Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: If you think about the period of take-off of the firm in 2009, up until you reach, let's call it like cruising altitude. When was cruising altitude and what was the most difficult part about getting it from take-off to that point?
· Ben Horowitz
[00:00:00] S1: The first thing is we really didn't know that much about investing. Marc and I had done some angel investing, but neither of us had any venture capital experience. Credit to Sequoia, credit to Greylock and Kleiner and all the guys who were around at that time. They just had years and years of doing it. We made more than our fair share of investing mistakes, missing things we should have done, and doing things that we shouldn't have done. But missing things that we should have done was probably the bigger one. And then the other thing is how we thought about the profile of the investor was wrong. We so over-indexed on our idea that we had to help the founder become a CEO, that we made it a requirement that you couldn't be an investor at Andreessen Horowitz if you hadn't founded and/or run a company. And that was a very good attitude and set the culture of the firm in a lot of ways and had good things that came from it. But most CEOs aren't as interested in investing as they think they are. Also, most CEOs aren't as good at helping somebody else learn the job. So those two things ended up being not quite correct. So we made some adjustments. Fund one just went really well because we hit the scene hard. It was a small fund. We did Skype. We did Slack. We did Okta. Stripe was in there. There were just too many good things in a $300 million fund for that thing not to blow the doors off. Fund two wasn't as good as one. By the time we got to three, that's when we had contention among like, "Oh, we really don't have the right profile for GPs here." And there was a while where we thought that was going to be a terrible fund. It ended up being a great fund because we had Coinbase, and Databricks, and Lyft, and GitHub. But that one was scary for a while. But coming out of that, we kind of knew what the firm needed to be. So I think it was settled down after that. It wasn't such startup. We got across that chasm. The bigger thing was, we always had this idea about software is eating the world. Marc articulated really well in his 2011 piece. We always felt venture capital firms needed to be able to scale, and that the other firms would have trouble scaling because of the way they worked, the way they shared control. So that could be an opportunity for us. But we hadn't figured out how to do it yet.
· Ben Horowitz, Patrick O'Shaughnessy
And then I'd say, starting with the bio and the crypto fund, I started to get to the organizational picture of how we would be able to address every market of technology. But with investing teams that weren't 20 people, that doesn't work. So you need an investing team of four or five people. You can't address the whole technology market with five people. So you have to have multiple teams. Having multiple teams in a venture capital firm is a little bit of a novel idea, particularly when each team has a platform that helps the founder build the company. We began it really in earnest with the crypto fund, I think, around 2018. And then now the whole firm is kind of organized that way. [00:00:00] S0: If we zoom now to today, and back to what you said, which is the scope of your ambition is big – as the leader, be the ones that are expanding the market. What are the components of doing that? What does the system need that it doesn't currently have that you might be able to provide? [00:00:00] S1: One is the capital markets have changed dramatically with not much help. So I went public at 18 months old with $2 million in trailing revenue. That wasn't a good idea. But companies used to go public routinely with $50 million in revenue. It was fine. Now nobody's going public. [00:00:00] S0: $500 million or something.
· Patrick O'Shaughnessy, Ben Horowitz
[00:00:00] S0: $500 million or something. [00:00:00] S1: A billion, you get to go public, or something like that. And you're kind of small if you don't have that. You kind of need a lot more out of the private markets than VCs are built to do. That's one of the things we have to think about. Another one is the companies in the portfolio, they'd leave you at $100 million in revenue. They're going public. They're out to the races. Well, that's not true anymore. What do you need when you get to be $200 million, $300 million in revenue? Well, you need to be multi-product. You need to be multi-channel. You need to be multi-geography. So as a venture firm, we need to help them. As a venture industry, we need to help them do that. "How do I get to Japan? How do I get to South America?" Most venture firms don't provide much along those lines. So we have to step up to those ideas if we're going to have companies in the portfolio at that stage. [00:00:00] S0: Do you hope that over time, your firm and maybe some others like it that have become these big institutions in venture, go on to be sort of like the Blackstone, Apollo-type companies that are big, publicly traded, enduring businesses?
· Ben Horowitz
[00:00:00] S1: We are about the creation of new technology companies. A big, huge wave among venture capitalists is private equity AI roll-ups. It's a good business idea. Just like the spreadsheet created the original private equity business, AI is creating a new private equity business where you can buy any existing company, optimize it with AI, and it'll be more valuable. That's a good idea. It's a good thing to invest in. It's not something we're going to do for two reasons. One, it's like the cultural opposite of who we are. So we're about building new things, growth, believing in the entrepreneur. Price doesn't even matter. As long as the thing succeeds, you're going to do well. Private equity is entry price is key. I had a great dinner with Marc Rowan, who's a super genius, runs Apollo. And he was like, "Entry price, entry price, entry price." We think about it, but it's not first and foremost. Thinking about containing costs and this and that and the other, that's just not what a good venture capital frame of mind is. Culturally, I didn't want to mix those two things. But more than that, like, I just didn't want to be in a business where the way you make money is you figure out how to optimize an existing thing and lay off people and that kind of thing. So we're about new technology companies, building the future, taking things forward. And I'll leave that to the other smart guys in the industry.
· Patrick O'Shaughnessy, Ben Horowitz
[00:00:00] S0: What, if any, trade-offs feel like they might exist at this scale as you continue to scale? As you consider all these different people you're trying to serve well – the investors internally, the LPs, the founders – nothing's perfect. What are the trade-offs to the path that you've chosen? [00:00:00] S1: With any scale of organization, you really have to overpay attention to culture, or the culture will drift. We probably spend more work on that than any venture capital firm. I'm like, you're not allowed to join unless you sign the culture document. I spend an hour with every single employee teaching them the culture. We really try to enforce it hard when we can. We have pretty good consistency, but that is hard to maintain as you grow. [00:00:00] S0: Can you teach me more about culture? You've written a book about it. You've studied some very interesting cultures that you wrote about in the book. If you had to teach a seminar or something on what a culture is in the first place, and then how to design one, given what you do and who you are? And then how to make sure people live by it.