're someone who has different ideas and what would you what criteria would you say ok this also the general criteria for a successful high tech startup in my view there's you see different sort of rules of thumb from different people but the three big things you always come back to are is is there a big market and and by the way that comes in two parts is there a big existing market that you think you can go after and sort of displace incumbents or is it or do you believe there will be a new market that'll be big so big market is there a fundamental technology or economic change that causes you to basically justify having a new company and that's really important so you know in a way I always think about that is is there a 10x change happening in the technology landscape is something 10x faster or 10x cheaper or 10x better and if it's not 10x we view as wealthy seasoned entrepreneurs who really have to ask ourselves like is it really worth doing because it's really hard I mean it's really hard to start new companies take time i macro theory new companies generally shouldn't exist existing companies are usually pretty good at what they do and so for a new company to exist it not only has to like you know come in and go you know go into business and bring a product to market but it has to bring a product to market that's so much better than what already exists that it punches through the sort of status quo and you know most customers in most markets are pretty happy buying from the current suppliers and so there has to be a real kind of edge on the thing and we look for that on either a technology change usually a technology change or an economic change which are off the same thing and the third his team is the team outstanding and if you think about this as an entrepreneur it becomes a question of the founding team you know if you know some companies are solo founders and they can work but generally you know most of us like myself we're human beings or mortal you know you want to have a founding team of multi of complementary skill sets and so you want to have at least one super strong technologist quite possibly more than one some of the best startups are see more than one founding technologist and then it often helps to have somebody who's like a product or who's out because a market or sales person or has a sort of really good understanding of business on the team certainly helps a lot and so that we sort of like a market product and team and you know the reality is you need all three I would say interestingly if you're gonna compromise as an investor if we're gonna compromise on one of those it would actually be the product and the reason I say that is because a great market is a lot easier to make up for with iterative product execution than a poor market because the problem of the poor market a small market is even if you do a great job on the product there just aren't that many customers it's hard to ever get big people get demoralized so you know we definitely focus a lot on the size of the market and then and then also the team and we actually evaluate the team in a start-up based on its ability to get into a big market with a good product and so one of the things we look for early on as VCS is we don't need the team that's gonna run the company when it's 500 people and a hundred million in revenue like that's irrelevant we need the people who can get the product to market in a big market and if they're wrong keep adjusting to get into the right market so that's the general template and that's how we always thought about it as entrepreneurs there is however one other thing we look at that I think is really fundamental an important and it took a while to figure this one out and I think it's really interesting so we sort of categorize so given all that then you look at companies and you say okay here's a high-quality set of companies and then we divide up sort of into two buckets and we basically say there are products that become companies and then there are companies that come up with a product and one of the interesting things you see over the years is that many of the most successful technology franchises were products first way before they ever became companies and so just in my own experience Netscape was a research project was based on a research project at University of Illinois that we had worked on for three years prior in fact the team had come together at Illinois before we started in Netscape you know Microsoft Bill Gates and Paul Allen were like deep into pcs early on before they even thought there was a software business you know Apple you know Johnson wise me I've built the first Apple sort of as hobbyists more recently Mark Zuckerberg had Facebook running out of his dorm room you know way before he ever thought of starting a company and then my other favorite example is Twitter Twitter was a side project at a company called oh do and oh do wasn't working Twitter was a couple of guys who were basically knew that the OTO product which was the podcasting product was going to fail and so they were you know frustrated and unhappy and so they started the side project Twitter and it just started to take off and so the the product it becomes a company is a really good template because and here's my excerpt theory on that is because it's a demonstration that the product has to exist like the market needs the products so badly that somebody actually built it and deployed it and you can actually see evidence that people want it even before there was an economic motivation to do so like that's that's market demand like that something magical is going on there at that point in contrast great entrepreneurs who kind of you know the sort of stereotypical well fuel at Packard kilo Packard counter example the company event product the original found at HP archives put online a while ago they put the original minutes of the first HP board meeting their great minutes because it's like you know it's you know mr. Hulett mr. Packard maybe was like in the 30s right so these guys are really young at the time and it's like their lawyer and their accountant whatever and it's like you know assembled in such and such in Palo Alto at 2:48 p.m. and boom you know first order business cash company has three thousand dollars whatever the checking account gonna do it's like topic number six product and it was a little one line I said the product that the company will build has not yet been decided period topic number seven right like they didn't know like they didn't know they had like a general idea that there was going to be something to do with electromechanical something something something I mean this is before the computer Bhutto had before the computer when they started this thing right so they didn't know what its gonna be and they came up with many good ideas later but they didn't know so that that's a success case a company first end product but we see a lot of failure cases which is smart entrepreneur sitting around saying I really want to start a company and now let's go try to figure out something interesting and good to do and it's very easy in that process we've found to kind of fool yourself into believing that there's a market and that there's a need because you want to find something you have a very strong motivation internal motivation to come out with an answer it's very hard to go through that process or three months and then say you know what we can't come up with any good ideas you know let's just go back to our day jobs so yeah big company of your choice and so it's a very start motivation to kind of fool yourself and so that we're always a little bit leery of those in fact if you track those kind of through fun during those are often the ones that aren't actually I've never able to raise money because you know the VCS can kind of you know these these are good at this kind of thing they can kind of smell that kind of thing coming so moral of the story is it has to be it has to be it has to be a really good idea that often will be an idea that it's pretty existing at the time we decide to start a company and if it isn't be really careful because you're kind of you know you're walking on sharp rocks at that point with a high risk of falling you know off the cliff into the ocean it's a particular dangerous scenario to be very okay so I a while back I was on the Charlie Rose show and I talked about how in my opinion newspapers it's easy to have opinions about other people's businesses and they love it when you do by the way it's very easy to it's a my opinion basically was it's it's newspapers and magazines you know in the current form are not economically viable it's time to shut off the printing presses and go digital and I provoked it by saying shut off the printing presses because that's what they're all thinking but none of them will say because they all say well eighty ninety percent of our revenue is still coming from the printing press still coming from the printed edition and so and we're not making much money from digital and so how can we do that and of course my response to that is the reason you're not succeeding digitally is because you're not focused on it right you're not you're playing defense not offense so when you go in these organizations what you find is you know attention is exactly correlated to revenue so if eighty ninety percent your revenue is coming from the old dying business eighty to ninety percent of the effort is being spent time to prayin to preserve the old dying business which dues you to failure in the new business and so I said you know what's the obvious thing to do and by the way if you do a margin analysis like if you look at the cost structure you would say a lot of the people and a lot of the overhead involved in running a printing press a physical distribution like if you just nuke all that stuff you could bring the cost structure of the company down a lot and then it'd be a lot easier for you to make money digitally because you wouldn't be carrying this huge burden you behind you I give an example Newsweek Newsweek magazine just got put up on the block's you know which is still is both printed online and they bet Newsweek has been struggling for years to try to figure out how to jump to online but they still print and the most revealing thing in the in the in the Washington Post annual report where they talk about Newsweek is Newsweek today Newsweek and you know how skinny Newsweek is today it's like a it's like good in a little magazine like there's not a lot in it 427 employees now if you said you know like what would Newsweek online like what would the true head count be for that same content if it were distributed online the answer has to be like 30 or 40 like you know you so what are the other 400 people doing well they're doing circulation and they're doing it you know they're doing that literally you know the printing and they're doing the logistics they have coordination with the newsstands and they're doing inventory and then they're destroying all the magazines that get sent back who don't get sold and it's just on and on and on and on it's like at a certain point okay like that's not the future and so the reason I sort of have even have an opinion on this is because this is exactly the kind of thing that we get faced with in in the technology industry all the time so what's ironic right we're actually in the tech in the tech industry we're actually used to dealing with his this exact kind of problem because what happens is the technology changes and we have to completely reorient our businesses and this is the closet you know this is the innovators dilemma this is the classic Intel story than Andy Grove tells in his book the only the paranoid survive where he talks about Intel used to be huge with memory business it was 80 percent of the revenue and then the Japanese came in and started systematically undercutting them and at a certain point they had to shut down the memory business to be able to focus on this on the cpu business because they knew that was the future but they knew the memory business would drag them down so but I always tell people in the media business is you're just not used to the technology changing like that right and then they say you know well that's a good point the newspaper in his current form was invented in Italy in the 1500s and I'm like okay if I was in an industry where you know the current business literally the current form of the business had been invented 500 years ago and have not changed yeah you can see why that would be difficult to deal with but in my view you know leaders of a business and this is true of every business I've been involved in and every business I'm invested in and it's like top of mind for every time I work with any business is you know if there are a set of disruptive changes coming it's incredibly important to go on offense it's incredibly important to get set up to be able to to compete vigorously and then this is why putting my money where my mouth is this is why I've invested in Talking Points Memo and I do best Business Insider which was Henry Blodgett separation of the New York they run a whole bunch of sites including Silicon Alley insider and there's a whole bunch of these TechCrunch locally here's another one the new media businesses are structured properly for the future and so you go to Talking Points Memo it's not a huge company yet but right it's also like 30 people not 427 and it's hiring and not firing and this 100% digital and there's no time and effort you know worrying about trying to you know charge for content or trying to you know trying to preserve the current base and every ounce of effort is going into growth and expansion in the model that makes sense for the future and it's just a completely different kind of energy and I think what's going to happen is I think there's gonna be a whole new generation of companies that are just gonna take over these these these things market by market you know unless more radical change happens fairly quickly okay so here's an example I said earlier we're not particularly theme driven so the question was in media reports we talked about consumer electronics being a key area of interest for us which causes people have strange reactions because people think consumer electronics went to you know Japan and China in Korea about 20 years ago and haven't come back so we must be out of our out of our minds this is an area where you know I said earlier we don't tend to work by category but of course you know we can't help ourselves and so we sit around and we think and we have theories like everybody else so one of our theories which we sort of lend a little bit of weight to we think there's gonna be a whole new wave of consumer electronics companies in the US and in particularly in Silicon Valley and we think that the sort of center of gravity for the whole consumer electronics industry is likely to shift back to the US and the reason fundamentally is because the technology that goes into a modern consumer electronics device product is completely different than it was when these products left the US they completely different and specifically the hardware is much more commoditized today than it was 20 years ago excuse me and then these products consist of a much higher percentage of software now than they used to and so what we're seeing is a whole pattern of companies in the valley I'll just I'll name a whole bunch and they're not all super successful or super success yeah but palm and TiVo and of course Apple and sling and flip and jawbone like there's a hole just series of these companies there's a whole bunch of new ones coming including some that we're backing and basically what they all have in common is they're taking off-the-shelf components and in particular off-the-shelf chips and in particular these really really powerful new off-the-shelf graphics chips for companies like Nvidia and that nti you know that do high speed you know they do high-speed 3d graphics and they do do high def video and it's just all on a single little chip that you can buy for you know a couple bucks and you know they wrap it in a box it comes in a box but then they build software and services that integrate right in and of course Apple is in many ways the template for that these days the way that you know Apple provides the device and the OS and the application stack and the store right and the online services and Google's obviously doing a lot of that as well and so we think that's actually a really interesting model and so we think there are a whole bunch of categories of consumer electronics that can get reinvented and then there's a whole bunch of new categories that can get created and so I'll just give you one example we are angel investors in a company called a company called jawbone that makes the sort of high-end Bluetooth headset sort of the high fashion Bluetooth headset what's interesting about job dublin is an example of this exact thing jawbone is a real R&D company with deep Rd in Bluetooth and in hardware and in software and in the new version of the job on headset that just came out when you connected to your PC it turns out it has an app store and of course the first people think well that's crazy it's a Bluetooth headset like what kind of apps could we possibly be talking about well you know the ability to read you turn-by-turn directions don't literally read you in your ear turn-by-turn directions you know what you're driving around or the ability to read your voicemails or the ability to read you a Twitter feed or a Facebook feed or the ability to do voice SMS and these are just our viewers like these are just the tip of the iceberg and basically you want to view the the Bluetooth headset as a wearable computer that's going to have many different kinds of software applications running on in the future and so you know basically if you can do that in Bluetooth headsets there's any number of categories that you can do that in so we're extremely excited about this and if anybody has any great ideas we're we're totally game this is the jugglin I'm talking about our space is to make it comfortable pieces we have a we have a big market we have a market spending how would you recommend we who are stumbling around in the dark putting together a team that can take this work oh yes the question is going a team around around a an idea that has traction you know it is probably recruiting actually probably the two hardest parts of running these companies number one is recruiting and number two is talking people out of quitting by the way at first recruit he seems like the hard part and then later you realize talking people out of quitting it's the hard part and by the way if you ever go through this and you would find yourself talking people out of quitting all the time it's completely normal you can't believe how often it happens it's successful companies it's like every day so I you know I would say the general answer I don't have any magical answer is the basic answer is brute force it's going to be it's going to be kissing a lot of frogs it's going to be talking to an enormous number of people a tremendous amount of networking in some cases investors and advisors can be very helpful and so one of the things we always tell early-stage companies to do like for example raising angel rounds of financing is it's a good idea to actually bring in a whole bunch of angels and syndicate the deal because a lot of the angels are actually really good at recruiting and networking that's something we try hard to help with and then of course later on there are some very good local executive search firms and talent and recruiting firms that are helpful but I mean I'll tell you it is hard it's hard for everybody like there's and there's no real easy answer yes what thoughts went through your mind when Netscape begin to lose popularity and how did you recover sure so will we did two things we did two radical shifts one is we took the browser to free was the question was Netscape started to come under pressure I started having issues particular with browser market share in the in the late 90s we executed to two shifts now one of the things about a story like Netscape is you don't often actually read the whole story because there's you know set of popular perceptions when companies actually become too popular or consumer consciousness it's hard to actually track what they do as businesses because narratives get set but we did two things one is we took the browser to free and then we ultimately released it as Firefox and so everybody who lives at Firefox today and it's you know huge numbers today is basically using the Netscape Browser essentially version 10 or something like that version 12 if you look at the lineage and then the other thing we did was we made a massive we put a massive investment did a massive turn focusing on unsought on actually two things software for businesses and then our website and so actually interestingly Netscape grew revenue all the way through its existence as a public company was profitable for virtually the entire existence and of course ultimately sold for a lot of money to basically a combination of a low and Sun but that's sort of the one of the case studies that I drawn I mean in my own business so Netscape we did this sort of massive shift from browsers to to server software and website services and we're talking about at that time six hundred million in revenue which you know just for inflation is you know close to a billion today so very very big software business behind that and then the other shift you know my other my second company you know went through a huge shift you know going from being a services business loud cloud being a services business office or being a software business and so we did it we did it again there and also led to a good outcome and actually my third company's going through a version of the shift right now Ning just went through a shift for people to watch these things for free sort of free premium free plus paid to paid and so my experience with these things is most of these companies just my experience generally as most these companies go through that kind of shift at some point I'll give you another example Intel I talked about before Intel made the shift from micro processors to or from memory chips to micro processors which was hugely traumatic back in the 80s Microsoft before that actually early in its life made a fundamental dramatic shift that they were forced to basically at the risk of not being a viable company it's it's all the histories people don't think about it much but it was very important at the time which was Microsoft never intended to be in the operating system business Microsoft intended itself to be a programming tools business and their revenue was programming tools for people to be able to build build software and they were building basic interpreters and all these other kinds of programming tools selling them to lots of companies making OSS if you had a PC in the early 80s no matter who it came from it probably had Microsoft basic as the programming language they had this amazing deal in hand to license their programming tools to IBM but IBM was unable to get a good operating system for a variety of reasons and so famously they try to get the dominant PC operating system at the time was called CPM from a company called digital research famously the CEO of Digital research was out flying his private here's his his small a private plane that day couldn't be bothered to meet with IBM sent in his wife who was a attorney who was very hard-nosed on the topic of NDA he's completely alienated the IBM team they got up walked out drove back up to Seattle and they told gates the deal to license Microsoft basic is off unless you can come up with an operating system and so gates to his credit said oh I think I can probably figure that out he went and bought we literally went down the street bought the rights to an OS that a guy down the street had built for $50,000 and that's das actually that's part one of the story part two of the story is the shift that he tried to make they failed at making which turned out to be one of the best failures he ever had in 1985 bill wrote a famous letter to somebody famous letter to John Sculley who was then the CEO of Apple his letters on the Internet begging Scully to license Mac OS to clone vendors so that there would be lots of different Mac clones so that the Mac UI and OS could take off in terms of market share and unit volume and because at that point Microsoft's view was most of the money is going to be in the apps so at that point they were building Microsoft Word and Microsoft Excel and PowerPoint and you know IBM had taken das kind of as far as it could go and math looked like the next big thing and so he tried to get a whole Mac clone market created and in fact he went to is an attachment to the letter where he went to Motorola at the time which was at the time at the time a big important computer company Annie had Motorola agreed to basically build Mac clones if only Apple would license them Mac OS and so yeah he like had the big OEM in hand took them to took a nap alone of course Kali said no no way no way are we ever gonna license Mac OS which then led to Microsoft developing Windows which then led to Windows having 97 percent market share Mac gave me three percent market share and so I just it's so common I I feel like I've been through it now two three times the vast majority businesses I've ever worked with have been through it I think it's just so common to go through this kind of transition I think once you get one of these businesses up and running you have to go through this kind of transition I mean a tech it almost seems like you have to do it every five years almost no matter what the other classic right Silicon Valley story his son you know son like hit its stride in the 80s when it started building building units workstations and then they went through a massive structural transition in the early 90s to building servers so that like almost killed a company it was like incredibly intense and then of course you know years later there was another fundamental structural change that they went through to try to adapt to Linux and Intel servers in the early 2000s and of course that ultimately led to you know some weight around being sold Oracle that one didn't go as well but you know that's again a common story and so my opinion is sort of a key skill set of actually running these companies or working with these companies is being able to make that kind of transition and it is never fun no matter when you go through it but it's a necessary thing and so I draw my own experience you know having done that a lot for we're kind of the new trend with with user-generated content and social networking social networking sites right now a lot of wondering yeah okay so two questions questions so startups first question was on startups using cloud services they take that one first so virtually explain what I mean what I mean by also by the question virtually all its been very striking virtually all of the startups that we see that are building some kind of Internet service whether it's a web service or a mobile application or even consumer electronics we saw we've seen startups recently that are building for example different kinds of fitness devices is this new consumer electronics model and it's got an online service component to it so there's a website you know that aggregates all the data virtually all of these companies are building on cloud services so virtually all of them are building and in particular today interestingly most of them are building on AWS like AWS is like 96% or something and then Rackspace is in there and then every once in a while you'll see somebody who's on I don't think we've seen anybody on Google Google has a thing called App Engine I don't think we've seen anybody building on that yet and we haven't seen anybody at building on Microsoft's new thing so Amazon right now is just doing a great job in that market and this is a really this is another sort of factor that's changing the economics of these businesses a lot it's a really big deal so these companies otherwise you know five years ago these new services companies would have to raise a lot more money a lot quicker because they'd have to buy a lot of servers and a lot of networking gear and a lot of it their own data center and they'd have to buy a lot of storage here there's a lot of capital cost involved in building a web service so back when even even back when Facebook started right 2004-2005 like Facebook today owns a very large number of servers which have you know which cost a lot of money the folks are running on AWS are completely sidestepping that upfront capital cost and so their their initial fund raise is much lower than it would otherwise have to be and then it's much easier to scale at least for the first few years there's a question of whether ultimately you'll have to jump onto your own servers if you get big enough weather weather AWS or one of these cloud services can scale to the really huge services but you know a very large number of entrepreneurs are making that bet and furthermore a lot of entrepreneurs that are running older internet businesses that had to do their all their own back-end that didn't have AWS available at the time a lot of them will now tell you if I were to do it over again I would definitely not do it the way we did it I would definitely do it all in the cloud and so that's a huge Minesh to spending a huge change an absolute fundamental and again it's why I get so excited about a lot of ease like the that's why I say I pair actually technology and economics when I talk about the kinds of changes to take place and so to me like the way I think about it is what I mentioned with consumer electronics where you have these chips now for a couple bucks that you can buy that do you know 3d graphics that you can embed it you know in anywhere like the the what what those chips can do in the you know 10 years ago would have cost you thousands of dollars and so there's just all of a sudden whole new categories of products and get built and so the cloud services to me are the exact same thing we can now afford as an industry to experiment on a much broader range of software and services because we can develop them so much more cheaply than we used to be able to so there's that and then the other question Oh user-generated content so question was you see all these user-generated content companies you know famously YouTube and blogging platforms and so forth and they all seem to Twitter most recently and they all seem to have a characteristic that the company that runs them ends up making a lot of money on advertising and that people who actually create all the content and don't and so I wouldn't be a good idea to basically share the revenue out with the users almost every attempt I'm aware of to try that has failed and so in practice and there's been a whole bunch of attempts for 10 years and I bet you have never even heard of any of them because they failed so spectacularly that they just vaporized the successful user-generated content applications the sites tend to harness people's passions much more than I 10 harness people's greed and so just in practice the sites and services that are super geared towards how people think and how they want to live and how they want to act independently of how they make money but to get people a platform for expression or if you know a platform for communication that's really good and fun and empowering and and wonderful to be on like those are the ones that tend to win in terms of user behavior and the ones to try to split revenue generally never never get anywhere and it's this is one of it this is a lot of economists look at this a lot of free market economists you know University of Chicago economist look at doesn't say well this can't be true because everybody knows that humans are purely economically motivated and only want to make money and never want to do anything for fun and you know and then you just look I'll give another case study Wikipedia look nobody makes money on Wikipedia Google watches this big effort called null and the big promise of null is that it's gonna be like Wikipedia except if you contribute to it you can make money and I mean it's like a dead zone like there is like nothing on knoll and Wikipedia is you know gigantic so it just Clay Shirky talks a lot about this in his book here comes everyone is there something really magical about harnessing people sort of in large numbers on things that they love and things that they enjoy doing and that seems to be the template for much more than immediately trying to figure out how to help people make money which is just a really interesting large-scale psychological experiment but one for which there's no a lot of data your first users for both Netscape bidding because as far as I can see they were both kind of new markets and new categories help you wakes up and says hey I want a social network for hey I want to browse the web at the time and so where did you find your first question is where did the first users for both Netscape and Ning come from because as you say there they were both brand new markets and so there wasn't a lot of you know there wasn't wasn't like people go to the grocery store and they're like boy I like one of those being things along with my coca-cola so so both Netscape and Bing are as our Facebook and Twitter and a lot of these other things are network effects they're at their core their network affects businesses and so the nature of network effects businesses the definition of network effects basically is that fundamentally you're building a network where people can communicate or share in some way and the nature of a network is it gets more and more valuable to everybody who's on it as more people join so you know when ten people are on it it's not very interesting when a hundred people are on it you start seeing more interesting when there's a million people on it it starts to get really interesting and that very first set of users actually liked it more and more as it grows because there's more people to talk to and you often see with these network effects thing it's like they can grow really fast for a very long time because they're just getting continuously more and more useful to everybody who's on them as another example I'm involved as I'd mentioned earlier were involved in Skype and Skype is now Skype today right so Skype now six or seven years old Skype today it's over 1.1 million downloads a day you know something like closing in on I was something like 600 million accounts like just staggering absolutely staggering numbers and growth rate if anything the growth is accelerated and a lot of people say well Skype was like from 2005 like who cares anymore it's like well Skype in 2005 had like 14 people you could call Skype in 2010 has like 500 million like that's that's much more useful so the good news that network effects businesses is that when they grow as they grow they can often grow very fast for a very long time and they get very useful in the long run you have this massive chicken-and-egg problem up front which is ok if there's no you it's like you know selling somebody the first fax machine right was a hard sales call let's imagine the sales rep saying well we'll give you at the fax machine well you can draw on a piece of paper you can stick it in here and you can send it okay well who can I send it to well nobody fax machine actually by the way a fax machine was invented in the 1860s this may have something to do with the fact that it didn't take off until the 1970s true story there the fax machine working before they had the telephone working back in history like the Civil War era so so you have the chicken and egg problem and so basically what you try to do well try to do it Netscape was he basically seated into the right initial community to get to basically bootstrap the chicken and egg movement will match them and what we did at that point was we basically seeded it not surprisingly into people who were super interested in at that point the internet which was a brand-new phenomenon and people who were very interested in internet software and information sharing on the internet and at that point there were some other systems with names like gopher and waste and FTP that people were using to share files and do things and so we basically just found those groups of people who are already sharing information on the internet we just introduced those straight in there and we actually use at the time we use news groups to do it because that was where you could talk all these people and so that worked later with Ning and and more recent Network effects businesses new entrepreneurs and network effects businesses are much smarter and much better educated on this phenomenon and so the new networks affects businesses tend to have what's called as a term called virality they tend to be viral and by that I mean they tend to have a mechanism built straight into the product that causes it to propagate to other users and so the classic example in this is you sign it for Facebook and it encourages you to upload your address book your email address book and then it tells you here are all your friends in your address book we're already on Facebook and so you can connect to them automatically and by the way here are your friends who aren't on Facebook and wouldn't you like to send them an email inviting them to Facebook and so there's a whole bunch of different viral mechanisms like that that you can employ and if you do them right and there's a whole art and science to virality there's a whole special thing in and of itself but if you do that right you can sort of wire a network effects sort of product you can wire it for growth from a very early stage and so we did much more of that in a the capital costs going lower and you also live in the streets having to change but what do you see with the VC industry has it been caned s capital requirements continue to drop and you see how substantial it you see a very common for okay so this is the mother lode of all questions for me so I'll probably talk for about an hour so the question is how are the economics of the venture capital industry changing and in particular like what are the changes what structural changes are gonna happen in venture capital as a consequence of these economic changes so first of all I don't believe there is such a thing as the venture capital industry I don't think it exists I think you've got a set of firms you've got 20 30 40 boutique venture capital firms that do really well over time and then you've got about 660 firms that will generally very much break your heart as a investor if you invest in them they'll return you a lesson in the stock market which with much higher risk so venture capital is one of those things venture capital firms hedge funds buyout firms investment firms operating in sort of special markets that are illiquid or have special knowledge you tend to have a few firms that generate all the returns then you tend to have a lot of people who want to generate those returns that can never actually figure out how to how to hurdle the bar and so like if you pull up you see these you can download this list online if you pull up like venture capital firms in the US it's like 700 and you'll read you can read through that for like three hours and like you won't recognize the vast majority of the names on that list and how they get funded I don't have the first clue like I you know it's the same thing with hedge funds there's like eight thousand hedge funds like it's just like you don't even know who these people are the problem is when you talk about the venture capital industry all that data gets rolled up and then they look at and they say well venture capital is terrible because venture capitalists make any money it's like well yeah if you include all the bad firms it's terrible so there's really no it's this really striking thing where it's in create an entrepreneur what's interesting is entrepreneurs know this and it's not like there's a shortage there's a bunch of good firms but like entrepreneurs are well aware that there's a set of firms that know what they're doing and there's a set of firms that really don't and so there's a whole adverse selection thing that kicks in so so there's two ways of asking the question one is what's going to happen to venture capital broadly and and I almost spent like almost no time on that topic to me the very interesting question is what's going to happen to the the really good venture capital firms and I think there's a whole variety of things that are happening there so one is there's this whole tier of sort of angel or seed funding because it's so much cheaper to start these companies there's a whole tier of angel or seed funding that's now that has now appeared and is becoming sort of very professionalized and in fact a lot of the best angel investors are now starting actually raising funds and so for example Ronnie my colleague Ronnie's father Ron Conway is that one of the really well-known Silicon Valley VCS he's just raised or angel investors and he's just raised a new fund to you know to do to even wrap up his activity and that's very exciting because the best angels are really good and if anything the best angels are at least as good or better than the than the good VC's in a lot of cases so there's so on the very early stage that's very exciting on the one hand on the other hand there's this equally interesting phenomenon that's happening in later rounds and the classic case study there is this Russian firm called DST that has become a major investor in both in companies like Facebook and Zynga and most recently Groupon and so you may have noticed in the last 10 years since my last appearance here on April 7 of 2000 there are very few IPOs and so you've got some of you've got companies like Facebook and saying a Groupon that are getting very successful financially and getting very large and they're not going public nearly as early as they used to and so there's this new category of investor that is coming in and some of these are existing firms that are now getting larger and some of these are new firms that are being created that are coming and are investing later and later in yeah and sort of the company life lifecycle and some of these firms are taking you know ownership stakes of you know hundreds of millions of dollars and 500 600 700 million of individual ownership stake in you know you know in a sort of high-growth company at a later stage another example of that is actually the skype deal we just did you know Skype deal was more of an LBO but it was a little bit of like what I'm describing because it was a two point seven five billion dollar transaction you know for a company with at the time about 700 million in revenue give or take and so you know and again it was like you know Skype will go public at some point but you know a lot of these companies that maybe in the long run will be public or not yet and so there's these specific kinds of investment opportunities that pop up and so I think that stuff's really exciting and I think it maps up well how these companies are getting built which is and you'll hear people over generalize you hope people say well companies cost less to get started and so therefore though we're just raised less money than companies used to and I don't think that's true I think they raised less money at first and then I think they raised more money as they grow because the markets are larger if you really want to build a company to go into a huge global market ultimately you're probably gonna have to raise a lot of money because you're gonna need to expand to be able to reach the market so so all the sort of tension and activity I see around people rethink their models has to do with some combination of either going much smaller or going much larger started there's a lot of competition how do you diverse the winner Oh question how did Facebook but Facebook got started there was a lot of competition how did it emerge the winner so when Facebook I started it's actually been more dramatic than that when Facebook got started social networking had been declared dead and buried so Friendster had failed and so Friendster company Friendster definitely people in the audience are not so young that you don't remember Friendster although time flies so Friendster appeared in like o1 o2 o3 and was this used the Silicon Valley startup very bright out very great entrepreneur named Jonathan Abrams and Friendster was sort of the first big social networking service that took off and it grew in a sort of a vertical takeoff rate and then a bunch of things went wrong and it had huge issues and lost most of its users and most people around the valley concluded okay that's you know basically that was evidence of category failure and so like that's that social networking has been proven to not work because Friendster didn't work later on MySpace and then after that shortly after that Facebook emerged and essentially like they did some things differently so MySpace focused on a basically entertainment and Los Angeles is a sort of initial seeding ground as opposed to Silicon Valley and then Facebook cut straight on college campuses and so they they seeded the network effect differently although they they both became large services ultimately so they took us a different approach to basically get to market but in my opinion that's all sort of the beginning of the story the real story has been Facebook in last five years Facebook has become one of the great Silicon Valley companies and so when you look inside Facebook at what the company actually is it is a technology it's a technology machine it is a development machine with world-class software capabilities that are you know easily equivalent to what you would find at Microsoft or Oracle or at you know any great historical software company it's a really really top-notch software company and like and it's like Google in that way it's the same thing right when you go to say Google it's a world-class software company and you know what we've seen in search engines is like it's a huge asset it's been a huge asset for Google to be world-class rnd it's been the cornerstone of why they succeeded I think the same thing is true for Facebook they just they become world-class at R&D phenomenal software engineering you know a lot of Facebook's competitors in the last few years have not been as good it software engineering and MySpace in particular had the potential to become that good but they got bought by News Corp and you know there was a whole series of management changes there that sort of prevented them from developing or the company they could have been and so you know at this point Facebook is it's a fun is absolutely phenomenal engineering company and to me it one of the reasons I'm so excited about our business is because I think Google and Facebook are great examples among many others but are great examples of how you know how the valley is still values still the values very bad at many things but the valley is very good at creating new technology companies and in a lot of markets in a lot of big important markets the quality of the technology and the products really matters and I think both of those companies or case studies of that identify them to actually join your Microsoft stock options which they'll tell you those aren't worth anything and then a friend of mine likes to say the other part of it is vision and he says the difference between a vision and a hallucination is that other people can see the vision and I think that's actually the the the core answer to the question so the best entrepreneurs are really good at selling people on their company precisely because they can explain the way the world is going to look in a way that is so compelling this is the famous Steve Jobs you talk about Steve Jobs has what he calls the reality distortion field so like if you get within 10 feet of Steve Jobs whatever he says the next 20 minutes you're gonna walk out of there believing but whatever he says you know you could say the sky is purple and you'd be like it that makes total sense and you know four hours later over dinner as you're explaining it you know - you know - your wife your husband is like well you know I don't really know what he meant by that but it was really really compelling at the time the best entrepreneurs all tend to have that in common they tend to be really good at that they tend to be really it's essentially sales you know selling to selling to employees and so it's incredibly it's an incredibly valuable skill to be able to do that that plus stock options the other thing I found was hiring over the years is that while it's incredibly frustrating part of the frustration is actually a good thing because of the frustration right is you try to talk somebody into joining they don't they don't come and you're like you know dammit I wasted a lot of time but hiring is also a selection process and it's a self selection process in the part of the candidate right and so of all the people you interview like if you hire them all it would turn out that a good two-thirds or three-quarters of them you probably shouldn't have fired anyway and what you can do in the hiring process with the best companies do is they provide a very stark idea of what their company is and what it isn't you know so we are a company where people are expected to work 18-hour days and if you don't like that don't come here or we are a company where people expect to go home at five o'clock every day and if you think that would be frustrating don't do there whatever it is or we have dogs in the office or we have we have a company the company we've invested in where the whole company does yoga together and so if you like yoga this is the company for you if you don't like yoga don't go there you're gonna be asked to put your feet in positions that you're just gonna be completely uncomfortable with literally yoga every day company's called asana which of course is a is it means that yoga pose I learned so a very very very stark idea is very good because it's polarizing and I think the best companies tend to be polarizing and so if in your hiring process you're turning people off as often as you're turning them on because it's just you're making it they're sort of deciding well this is clearly not the right fit for me I think that's a good thing and actually by the way the same thing applies later on to product development with sales we much prefer companies that have polarizing products like we love companies where food products where like some people hear about it they're like that's awful I would hate that you an example on Foursquare we were recently in the bidding for we dropped out while we were in the bidding for a four squared you described Foursquare to like 20 people so four squares of location-based service where you know you can check-in and you can see where all your friends are and they can see where you are like you described that to 20 people like 16 of them are like that is the scariest stupidest thing I've ever heard like why would I second it there's actually a website called please Rob bing.com and they use the first grapey I and they basically give you a running list of the names and addresses of people who have announced that they're not at home so like this just like freaks people out well we love it because 16 people out of 20 might hate it but the four people who love it just absolutely love it and they pride themselves on like being on Foursquare all the time and logging all the time so we would much rather back a company that has that kind of polarizing vision my other favorite one recently that we're not in but I love is blippi and it's a blip he's the one where all of your purchases are online right did you just plug in your credit card and all of a sudden everything you buy is listed online for your friends to see and again most people I see eyebrows going up most people are like oh my god you know I buy stuff that I wouldn't want anybody to see I wonder what that is you can get maybe later on everybody can volunteer one thing they bought that know but they don't want anybody to know about but Blimpie's already has a core community of people who just think this is the best idea ever and so another great example is there's this whole phenomenon of people there's like a health and fitness bloggers who are like fantastic because they're like documenting extensive detail like all of their like you know all the stuff they're eating all this stuff they're not eating all the way they're losing all their bodily functions like you can learn stuff about people that like you know where I grew up like you didn't talk about but people loved because certain kind of people certain kind of person loves it because it's social reinforcement and it's being part of a community and so yeah we love polarization and I think that also works for which the recruit really well yeah so when you're looking at early stage company how do you come up with a valuation for investing in those companies yeah the question is found an early-stage company how do you come up with a valuation for for the investments so for an early-stage company generally it's there's just a set of it's sort of market comparables and so generally you basically look but what we do is investors is we just kind of look at a cross-section of other companies that are you know similar founding team similar potential of idea similar state of company and so you know and this is all think riley's and Ronnie's expert on this but there's you know if it's you know if it's two people two founders who have not started a company before and have a brand new idea and don't but don't have anything running yet the valuation could be arbitrarily low it could be you know five hundred thousand three or something or a million pre if it's you know two people who have successfully started a company before and sold it for 50 million dollars then the valuation might be two or three or four pre if it's you know Diane Greene who started VMware or you know Bill Gates decides to start as nice company you know the valuation will be significantly north so track record of people the other real moving target that you see a lot is you know this goes to this product product it becomes a company versus a company that comes up with the product product it becomes a company those will get higher valuations in general because there's already something running and I always tell people especially in software like by far the best thing to do from a fundraising standpoint is actually build the product first and then raise money like or at least raise a very small amount to build the product and then raise large around the money because you get dramatically more leverage that way and now she's investors we enjoy that you know because it's nice to be able to it's nice to be able to see people with a small amount of money to build the initial product without having to take a big gamble and then it's nice to be able to double down once they prove that it works maybe it's ten years and this VC using as a proxy for that as well as do you think that's a function of the actual value that's being created financial markets why well the question is in the last ten years I mean overall like ever get equity value stock market value there's obviously been a lot lower in the last ten years I don't know people have noticed this but the stock market is sucked for ten years different 401k you might have noticed versus the 90s and then venture capital yeah in your right so venture capital is a proxy for that so venture capital generally is sort of a you can think of venture capital is almost it's almost a form of leverage sort of high risk high return on top of equities I mean you know I'm not you know I'm not an economist but my diagnosis is that the stock market is manic-depressive and there are periods in the 90s where you know everybody is all excited they're people that dives in the two thousands every buddy's all depressed about everything but I think that's also true so in tech and in tech the so okay so I'll give you I'll give you the answer first and explain so as far as I can tell technology new technologies is follow a shockingly straight sort of linear line and part of that as more as well like part of that is just the mechanics of like how semiconductors get built where they follow very predictable patterns over time but also like software advances like software advances just keep coming like every year there are more so you know better software tools and better software infrastructure and better programming techniques and programmers keep getting smarter and more productive bandwidth keeps getting cheaper like there's a huge amount of progress and in fact from 2008 2005 was a time of fantastic technology progress like the prices on all kinds of things drop tremendously new kinds of applications got created Google took off Facebook that created like all kinds of things happen so as far as I can tell there is a very large disconnect between what's actually happening in the technology and then whatever is happening in terms of especially in terms of the public stock market and then the private markets sort of you know echo that just sorta nice Jim so you know my only conclusion is he essentially it to be in this business you essentially have to ignore the opinion of sort of the broad base of investors because Eisley because they're going to be mathematic depressive and the other thing I would say is trying to then you say well what if you wanted to take that into account what if you wanted to think about it well the problem is that when people try to when people when people in technology think too much about what's happening in the broader markets or in the stock market they tend to want to try to get involved when things are hot the stock market is hot and they tend to want to bail out when the stock market is low so you know a very large number of people you know came out of Investment Banking came to Silicon Valley in 1999 because I thought they're gonna make a lot of money in a two thousand one they all turned around went back just went back to a New York and created the credit crisis that works out well and so you know it's almost like it's almost like a buy high sell low kind of thing you know I guess my own personal point of view is just it's it's irrelevant it'll even out over time and if you're building real value in technology you know it'll ultimately show up in the prices but you know that could take five years 10 years 15 years that could take a lot of time one of the reasons actually like being in the venture capital business with venture capital is actually a very interesting asset class might buyouts because you have this enormous virtue of a ten year lockup on the funds right so we raise money in July of 2009 we have until 2019 right a guaranteed contractual lockup and then we actually have the ability to extend it beyond that right if the stock market is low so you know I talked to friends of mine who run hedge funds or mutual funds and you know mutual funds get redeemed on a daily basis hedge funds get redeemed clearly venture capital gets redeemed every like 13 years like it's perfect its outstanding and so you know our view obviously as we should take full advantage of that we should be funding things that have you know enormous long-term potential and then if it takes seven to ten years and if we go through a full up-and-down cycle and then back in an up cycle in that time you know that's just fine so that's our goal you

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Length: 61min 8sec (3668 seconds)

Published: Wed Aug 28 2013