Marc Andreessen - Making the Future - [Invest Like the Best, EP. 232]

My guest today is Silicon Valley icon, Marc Andreessen. Before co-founding the legendary venture capital firm, Andreessen Horowitz, Marc was an early pioneer of the internet. At age 22, he built Mosaic, the first widely adopted web browser and the technology that underpinned Netscape Communications. Marc was an early proponent of cloud computing, social networks, and the software business model. In each case, Marc seemed to be well ahead of the crowd. During our conversation, we explore how software is making the world better, how slow sectors like education, healthcare, and housing are eating the economy, and Marc’s vision of the future for A16Z. Please enjoy my conversation with Marc Andreessen. Before we transition to the episode, I wanted to highlight our newest series, Business Breakdowns. Each week we do a deep dive into an individual business to understand what makes it great. Find more information on joincolossus.com or search for and sign up to the Business Breakdowns feed on your preferred podcast player. For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. ------ This episode is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors. With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Affirm, Teladoc, Roblox, or almost any company of interest. All you have to do is log in. Visit tegus.co/patrick to learn more. ------ This episode is brought to you by Paxos. Paxos offers your customers crypto buying, selling, transferring, and more with easy to integrate APIs. Whether you’re a small fintech or a large financial institution, Paxos takes care of everything in the backend – from licensing and compliance to custody and exchange. You can start offering crypto to your customers within months. To learn more, visit paxos.com/patrick. ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:04:10] - [First question] The ways in which software is eating the world [00:06:25] - The power of transitioning from atoms to bits and its impacts [00:09:57] - Potential downsides and credible concerns as we shift into an automated world [00:16:00] - Major impediments of productive growth over the coming decades [00:23:12] - Real change versus false change due to COVID-19 writ large [00:30:06] - Thoughts on the rising cost of post-secondary education in light of the internet [00:37:03] - Why doesn’t Google have their own university and if they might in the future [00:41:30] - Whether or not an entrepreneurial focus on generally slower sectors may produce excess returns [00:44:17] - Thoughts on hardware, its unit economics, and its role in shaping society [00:47:52] - How to think about investing in immensely complicated, large-scale projects [00:54:10] - What they’re building at A16Z, a new crypto fund, and where their sights are set [01:03:09] - East coast investing styles and things we can borrow from them [01:06:01] - Potential plans to step into the public equity space [01:11:09] - Defining why it’s time to build and the imperative it sets [01:15:13] - The kindest thing anyone has ever done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  Conducting effective primary research shouldn't take weeks, it should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. Teegus solves these problems and makes primary research faster and better for professional investors. Teegus has built the most extensive primary information platform available for all investors. With Teegus, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake or almost any company of interest. All you have to do is log in. Still want to do your own calls? Teegus has a solution. Experts that are just as good or better than what you'd find on other networks for

• 1:26Patrick O'Shaughnessy?

  just $300 per call, not the $1,000 or more that others charge. If you're curious about Teegus, call the top performing investment manager you can think of. They're probably already a Teegus customer and they'll point you in the right direction because customers, myself included, love Teegus. Visit tegus.co/patrick to learn more. To hear more about how investors use Teegus, stay tuned at the end of the episode where I talk to Elliot Turner of RGA Investment Advisors, a longtime Teegus customer. This episode of Invest Like the Best is brought to you by Paxos. I have personally interviewed Paxos's CEO Chad Cascarilla on this podcast before and I'm excited about how they're changing the crypto landscape. Whether you're a small fintech or a large financial institution, with Paxos crypto

• 2:09Patrick O'Shaughnessy?

  brokerage, you can offer your customers crypto buying, selling, transferring and more, all with Paxos's easy to integrate APIs. Paxos takes care of everything in the backend from licensing and compliance to custody and exchange. You can start offering crypto to your customers within months. I've gotten to know Paxos over the years and have been personally impressed with their track record. With clients that include PayPal, Venmo, Revolut, and Bank of America, they are the most trusted infrastructure provider for crypto and blockchain. I'm excited that more fintechs and banks are starting to offer crypto features and Paxos crypto brokerage is the best way to get to market quickly and safely. To learn more, visit Paxos.com/patrick. That's P-A-X-O-S.com/patrick.

• 2:55Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 3:22Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 3:47Patrick O'Shaughnessy?

  My guest today is Silicon Valley icon Marc Andreessen. Before co-founding the venture capital firm Andreessen Horowitz, Marc was an early pioneer of the internet. At age 22, he built Mosaic, the first widely adopted web browser and the technology that underpinned Netscape Communications. Marc was an early proponent of cloud computing, social networks, and the software business model. In each case, Marc seemed to be well ahead of the crowd. During our conversation, we explore how software is making the world better, how slow sectors like education, healthcare, and housing are eating the economy, and Marc's vision for the future of A16Z. Please enjoy my conversation with Marc Andreessen. Before we transition to the episode, I also wanted to highlight our newest series, Business Breakdowns. Each

• 4:29Patrick O'Shaughnessy?

  week, we do a deep dive into an individual business to understand what makes it great. Find more information on joincolossus.com or search for and sign up to the Business Breakdowns feed on your preferred podcast player.

• 4:42Patrick O'Shaughnessy?

  So Mark, we're going to cover a ton of territory today. I'm going to start with some of your iconic ideas and we'll start with maybe your most famous, which is this concept of software eating the world. I want to focus on the middle word eating. I think everyone understands software, people understand the world. Could you describe exactly what you mean by eating? Like, what is literally happening here?

• 5:01Speaker 02

  Part of it is just trying to be colorful to make it interesting, but the thing that's happening is quite literally, it's actually a concept from Mr. Fuller, believe it or not, 100 years ago. And he called it, I think his term for it was ephemeralization. And the reason I'm getting confused is because economists have a separate term they call dematerialization. Think of those two terms. And so Mr. Fuller had this thing that he had. It's amazing that he saw this. He saw this in like, I forget what it was, like 1910s or 1920s or something, you know, way before the computer was invented. But he looked at sort of the progress of sort of industrial development at a time where people generally had a very different point of view. He said, basically, with science and technology, we're getting better and better at doing more and more with less and less, until ultimately

• 5:42Speaker 02

  one day we'll be able to do everything with nothing. Then the literal like meaning of what he meant, and this is why economists now have this idea, dematerialization. The literal idea is like, you know, in the beginning of industrial development, you're using raw materials in this just grossly ineffective way. Like, you're just mining for huge amounts of natural resources. You've got this just incredibly inefficient process you're making steel. So you're just using huge amounts of ore, you're using incredibly inefficient engines, you're using huge amounts of oil, you know, to generate very small amounts of power. And then what basically happens is you get more and more advanced, you get much more efficient, use less natural resources, use less energy, and you're getting better and better results. It's funny that he observed that was actually happening, you know, with just simply the art of science and technology even before computers. And then software is

• 6:23Speaker 02

  that alchemy that finishes that. And ultimately, I think, in the far future, you know, delivers ultimately his vision of doing everything with nothing, which is quite literally taking activities, productive processes, entire categories of products and services that have a real world footprint, a footprint made of atoms today, and ultimately turn them into bits. We've all been through this in the last 18 months, the degree to which travel, driving to the office and the actual physical office building, quite literally got dematerialized into video conferencing. It's sort of one of these just like classic incredible examples of that phenomenon. That's the long-term arc. That's ultimately where it's headed.

• 6:57Patrick O'Shaughnessy?

  I've seen you describe it elsewhere as just the ultimate lever on the physical world. And I think of Veklov Smiel's work on energy, where you've got sources of energy and that you've got the efficiency, like how much of the energy can you eke out of the fossil fuel or the nuclear rod or whatever. It seems like software is the best possible way, not just to make bits or atoms, rather, more efficient, but also remove them from the equation. I think that's what you're saying. Do I have that roughly right?

• 7:23Speaker 02

  The way I put it is basically, it's like, look, if a physical product can be replaced by software, the example I always use for people who are trying to think about this from scratch is to get up in the morning, most of us used to have an alarm clock, a little plastic box that sat on our bedside table, plugged into the wall, but you yell at us to get up in the morning. There was this entire company, Radio Shack, that was in the business of selling us all these little plastic boxes that did all these things. Now that little plastic box, that alarm clock gets nabbed on your phone, and so is the answering machine, CD player, and so is the DVD player, and so is literally dozens or hundreds of little things. And so for anything that can be quite literally transformed or replaced and transitioned from atoms to bits, like that happens. That caused kind of a form of reaction, that original essay and that argument, which basically is, okay, smart guy, like that makes sense for alarm clocks and whatever

• 8:06Speaker 02

  and newspapers, but what about cars? Or what about, you know, houses? You can't drive bits. Like, if you do need to go from one place to another, you at some point need bet metal and glass and rubber at the form of a car. There are certainly things that will always have some real world footprint, at least for a very long time. But to your use of this term lever, basically the way to think about it then is software is a lever to be able to have those physical systems and products become much more efficient and much more powerful, you know, way in advance of them ever actually being eliminated as physical products. That's happening with the car in real time, which is, first of all, like the car is being transformed into basically a rolling supercomputer, but still bet metal and glass and rubber, but more and more the value of what the car is, and you know, quite literally the functional value, quite literally the economic value of the car is, is being basically turned into software. These things are supercomputers on wheels.

• 8:51Speaker 02

  They're now, you know, starting to drive themselves. The entire basis for competition in the auto industry is to transition to software. The entire basis of how people are going to evaluate one car versus another is going to be on the basis of the software, which is very different than how people used to think about these things. The other way to think about it is how is the activity of all those cars coordinated? This is where you get this kind of magical phenomenon in the form of these systems like Lyft and Uber where, just think conceptually for a second, like, how did Lyft or Uber come into being? The thing that literally happened was a programmer sat down, typed in a bunch of computer code on a computer and pressed Enter. And the program, and the code started to run, and then the next day, cars and their drivers started to drive to different places and pick up passengers who they normally never would have even known about, and those passengers all of a sudden had a completely new way to get a ride.

• 9:35Speaker 02

  You configured an entirely new revolutionary real-world transportation system, not by building a new kind of car, not even by buying a lot of cars, not by building a train tracks or a monorail or suborbital rockets or any of these things, but just having software re-coordinated existing physical resources into a far more efficient form. Airbnb is the same thing for housing and so forth and so on. And so, software is the lever in the world. Somebody types in code, that code runs, the real world changes. And the real world changes, not just arbitrarily, but in a way that's more efficient, that's more organized, that's more productive, that provides more opportunity to people. There's just this enormous future runway. As software is becoming pervasive in our world, it's like every physical item is getting a chip, as every chip is getting connected to the network, as this technology kind of saturates every kind of physical product around us, which is what's happening,

• 10:19Speaker 02

  the software increasingly is the coordination layer. You have this long arc of improvement in the physical world that actually doesn't require a complete replacement of the bits, but just lets you use them much, much better.

• 10:29Patrick O'Shaughnessy?

  Do you think there are credible downsides or potential downsides to this trend? You might call this like the Luddite question or South Park, they took our jobs, like the automation problems that people talk about. What, if any, do you think are credible concerns about this inexorable trend?

• 10:45Speaker 02

  It is economic change. It is change. Of course, this is a process that's been running for a very long time. Once upon a time, all of mankind was doing subsistence farming. The good news is the subsistence farming jobs went away. Those were not very good jobs. All the jobs that everybody has who's listening to this podcast, these are all jobs that got newly created as a consequence of technology at some point in the last 300 years. It is a process of change. It is a process that results in creating more and better jobs. We're all relieved that we don't live in a world pre-automation for that reason, because we really, seriously, quite quite dramatically would not want the jobs that preceded technology. We are all the beneficiaries of this trend, but it is change kind of in the moment. There are entire fields and professions that do get eliminated through this process. A classic historical example is there was once a thriving professional world of blacksmiths. The job of the blacksmith was to put shoes on horses.

• 11:30Speaker 02

  Horses were the dominant transportation technology at the time, and when the car came out, like, the blacksmiths were not happy. And there were blacksmiths that went out of work, and there were blacksmiths that had to retool into a different career, had to lay their lives in a way they never would have wanted to. And there were blacksmiths that never had the same standard of living on the other side of that. It is change, and it is a disruption of the status quo. There's a few things that you just have to kind of put balance against that. I think one is kind of the point I already made, which is that the result of this process is more and better jobs than you had before. That is good for many people in their own lifetimes that get to have a better life as a consequence. And by the way, it's doubly true of their kids. And I think this is a big difference between people who think about this process abstractly and people who kind of think about it in the real world, which is if you ask any responsible parent,

• 12:12Speaker 02

  ask any responsible parent, would you like your kid to have the same job you do, or would you like them to have a better job, a different job, a different... Ask a parent who works in a blue collar profession. Ask a parent who works on an assembly line or works in the frontline that are sort of manual labor, the harder work. You want your kid to be doing that, or would you rather your kid, software developer, or artist, or a job in which you're in a very comfortable physical environment, you're not running the risk of, like, workplace accidents? And so forth, and higher paid, and able to provide better for that kid's family and for ultimately your grandchildren. And virtually all parents will say that they're in favor of that. This is progress. This is how it happens. So I think that's important. The other really important thing I think people just miss, and this is sort of this massive disconnect between the narrative and then the facts or the statistics, is basically like there's this perception...

• 12:54Speaker 02

  A narrative that we live in this time of unprecedented technological disruption. You have these both very triumphalist kind of analyses of like soccer seeding the world. Or you've got these very negative blasts. The New Yorker did that big piece a while ago about how awful disruption is and how technology is destroying everything and making everything awful. There's this narrative that this is this time of unprecedented disruption, technology-driven disruption. Then you actually look at the numbers. The number that you look at to try to get a handle on what's actually happening is productivity growth. Productivity growth is the economic statistic that captures. It captures a bunch of things, but primarily it captures the impact of technological change on the economy. You can quite literally just get a gauge on like how much is technology transforming the economy in a given year by what the productivity growth number is for that year and productivity growth.

• 13:36Speaker 02

  You'll know this productivity growth was much higher from call it the 1920s to the 1970s than it was from the 1970s to today. Generally speaking, the rate of technological change in the economy has been decelerating for the last forty years, not accelerating. And everybody thinks it's been accelerating. It's actually been decelerating. By the way, productivity growth has been decelerating. Several other important related metrics have been decelerating. The rate of new business formation has been decelerating. And again, this is one of these contra-narrative things where you think entrepreneurialism is everywhere. It's like, no, no, actually across the whole economy, entrepreneurialism is in decline. Company turnover is in decline. Job turnover is in decline. You know, there's this narrative that like your kids are going to have like a lot more jobs in their lifetime than you do. That was true at one point and it's not true anymore.

• 14:18Speaker 02

  And then there's these two other really interesting metrics I always look at when you get to the jobs questions, which is if you look under the net employment numbers, which are the headline numbers, you know, you'll read the headline numbers every month or whatever of X hundred thousand jobs are created this quarter. That's a net number. But that's net of job gross creation and net job gross destruction. It's literally creation minus destruction. And it turns out the creation to destruction numbers are much higher than the net numbers, but they're also falling. And so the rate of new job creation in the economy has been falling for forty years. The rate of new job destruction has been falling in the last forty years. By the way, another interesting thing. The aggregate level, I think I have this right from memory, the aggregate job creation and destruction rates in the U.S. are something like four X per capita, their respective rates in Europe.

• 15:03Speaker 02

  Europe has like a Far more rigorous draconian, you know, regulatory system aimed at basically stalling economic change. They have succeeded in that mission and the way that we know that is they've succeeded by basically dramatically reducing both the rates. They've done what they wanted to do. They've reduced the rate of job destruction. There's a lot less job turnover. They've also correspondingly really sharply reduced by an equivalent amount of rate of new job creation. And of course, the result of that is unemployment rates in Europe are higher, wage growth is lower, new job creation rate is lower. Generally speaking, this has been, you know, I would argue a bad trade for Europeans in general. You can make an argument either way, but it's like you also have the counter example of society that has decided that they want even less change. And I don't know that it works out that well. You want to parameterize that, which is like, we're not actually in this era of like just enormous technological change, the way people think.

• 15:47Speaker 02

  And we can discuss why that is. It's a very interesting question. It's me just to the conclusion that actually the criticisms are actually a hundred percent up based. They're completely wrong. If you want more job creation, if you want higher wages, and if you want more of a sense of opportunity and potential and the ability to be fulfilled and the ability for people to provide for their family and for their kids to have great jobs in the future, you actually want more technology in the economy. You want more productivity growth. You want more economic change, which again is very contrary to the current narrative.

• 16:14Patrick O'Shaughnessy?

  I think this productivity growth thing is like the most fascinating thing in the world because how odd it is to put the numbers against what feels, especially in 2021 and maybe something's changing or has changed post-COVID. But what feels just like explosive experimentation in lots of sectors beyond software that were sort of stagnated for a while. So it begs the question, you kind of alluded to it, like if we agree that productivity growth is good and want it to go a lot faster, what are the major category impediments to that potentially happening over the next 10 to 20 years?

• 16:47Speaker 02

  To your point, let's talk about this in two phases. Let's talk about it up until 2019. And then let's talk about what might happen from here because I think the world maybe did just change in this respect in a pretty interesting way. So basically from call it 1971, if you look at the charts from like 1971 to basically 2019 is this era of stagnation is the wrong word because like there was a lot of change, but like this sort of decelerating rate of change. So my analysis is basically that the thing that's confusing on that is the economy is not homogenous. All sectors of the economy aren't the same and what's happened Over that forty year period is this really sharp divergence between different parts of the economy. There's a chart, we don't have it in front of us right now, but there's a chart that maybe you could link to. Probably seen before, which is this chart, the economist Mark Perry post updates to on a regular basis. He calls the chart of the century.

• 17:31Speaker 02

  And it's the chart of price curves by sector in the economy. It's like average prices across these huge economic sectors. And basically what you see is it's a tale of two cities. Basically, there are a whole bunch of sectors. Let's call them the super fast change sectors, if you will, there's kind of super fast growth sectors or super fast. The sector is getting disrupted on a regular basis. These are sectors like computers and media and retail. By the way, cars and clothes and food, most of the stuff you buy. Those sectors basically over a twenty, thirty, forty year period. What they experience basically is this really rapid rate of price declines. Price declines and then also and or like dramatic improvements to the product. The canonical example might be just the television set.

• 18:14Speaker 02

  If you spent like thousand dollars on a television set forty years ago, you got, you know, a thirteen inch, you know, whatever twenty one inch maybe CRT thing. If you spend a thousand dollars on television today, you get a hundred inch, super skinny wall mounted. This like most amazing at home cinematic experience you can possibly imagine. And in fact, they're having trouble in the TV industry even holding the prices at like a thousand dollars. Like by the top of my TVs now are like three hundred, four hundred dollars. They're just spectacular, they're just amazing. That's representative, that's great example, that's representative of a sector that has just had a ferocious rate of technological change over the last forty years. So very rapid price declines, very rapid product quality improvements. By the way, very rapid volume growth, way more people have TVs today than had forty years ago and have way better TVs.

• 18:57Speaker 02

  I mean, forty years ago, people didn't even necessarily have color TVs, and now they've got these like cinematic things. That's representative of maybe call these the fast economic sectors. And by the way, in a lot of those sectors, there's been just like a enormous amount of job growth. So the amount of job growth that's taking place in like making entertainment for those TVs or video picture. There's been huge job growth in those fast sectors. Then you take the other sectors, we might call those the slow sectors. There's a bunch of those, but three really big ones, housing, healthcare and education. And those sectors exhibit the opposite behavior, the opposite behavior of your TV set. So the hundred inch TV set that covers your wall is going to cost a hundred bucks. The four year college degree is going to cost a million dollars. And it's like the four-year college degree is basically, just think about it technologically, it's unchanged experience from a hundred years ago. Getting a degree from a college/university today, it's the same set of activities, it's the same format,

• 19:42Speaker 02

  it's teachers in the classroom, it's written exams. But there's been no technological change whatsoever and prices have exploded. It's a great example of you've got a sector where you would think the Luddites would be happy. Because it's like technological change is not happening, but then you see these explosive prices. And then you kind of look at the nature of these categories. So let's say housing, education, healthcare. It's like, well, those sound familiar. Why do those sound so familiar? It's like, oh, yeah, that's what we call the American dream. That's what we call being like middle class. What's the definition of the American dream of sort of being middle class, upper middle class? It's like, I've got a nice house in a nice neighborhood, I've got my, send my kids to really good schools, and I've got really good healthcare. In those three sectors, prices are exploding through the roof. You have either very little technological change happening in those sectors. It's actually possible you're actually going backwards. It's possible you're actually losing productivity in those sectors as time passes,

• 20:26Speaker 02

  because the administrative blow is driving this huge increase in cost. Now, here's the thing, there's a bunch of things that are also sort of interesting about those sectors. So one is very little technological innovation happening in those sectors. Houses don't really get built differently. Hospitals don't really get run differently. Schools are exactly the same. Two is these sectors are huge. These are like giant slices of GDP. These are like far bigger industries than like televisions or books, food. These are huge. Healthcare is a sixth of the American economy, on its way to being half. And then, of course, housing and education is also super expensive. This is the answer to the question you asked, which is, the reason why the economy as a whole is not going where you would think it's going is because these sectors are most of the economy. And then think mathematically what's happening, mechanically what's happening,

• 21:09Speaker 02

  which is if the prices of the fast sectors are falling and the prices of the slow sectors are rising, and the slow sectors are eating the economy. Mechanically, they're becoming a bigger and bigger percentage of the economy. The non-productivity growth, non-price declining, non-technologically innovative sectors are becoming the economy. This is the ephemeralization point. Like, all this stuff that has a lot of technological change is becoming ephemeral and cheap, leaving everything else to become where all the money goes. And then you get to this kicker on it, which is housing, education, healthcare. The other thing they have in common is this very specific form of government intervention in those markets. And that government intervention comes in two parts. One is restricted supply. In all three of those sectors, there are very sharp government-driven restrictions on the provision to produce supply in the economy, and we could talk about that. But, of course, the problem with restricted supply is you drive up prices.

• 21:53Speaker 02

  Because you drive up prices, voters get very unhappy, and so then the government subsidizes demand. This is the phenomenon, you just take colleges as an example. You have a literal college cartel in the US. You have an accreditation agency that accredits colleges, universities, run by the incumbent colleges and universities. The accreditation is necessary to get access to federal student loans. Without federal student loans, you can't make these business models work in the current structure. But the consequence of that bottleneck of supply, which is supported by the government, which is enabled by the government, because otherwise they would just break it up under antitrust grounds, they let the federal student loan program be kind of leashed by it. Because the restriction supply, prices rise. Because prices rise, voters get upset. Because of that, politicians put more money into federal student loans.

• 22:35Speaker 02

  But if you put more demand, if you put more money into an economic sector with restricted supply, the result is prices go up even more. And so then prices go up even more, and then voters get even more upset, and then politicians subsidize even more, and then prices go up even more. And so in all three of those sectors, they're in this doom loop that's going in the opposite direction of what everybody thinks they're worried about. They're not in a doom loop of technological innovation and automation. They're in a doom loop of lack of technical innovation, steadily escalating prices, steadily escalating government subsidies, right, with this incredibly restricted supply. And in that formulation, there's no limit to how much these things can cost. There's no limit to how much a house in San Francisco can cost. There's no limit to how much heart surgery in a hospital can cost. There's no limit to what a four-year college degree can cost.

• 23:20Speaker 02

  It can potentially cost infinite, because the government will just keep subsidizing it. I look at that, and I'm like, well, it's obvious what we need to do. We need to technologically disrupt those sectors. We need to do to the slow sectors what we've done to the fast sectors. We need more technological innovation. If we don't do that, this story evolves in the exact opposite direction that everybody's worried about, which is what's actually happening right now.

• 23:39Patrick O'Shaughnessy?

  If that brings us through to 2021, you mentioned that maybe something has happened that might cause a shakeup in this inertia. I almost want to go example by example here because they're so big, they're so important, and it could give us a couple of different lenses to view what the future might look like. So I guess the first, as an umbrella concept, what has happened as a result of COVID or in 2021 that you think is different? And then maybe we'll start with education to dig in a little bit on how we might attack this problem because to me, it seems like the most obviously ridiculous one. There's a network, there's accreditation, there's actually the stuff you learn. We can attack those things with technology. But before we get to the example of education, I'd love just to hear your thoughts on what really has changed versus what's changed Mirage as a result of COVID.

• 24:22Speaker 02

  I think the big thing is just the system shock. Start by saying, look, we're going to talk about some positive things that are going to come out of COVID. So, you know, important to kind of note upfront, like COVID in general was very bad. It was very bad for a lot of people. It was very bad for a lot of families, has severe health consequences for a lot of people. A lot of people died. It was also like very economically disruptive and a lot of people have got very badly damaged by it. A lot of small businesses have gotten destroyed. So overall, it's like a big negative and we wish that we hadn't gone through it. That said, it is going to have consequences and I think some of those consequences are actually potentially quite positive. So the big one is just like it's a system shock. You know how life works is most days, weeks and months are a lot like the ones that came before. Life just kind of rolls along and through once in a while you kind of tweak things a little bit, but generally tomorrow is actually a lot like

• 25:03Speaker 02

  today. And then you may either as a worker or as a manager or as a CEO or as investor or whatever, you're an entrepreneur, you may have some idea on how to do something radically different. Gee, maybe I want to like go live somewhere different from where I work and tell them that's okay, that's kind of weird, different. Or maybe I want to start a new kind of online retail business that doesn't even have a physical storefront. Or maybe I'm a CEO and I've realized I actually have 10,000 too many people. Maybe I have 10,000 people answering the phones and I really am ready to replace that all the software, but I'm worried about the effect on my company if I cut 10,000 people out of a customer support function. Or maybe I'm a restaurant chain, maybe I'm the CEO of McDonald's or whatever, a restaurant chain. And maybe I think it's time to actually build a big delivery component to my business. But I think my shareholders will get mad at me because it's a large amount of cost to get a new delivery business up and running.

• 25:47Speaker 02

  So people have had all these ideas, I think, for a long time of things that they might like to do differently. They just haven't had catalyst. There's been no kind of environmental setting for which I think a lot of people could pursue the more radical ideas that they had. And so I think COVID as a system shock is an opportunity all of a sudden for a lot of those ideas. First, for a lot of experiments to get run during COVID, right along those lines, which have been really interesting for a lot of people, both personally and businesses. But the other is like, okay, now it's like everybody has a cover story. If I ever wanted to reorganize my company, now's the time. If I ever wanted to fundamentally eliminate job departments over here and create new lines of business over there in a way that would freak people out, now basically it's just like, well, because of COVID, we're going to do this. If I always wondered like, you know, why is the CEO, do I have all these offices?

• 26:29Speaker 02

  And everybody commutes to the office and they kind of dress up in these kind of funny clothes and they sit there at their desks and they just like stare at their screen and do email all day. Maybe they could have done that at home. Now I have an excuse to say, hey, we're not going to have an office anymore. And all of a sudden, instead of being like a weird thing that freaks everybody out, it's like, oh, of course. In COVID, we ran the experiment and it turns out maybe we don't need these offices. It's this really unusual opportunity to take stock from first principles of how we think things should work and how we want to live and possibly draw very different conclusions. So that's the kind of macro backdrop in that things get really interesting. So there's implications kind of all throughout the economy, but the really big one is just for the last, whatever, three thousand years. If you were an ambitious, capable young person and you grew up in a village or you know, some remote location or whatever, and even a mid-sized city, if you wanted access to top-flight economic opportunity,

• 27:14Speaker 02

  you moved to the biggest city you could find. And this has been a long-running, this way pre-dates technology that's true of London and Venice and many other big cities for a long time, for thousands of years before technology. Economic opportunity has always been in the city. And then, of course, that also means there's always been this lifestyle trade-off, which is like, okay, I can make more money in the city. I'm going to live worse for the same amount of money. And then, of course, that problem has gotten particularly acute in the last 20 years because of all these crazy housing policies where the cities where everybody wants to live don't want to build more housing. And then, of course, Now you have just like this general collapse of civil order and this incredible spike in crime. Decided to turn our superstar cities into Gotham for some reason, except apparently with no Batman. I have all these friends, it's like a running joke out here. I have all these friends who like live in San Francisco.

• 27:58Speaker 02

  And I've been teasing them for years. It's just like, okay, I've been accusing my friends who live in San Francisco specifically, the specific city of San Francisco. I've been telling my friends for years, you only live in San Francisco for the stories. You want the like crazy stories. I came home last night and there were like almost people having sex in my front yard. Usually get people to kind of admit that they kind of like that up to a point. But then it's like, I took my three year old out yesterday, went down to the park and we got a, somebody, a junkie tried to like stab my three year old with a syringe, you have a used syringe. The jokes start to get less funny over time. You just have this generalized collapse of these environments. That was a problem that was already developing. And of course, that's really been exacerbated over the last eighteen months. So it's like, okay, what's that trade off? What is it worth a hellscape in order to have this spectacular job? If you have to make that trade off, it's a difficult choice, but all of a sudden, lo and behold, you don't have to make that trade off.

• 28:42Speaker 02

  And maybe it actually turns out that remote work, and this is what every CEO found during the pandemic, is actually remote work. Remote work's not perfect. There's going to be a lot of changes that companies are going to make because of remote work and there's experiments that we could talk a lot about that, but. Generally speaking, it worked really well. And it worked much, much better than anybody thought it would work. There's no company of any size that I'm aware of where any of the knowledge work. There's a production plant that might have gotten shut down for a while or something, but every company I know of that has knowledge work and knowledge workers. They all had good experiences with remote work across the board. If you think about just economy, no bank went down, no stock exchange went down, no internet company went down, nothing, no insurance company.

• 29:21Speaker 02

  This might fundamentally change what we thought we knew from three thousand years of economic history, which is this idea that where you work, where you live has to be connected. And maybe fundamentally, they really don't. And then at that point, now you're in a whole new world. Housing is an example, already completely changes this housing question. Cause it's like, okay, now maybe people are going to maybe separately optimize their work lives and their home lives. Maybe they're going to live in a very different kind of built environment. My favorite example is if I were in the real estate business, what I'd be doing right now, which I'm not, but if I was, I'd be trying to figure out, find really nice mid-sized cities. Or larger towns that are like really nice phys- environments, really safe and like good schools and just generally really nice places to live. And then build like basically new kinds of multi-generational housing. Basically, you know, compounds, neighborhoods where you could have 12 or 15 or 20 homes interlinked,

• 30:07Speaker 02

  where you could have basically all the members of extended family. Every member of the family could have three, four, or five thousand square foot house and you could all be clustered together. And collectively, you would be paying less than you'd be paying if you were all living in one bedroom apartments in San Francisco. Kids growing up in that environment might have fundamentally kind of more pleasant upbringing, especially surrounded by extended family, but then they might still have access to all the top economic opportunities in the years ahead because they can just video in and they can get the internship at Google or whatever. And have the same career that they would have if they were in San Francisco. And that's the kind of thing that I think becomes possible now that might be a really fundamental break from how things have worked until now.

• 30:38Patrick O'Shaughnessy?

  You mentioned this idea of knowledge work and how swimmingly any company based on knowledge work went through this period, shockingly so. It brings me to education, which of the three categories to me is by far the most confusing because on the one hand, you can learn anything you want online in much more depth and speed and fun than you ever could in history. Yet the cost is going up. How should we think about this? Should we think about it as that bundle of accreditation network and actual education? Should that be unbundled? How could we attack this such that? Because on the other side, you have those stats around, if you go to college, everything's better. And I don't know which way the causality runs, your incomes are way higher and your health is better and like all these other things. So how should we square this circle? Like, it just seems so confounding to me that we could have the internet and yet this cost keeps going up.

• 31:24Speaker 02

  Yeah, that's right. So a couple of specific things happened over the last 18 months. So one is my wife teaches at Stanford Business School and I saw her actually go through this. In like one week, Stanford was like, everybody's going home. Professors, they basically said, which professors are willing to teach online? And it was like, whatever, half the professors were like, yeah, no way. I'm not doing that. The other half of the professors were like, okay, I'll give it a shot. For the professors that were willing to teach online, they literally had to construct their own method and system for doing it. All of a sudden, on the fly, create a new way to teach courses online. And then their courses actually got a lot more popular because a lot of the other courses got canceled. They all got just thrown in the deep end of the pool for online learning. And again, it's one of those things like it went better than anybody had a right to expect. It was by no means perfect because having Week to retool our classroom in person at Zoom is not exactly optimal.

• 32:08Speaker 02

  It's a pedagogical methodology. You might want to have a chance to think more systematically than that. But again, it worked fairly well. It worked a lot better than people thought. The education system kind of ran this experiment. A bunch of things happened. I think one is, I think a lot of parents of K through 12 students. I think it's the first time parents saw what their kids are getting in the classroom at the K through 12 level in many, many years. Most parents, if you're in your whatever 30s or 40s and your kids are in like whatever sixth grade or eighth grade, you were taught in the classroom, you know, whatever 30 years ago. It turns out some things have changed.

• 32:41Speaker 02

  The current curriculum is quite a bit different. At a lot of schools, I know a lot of parents were just shocked, absolutely shocked at the stuff that was coming across. There are these great viral videos that have gone basically like teachers getting caught on video basically saying, yeah, this is a big problem. The parents are seeing what we're teaching, like they have to figure out somebody to get back in the classroom. So they can't see it anymore because you don't want parents interfering with whatever's happening. On the extreme end, you've got like parents who are just like, oh my God, this is so much different than I thought it was. By the way, maybe you like that, maybe you don't. It certainly feels like we're on the front end of a pretty dramatic homeschooling boom. I believe some set of parents are like, I'm not sending my kids back to that. That's one set of things. At the college level, it's actually funny. The phenomenon you described, like it really stresses this question of what is college? You just mentioned like sort of advanced view on colleges. College is not one thing. It's a bundle of things.

• 33:25Speaker 02

  It's quote unquote education, but it's also a daycare for young adults. And then it's also like a, you know, social dating environment. And then it's also a testing gateway kind of thing on the way in. And then there's a, you know, certification branding thing on the way out. So it's a bundle of these things. And so I think that the streaming experience, there was this meme that went out that was like popular internet streaming services. Hulu, $60 a year, Netflix, $100 a year, Harvard, $54,000 a year. I think it really like kind of stressed the people. It's like just sitting at home and getting a bunch of video lectures and doing a bunch of exams is nice. And I'm sure that's useful for some of those classes are used. That obviously is not most of the value to your point because right, because otherwise you would just be like watching courses on YouTube. You'd be getting basically the same thing at this point. So it's basically not bad. So what do we know about what colleges and universities actually are?

• 34:10Speaker 02

  What we know, and Brian Kaplan's probably written the best on this. We know is it's mostly the stamp of approval. And we actually know it's mostly the stamp of approval because of this thing that Brian Kaplan talks about called the sheepskin effect. Which is basically, this interesting question, which is like, suppose you go to Harvard for seven semesters out of the eight, but you drop out right before that last semester. You have seven eighths of the learning. Do you then go out in the workforce and make seven eighths of the salary? The answer is no, you make half the salary as somebody who completed that last semester. And so there's two possibilities in the sheepskin effect. One is all the actual skills are taught in the last six months, which is probably not the case. And at least if your college experience is like mine, that's not the semester where you're studying the hardest.

• 34:51Speaker 02

  So that's not the case. And so what's the case, which is it's the stamp of approval. It's the brand that you get when you successfully complete the degree. And then you kind of dig underneath that. It's like, okay, what exactly does that brand mean? And it actually turns out it means a couple of things, very specifically, in my analysis at least. It means that you passed an IQ test on the way in, which is basically, and it's quite literally, it's SAT, ACT admissions process. You made it through the front door and basically, basically what happened was employers used to do IQ testing directly 40 years ago. And then it became very politically unacceptable to do that. And so employers for the last 40 years have been laundering the IQ testing through the universities. They've been letting the universities do that on the front end of the university admission process with use of scores like the SAT and ACT.

• 35:33Speaker 02

  But that signal persists, which is if I'm hiring somebody who's 22, who got a degree at a top school, I know they made it through that admissions process. That means they're smart because they had SAT or ACT scores high enough to clear that. So it's literally a laundered IQ test. And that's significant because the universities are currently in the process of dumping the tests and they're dumping the SAT and ACT. And this is amazing to me. The universities are voluntarily dumping half of the value in certification, right? For their own political reasons. So that's going to have consequences. We could talk about that. And then the other thing, the sheepskin effect, the reason why the sheepskin effect is real, the deeper reason that that happens, the psychologists think and people who study this stuff. Is it's basically, it's a test for the personality trait of conscientiousness. Quite literally, the personality trait of I finish what I start. I'm a responsible adult and I'm capable of finishing complex projects.

• 36:17Speaker 02

  And this is why graduates out of top schools are so attracted to employers is because it's somebody who's very smart, who has a demonstrated track record of high conscientiousness. Those are the ideal employees. Like, that's what you want for the highest end jobs. Like, those are the two qualities that you want. And so basically, like, I think there's an argument that a huge amount of the sort of activity at the university level is a kabuki dance around fundamentally these two tests. The test for IQ and the test for conscientiousness. And then I think if you put your employer hat on, you're like, okay, that works pretty well up to a point. But like, maybe that's not working as well anymore because first of all, these universities are dumping the tests, the IQ tests, and so like, I'm not going to get that signal anymore. And then the other is, is a four-year college degree the only way to prove conscientiousness? And maybe there are other ways to do that. And by the way, maybe finishing online coursework is actually the same signal.

• 37:02Speaker 02

  And it's not the same signal today because people aren't used to it yet. People are still getting used to this new world, but sitting here five years or 10 years or 20 years, do we really believe that the only way to kind of check that box that says I'm a conscientious adult is that I went and sat in a classroom for four years? It is hard to believe that that persists, especially with all of the other consequences of the educational system that are kind of getting so pathological. And that's the long run opportunity and we're excited about that. As VCs, we're excited about that. We're trying to back online education companies that are kind of behind that trend. And again, it's like COVID doesn't change all of that overnight, but COVID is enough of a system shock where I think it's going to cause more people to be asking these questions.

• 37:35Patrick O'Shaughnessy?

  The job being done here in large part is reduced search costs for employers. And it's a kind of a workaround, like you said, a laundered testing. Why not start universities? Like, why doesn't Google have a captive university and just own the stack? Make it more efficient, make it more tailored for the actual jobs they need to fill? Do you think that might start happening, that big companies will actually create replacements for this system?

• 37:58Speaker 02

  So it's starting to happen. I mean, and there are companies that have done this for a long time. GE for many years, I think they still do. They have their actually their own management school, literally its own offsite facility. McDonald's actually has had this for a long time. They have this thing called Hamburger University. In theory, you can enter McDonald's as a line worker and then at some point you go to McDonald's University or Hamburger University and you get literally the training. And at some point you become a franchisee or a manager or an executive at the company. GM had, what do they call it? Kettering University in Michigan, in Detroit. It had a different name for a long time and it was where GM basically trained up their own people. There is a history of this. Arguably, this is part of this general transition towards, you know, I don't know, complacency or something over the last 40 or 50 years, where I think a lot of big employers just decided that they could outsource all this. Here would be one interpretation, right?

• 38:41Speaker 02

  Which is basically the US government decided post-World War II to just flood the university system with money. It's like, okay, if that's gonna happen, then we might as well just piggyback on top of that. That did work for a long time, and maybe it's just working less well now. So yeah, no, look, I think a lot of companies are gonna do that. Google, I forget the latest, but Google has a program. They've at least announced, I think they have. If I believe I recall correctly, I think Google has now formally removed college degrees from their recruiting process. I mean, it's actually funny, which is they've actually done that from the left. They've actually done that as part of their quote unquote equity thing. Which is basically it's quote unquote unfair to discriminate against people who didn't have the opportunity to go to college. But it results in the same thing that we're talking about, which is I think they have a way of testing and evaluation now for their incoming funnel.

• 39:22Speaker 02

  That doesn't require you to have a college degree and you get evaluated, at least they claim you get evaluated fairly as compared to people who do have college degrees. They seem like they're pushing on that pretty hard. Look, I think the dumping of the SAT ACT, I think that alone, I think any employer with their head screwed on straight is gonna be like, wait a minute. Now what is this signal? It's literally half the signal is big nuke. So I guess the good news is college degree is still a conscientiousness test, but the IQ test is being tossed out. That stresses, this is incredibly politically charged topic, and so there aren't a lot of employers who can like stand up in public and say, you know, we need to start IQ testing again. Or take the SAT as part of your, you know, application process to work at the company. But they're gonna need some signal. At the end of the day, they do need performance, and to get performance at some point, they need intelligence. They're gonna look for some other proxy. We've got various companies that are operating in this space.

• 40:06Speaker 02

  One of them is, you know, our company Udacity, has been doing this for quite a while now, with this concept of nano degrees. So here's another thing that you see. So here's another thing that happened where I think the education system was pathological. This is always this thing whenever people who like run universities kind of talk in public, it's this interesting thing where their university presidents always seem to take great pains to point out that the purpose of a college degree is not to get a good job. The purpose is not to get a good job, the purpose is not, you know, filthy money. Purpose is not this or that. They sing these odes to like living a good life and, you know, achieving social justice and all this stuff. And it's like, people grew up in different settings. I grew up in the rural Midwest. I always knew the entire purpose of the college degree was to get a good job. I was never confused by that because I always knew what the alternatives were. I knew what the default was. It's like working at a gas station, which God bless people who work at gas stations, that was not for me.

• 40:51Speaker 02

  What some of these new private sector solutions have is they get away from maybe the flight of fancy of the whole thing and they get much more down to brass tacks, which is like, okay, skills for a job for an employer. And then, by the way, it turns out employers are pretty interested in that. And so there's a lot of partnerships. And if you'd ask these example where they have like explicit partnerships with employers and they work with the employers upfront on crafting the curriculum. And it's like, okay, if somebody goes through this program and if they get these skills, they know how to do, let's say, mobile app development and machine learning and data analysis. Then there are these jobs available and we'll hire these people for these jobs. It's a much more fundamental. You know, I don't know. It's like the knowledge work equivalent of trade school or something like that. If you can get the good jobs coming out the other side of that, for a lot of people, that's like, wow, that's fantastic.

• 41:33Speaker 02

  And maybe I don't have whatever and I believe school in my resume, but I've got a great job and a great life and a great ability to provide for my family and all the same skills and it's great. And by the way, if I like philosophy, I can spend my spare time reading about philosophy. I guess put it this way, the more abstract and weird and detached the legacy system gets, the more practical and pragmatic I think the private sector will be in filling the gap. And at the end of the day, like employers need people who are smart and who can do the work. There is an opportunity here for a new kind of system with just works better.

• 42:01Patrick O'Shaughnessy?

  From a selfish investing point of view, do you think that focus of entrepreneurs on these big areas that have not seen the cost deflation, the slow sectors can or will result in higher returns for technology like investments because there's so much white space to make improvements?

• 42:20Speaker 02

  Good news, bad news. We talk about this all the time. So this is very much a good news, bad news story. The good news with these slow sectors is the markets are gigantic. The good news is that competitors are like not good. They're generally not only not good, like they generally have incentives wired in the wrong direction. They've got the Thelma Louis strategy. It's like driving themselves off the cliff for reasons I don't fully understand, but they're going for it. I don't understand how the universities are going to continue their claim on this amount of federal student loan funding with all their other behavior. Like, I don't understand how that continues, but they seem on board with it. So the incumbents are like headed in the wrong direction. And then, yeah, there's very little technological change happening. And so you would think that if you could inject technology and have a better way to do things, you can potentially build something very large. I think that's all true, by the way. The bad news is these sectors are just harder to operate in for all the reasons we've discussed, like they're very entrenched.

• 43:04Speaker 02

  There's all these systematic kind of issues you have to work through. And then again, you go back to the government, the government is very involved. Take education as an example. If you're going to start a new education company and trying to compete with colleges, universities in any way, you have this fundamental question, which is, are you going to have access to the federal student loan money or not? If you do have access to it, you have to fit into the existing system, in which case can you really innovate? If you want to do something different such that you're not going to have access to it, then you're at an immediate economic disadvantage. To the incumbents because you don't have access to that money. So you've got this real basically economic disconnect core of the business model that you have to figure out a way through. And so basically what we find is these founders, the founders in the slow sectors are different than the founders in the fast sectors. The founders in the fast sectors are just like, I'm going to build a better product. I'm going to take market. I'm going to focus on my customers.

• 43:48Speaker 02

  I may have some theory, but most of what I'm doing is just I'm going to hit the market as hard as I can with the best product I can, and I'm going to kick butt and it's going to be great. The slow sector founders have to be, I would say, much more sophisticated, more sophisticated because their business models are more complex and there are more issues. And so they have to have like a fundamentally like the government relations kind of approach from the very beginning. They have to have some sort of more advanced theory on business model, different kind of fundraising plan. The company will kind of stage capital differently. It might take longer to develop. There are more things that can go wrong. By the way, the incumbents are very powerful. The incumbents have achieved almost complete regulatory capture in these spaces. And so new education startups should be ready to come under just withering assault from Washington or from Sacramento because all of the teacher unions and all of the universities

• 44:30Speaker 02

  like and all of the people who are basically wired into those systems are going to just try to kill it. I don't know. It's like it's hard mode. It's attractive to a certain kind of founder. Some of those founders are very naive and they just get kind of crushed through the process. On the other hand, some of those founders are very sophisticated and very ambitious. And then there's this giant brass ring at the other end, so they're going for it.

• 44:49Patrick O'Shaughnessy?

  Obviously, you've been extremely focused on funding this software eating the world trend. What about hardware? It seems that this is kind of the, this doesn't fall in either of the categories we've talked about so far. Hardware as a technology has been a key part of the world's story over the last 300 years. How do you think about who finances this? Who builds it? What's important to build that we haven't? What are your thoughts on hardware tech more generally?

• 45:12Speaker 02

  Hardware is just more difficult. The easiest tech startups are always 100% software. It gets more difficult from there. There are 10 things in hardware that can kill you as a company that just don't exist if you're just doing software. Well, the most notable one is actually playing out right now for a lot of companies, which is because of COVID, there's this so-called supply chain interruption happening right now for chips. And so there are a lot of components. You're building a hardware product. The product is usually made out of components from multiple places. There's a whole bunch of chips and other kinds of things you need to build these things. And then the nature of hardware is if you're missing one of those components, you can't build your thing. If your thing has 40 components and you have access to 39 of those, you're stuck. Which is why like Elon is an example, you know, running Tesla, he's always put this big focus on he's trying to verticalize their supply chain. He's been trying to bring everything at house as much as he possibly can.

• 45:56Speaker 02

  It's specifically to get past this risk where any one vendor can hold him up, either intentionally or unintentionally. There's a bunch of hardware companies right now that like can't build product because they can't get chips. By the way, there's another big issue, which is this is a startup challenge, which is when Apple goes out to like buy chips in Asia. They open the negotiation with a check for five billion dollars. They buy out all future manufacturing capacity of a certain kind of chip for the next three years. And then you show up as a startup and you want to buy like 10,000 of those chips and you're opening Gambit as a check for two billion dollars. You should get laughed out of the room. It just puts you in hard mode. Like many of the great entrepreneurial successes have been hardware startups. Because it is harder, arguably, there's less competition and if you win, the prize is bigger. It's a harder road. The best of those founders, they tend to be very good at fundraising.

• 46:38Speaker 02

  Like this way, there's a reason why you end up with like these multinational, basically industrial conglomerates. There's a reason you end up with these companies like, you know, in the old days GE or in the new world, Apple or whatever, that are operated all these different sectors and do hardware at such massive scale. And it's because there is a big scale advantage in that industry. So it's harder. And again, this is why, this is why software has been such a blessing in some sense, which is software as a technology has just really opened up entrepreneurship, a lot more sectors of the economy because it's relieved this dependency. And so, you know, I think generally that's been a net positive. I don't think we've lost anything because that's happened. I think hardware was always hard to do. It's just now we have something that's somewhat easier to do. A lot of hardware is commoditizing. There's a really interesting, actually, economic phenomenon that I've been trying to figure out recently, which is there's this concept of what's called the flattening of the supply chain.

• 47:21Speaker 02

  Another example of this ephemeralization concept, which basically is like, well, just think computers as an example. If you open up an old computer from like 20 or 30 years ago, like just the number of parts in the computer is just a lot more than the number of parts in a computer today. Like you open up a computer today and it's like, it's a future concept now and in computers called system on chip. You literally have these single chips that have the equivalent of what used to be, you know, a dozen or two dozen or three dozen other chips. And they've just all been integrated onto a single chip. That idea, basically, that's happening broadly in the hardware world, which is basically the number of parts is shrinking. Which is actually pretty exciting. It's basically like a lot of constant stress and drama around global trade has to do with very complex supply chains. With all of these different kinds of components that go into making a car or phone or something like that. And if you get these hardware products to the point where they just have like a lot fewer pieces

• 48:06Speaker 02

  from a lot fewer places, then you can start to strip away a lot of that complexity, start to strip away more of this dependence on foreign partners that might not be reliable. I also think there's that sort of underlying thing that's happening, which is these supply chains are being flattened. And so maybe in the years ahead, it will be easier to build hardware just because you need fewer pieces. It'll still be harder than doing software, but maybe it gets easier.

• 48:23Patrick O'Shaughnessy?

  Thinking back to this idea of factor productivity growth and the idea of just really complicated projects, your partner Alex had a great suggestion, which was to ask you how you think about financing things that are very complex. The specific framing he recommended, which I love is what would like a series A round into the Manhattan project have looked like? How do you think about this financing of very complex and therefore meaningful and worthwhile projects?

• 48:48Speaker 02

  You do it by the process of kind of elimination work backwards, which is like, why did you need Apple to do the iPhone? Why wasn't the iPhone a startup? There were a lot of big advances over the last three or 40 years. To your point, like especially in like these more complex fields. They come out of these big companies, the entrepreneurs tend to be building, building the software. It goes back to this thing of like, why do you have these large scale industrial bombers? Why can't you have more startups that are like Tesla and SpaceX is ultimately the question. Part of that is you read the story of Tesla and SpaceX and it's this story of just, there's a couple of things to jump out at you. One is this is a story of just unbelievable drama, stress and risk. Elon almost lost both companies at different points, you know, multiple times. Very tenuous whether those companies could raise money at each point in time. The classic venture backed financing model, you raise a new round of money every two or three years. You need to assume you're doing it with a new lead investor each time.

• 49:31Speaker 02

  If you need five or six or seven rounds of financing to get a complex product to market. If you can't raise that third or fourth round of financing, it's game over. You lose the whole company. As I would say, this is a criticism of Silicon Valley that I give a little bit of credence to, which is like these big hairy audacious projects that involve lots of moving parts. Like they are just hard to do with the classic venture financing problem because of this need to raise multiple rounds of capital. What would be the alternative to that? Like, what would be the counterfactual where you could have told Elon Musk upfront? We're just going to like pre-commit $5 billion to build Tesla or SpaceX. By the way, oh, this is the other thing with Tesla SpaceX, which is they're the only examples. Why aren't there 100 more Tesla? SpaceX. Why are there not companies building like automated machine factories, building thousands of houses for a fraction of the cost of today?

• 50:16Speaker 02

  Or why are there not like these huge new universities or robotic automated hospitals, like all these things that the world pretty clearly needs? Like, where are the startups to do those things? Why do we only have Elon? Why do we only have cars and rockets? And so it's like, okay, well, what if you had a system in which you could like pre-commit five billion dollars? And you could pre-commit five billion dollars to a project like Tesla or SpaceX or any of these other projects? And you were willing to do that because you knew that if the thing worked, it would do what Tesla and SpaceX have done, which is you would generate equity value far in excess of that. So you put five billion into Tesla over the course of whatever its first 10 years. And then if it worked, it's worth 500 billion on the other side. And you make 100x. That's a venture scale, venture capital style proposition that actually looks quite attractive. So then it's like, well, what would it take to basically make an upfront commitment to somebody for five billion dollars?

• 51:00Speaker 02

  It's like, okay, that's interesting. So question number one is, could you raise the money to do that? And actually, like in the old days, the answer to that probably was no. In the current world, the answer to that is probably yes. There are a set of private equity firms that could probably raise that money to have a program like that. There's this global savings flood, there's this just trillions of dollars accumulated capital out of the economy that just doesn't know where to do. There's 15 trillion of negative yielding government debt in Europe. Like there's these giant sovereign wealth funds that have no idea how to invest their money. And so if they had a chance to invest in another dozen or 100 attempts to have a new Tesla, they probably would go for it if you had a responsible plan. So it's like, okay, could you raise the money to do it? And then there's the like, what's the responsible way to pre-commit five billion dollars, right?

• 51:40Patrick O'Shaughnessy?

  Right. How do you let the entrepreneur draw it or something?

• 51:42Speaker 02

  Right, exactly. And there's an old idea that I think could be brought back. And it's a term called project finance. And it's basically how you finance a dam or a bridge or a new like highway or something like that. It's crunch money. It's crunch money corresponding to milestones. You basically have a plan. The plan has very specific milestones along the way. The burn rate escalates over time. You've got these milestone check-ins over time, and then you pre-commit the money, but the money gets released in chunks. And the money gets released additional in progress. You predefine the plan in a much more rigorous way than the general venture back startup does. And then you kind of unlock the money as you go. And then basically you would build a portfolio of these investments. You would probably start, you'd raise some huge fund, you would nominally commit five billion to each to a whole bunch of projects.

• 52:23Speaker 02

  And then you would basically, Darwin would take its course and a bunch of the projects would not hit their milestones. Hopefully relatively early in the process, you'd kill those projects. You would end up funneling most of the money into the set of projects that actually that were making the right kind of progress. This is a doable thing. It's a doable methodology. It's actually like how you've ever read, is it Augustine, um, what was his name? It was a former CEO of Lockheed wrote these great books about large scale project management. And it's basically like, at least how they used to build like new fighter planes. It was a very similar kind of process. Not Skunk Works, is it Skunk Works? Skunk Works was like the lightweight version of this. It was like the venture capital labs version of this. I'm talking about the main line. How they did the mainline projects, like how they built the F-16. It's like on a government contract, but it was like on a government contract with milestones. So then it's like, okay, what would it take?

• 53:07Speaker 02

  Because this is a different way of operating than the venture backed startups. The way venture backed startups work is not like this. The way venture backed startups work is they reformulate the plan on each, on each raise. At each step, they have a plan that's designed to appeal to the next investor. As compared to a plan that's designed to appeal to the investor who pre-committed upfront. And that's a, that's a very big difference. And then you need a different kind of founder as a result of that, right? Which is you need a founder who's willing to basically pre-plan these things years in advance. You need somebody who's really systematic and really rigorous. You probably want to amp down a little bit on the creativity and wildness. This sort of characterizes high tech and you want to probably amp up on the rigor and methodology. Kind of side of things and operating discipline side of things. And then at least in theory, if you found a founder like that, you could line up against this.

• 53:52Speaker 02

  You know, and then of course that begs the question of our times, which is how many more Elons are there? How many more Elons are there? And then it's like, well, are Elon's nature nurture, are they? Can we grow them? Exactly. Where are the cloning tanks? How should they be trained? And then how would you possibly find those people, evaluate those people? The counter argument to everything that I'm saying is basically the venture capital ecosystem, the way it exists today. Did finance Tesla and SpaceX. So Elon didn't need this new method. He was able to make the old method work. Maybe we just need more people who are more ambitious like Elon and they just need to go make it work. And I mean, God knows there's no shortage of venture capital today. So if you can't do it in today's venture capital environment, like when could you ever do it? On the other hand, you go right back to the original question, which is like, why aren't there more Elons?

• 54:33Speaker 02

  There's something in there. There is some possibility here of like, I would say a major kind of conceptual breakthrough. It feels like it may be a sitting right in front of us, but nobody's doing it yet.

• 54:42Patrick O'Shaughnessy?

  You are a not, and your firm are non-insignificant player in this question. And it's a good excuse to talk a little bit about what you're building with Andreessen Horowitz, the firm. I think a lot about velocity and vector for all kinds of companies. And it feels like most investment firms sort of skate away from all the hard questions that we ask of the companies that we invest in. You're thinking about building the firm in what seems much more like a enduring, long-term way. And I'd love to hear you, I guess, first just frame the scope of the ambition for the audience in what you're building at A16Z. And I'd love to talk a bit about how you came to these ideas that you're trying to deploy. The morning that we're talking, you announced both a very large new crypto fund, a new general partner, my good friend, David Haber.

• 55:22Patrick O'Shaughnessy?

  And it just seems like the velocity is incredibly high at Andreessen Horowitz. So I'd love to learn a bit more about the vector. Like, what direction are you going?

• 55:31Speaker 02

  There's sort of the obvious one, which is just technology neutral in some sense. Technology is a tool in every case, and it's up to people, how people use it. And there are technologies used for very bad things. But like, on net, technology is good. On net, technology leads to the world becoming better. Because we've been discussing today, like, there are all these fields of human activity in which very clearly I think we need more technology. And it's going to come from this kind of process, these kinds of entrepreneurs, these kinds of startups. So we're big believers that, like, the world needs more of this, and we're positioned to kind of do more of this to help these companies kind of get financially built in the right way. So honestly, part of it is just conviction. We really believe in what we're doing and why it's good. There is a structural, I wouldn't say it's a secret plan, but I don't talk about it much, just because it gets a little bit abstract. But it's sort of a structural idea that we have underneath us.

• 56:13Speaker 02

  Your audience might actually be more interested in than a normal audience, so I can go through that if you'd like.

• 56:17Patrick O'Shaughnessy?

  Yeah, bring it on.

• 56:18Speaker 02

  This is going to sound really weird, but like, we've thought about it a lot. I call it HP 2.0, Hewlett-Packard 2.0. So if you look at, it was sort of talking about earlier, if you look at basically the history of technological development, industrial production, basically up until the 1970s, the model was basically the industrial conglomerate. There were these companies, GE was kind of the classic for a long time, GM was an example. And then even in the computer industry, for the first 30 or 40 years of the computer industry, you had IBM, you had digital equipment, which was another one of these big ones at the time, and then you had HP. HP was like the founding company of Silicon Valley. Literally founded in the nineteen thirties, it was put on ice for World War Two. They resurrected it when they came back from the war and they built HP.

• 56:58Speaker 02

  And the point is like between basically call it nineteen forty five and nineteen seventy, I don't know, one or two or three. The way new technology products got invented and developed was primarily not by a startup. It was primarily by like a new division of HP or a new division of IBM. And so literally Bill and Dave at HP, I'll just focus on them. They would pick a high performing up and comer engineer, product manager, general manager. And they would basically anoint that person and say, you know, you go forth and build the laser printer. And then that person would create a new division inside HP and they would go and do that. And it would either work or it wouldn't. And if it worked, they would kind of feed it money and resources and talent. And if it didn't work, they would wind it down and transfer those people to other projects. And people would work for HP for their entire careers, but they would go from division to division.

• 57:42Speaker 02

  They would be in some divisions that were growing fast. They'd be in some divisions that were winding down, maybe starting divisions, so forth and so on. So, and then from the perspective of HP itself, Bill and Dave, they basically ran the classic organizational structure. It's the one that GM used to have that Alfred Sloan wrote his whole book about, which basically is like you have this central office. And the central office basically has, you know, a set of functions. It's got this people talent evaluation function, sort of centralized HR. You have a common pool of talent. These companies were famous for moving their high potential people from division to division. I was intern at IBM. If I had stayed at IBM, hopefully I would have been part of one of these programs. But I was intern, I saw it happen, which is if you were an up and coming executive at IBM in the forties, fifties, sixties, seventies.

• 58:24Speaker 02

  They were hopscotching you from business to business like every two years for the first like twenty years of your career. Because they were trying to get you to be as well rounded and generalist and skilled in as many areas of the business as they possibly could. Cause you were a future potential CEO of the company. And so they had this really serious effort devoted to leadership development talent. They knew the same thing that for engineers, they knew who the really good engineers were, they would move them around. If you were in a business at HP that had a particular technical problem, they would transfer in an engineer for another division. Then you could solve that problem. So they knew how to allocate talent. And it was great. If you're going to work at one company for your whole life, which was the model that you wanted your employer to know who you were and to care about you and to try to develop you like that. So that was great. They had capital allocation. They would decide where the money goes. They would have strategy office. So they would have some sense of the future, market trends.

• 59:09Speaker 02

  They would have like a sales overlay function. They would have like large account management out of the central office. So they'd have relationships with other big companies. There'd be somebody at the HP central office who owned the overall relationship with General Motors as a customer, JP Morgan as a customer and had overall responsibility for that. So they knew what all the other big companies were thinking. They had an M and A office, the mergers and acquisitions, regulatory affairs. They had branding, marketing. They have these big marketing campaigns about innovation and all the great stuff HP is doing. But then they'd have all these divisions. And then in each division, the division would own the product. They would own future roadmap for the product. They would often have their own sales force, their own marketing campaign. They'd have their own HR internal division. They'd have their own finance internal division. And they actually would give the divisions quite a bit of autonomy. And in fact, it's actually funny.

• 59:53Speaker 02

  They would actually put the divisions for the most part, not in Silicon Valley. For the most part, the divisions were off in other cities. The same IBM, same thing, Beck. They'd have 20 or 30 other geographic locations where they actually had all these, all these divisions running. And then you'd have these general managers of the divisions who actually had a lot of control. They had a lot of control and autonomy over running the business. They had the report up to Bill and Dave. Then they were expected to do a good job in the business and hit certain financial metrics and so forth. But like they were like mini CEOs, like running their companies. And in fact, basically what happened was venture capital emerged in the 1970s. And basically what happened was venture capital stripped mine the talent out of these companies, especially the entrepreneurial talent. So basically the founders and CEOs of a lot of the great tech companies in the seventies and eighties were either top general managers or top engineers out of HP, IBM and Beck.

• 1:00:36Speaker 02

  Venture capital basically was this siren song basically saying, look, do what you're doing today, run a business. But instead of being a mini CEO, be a real CEO. And instead of working for the greater glory of Bill and Dave, work for the greater glory of yourself. Instead of having to constantly have your best people be stripped away from you to move to another division. How about you just like keep all your best people forever? And why don't you build your own company, right? And by the way, if you're Mr. HP General Manager, start your own company, we'll finance it, we'll venture finance it. You'll control it. You'll be the CEO, but we'll be a minority investor and you go do your thing. And by the way, if you grow up, ultimately maybe you can be the next HP. And then within your company, you can have multiple lines of business. And then the implicit underneath that was then at some point, other venture capitalists will come and they'll try to take all those people. To start more new companies and that was the bootstrapping process for Silicon Valley. Like that's why it exists.

• 1:01:21Speaker 02

  And that's why that conglomerate model kind of stopped working, which is basically venture capital stripped mined the talents and created this entrepreneurial ecosystem out of it. And I think the net result of that was good. Having a thousand or 10,000 companies in Silicon Valley is better than having three. Then we just have like a much broader range of products and you know, much larger number of jobs today would have if everything was still in these conglomerates. But there were advantages to that structure that just like basically got lost. And so then you kind of say, okay, what if I'm just a startup today? So I'm just like a raw startup company and I'm just starting and it's just me and my friends are trying to build a product. What is it that we're lacking? And of course, what we're lacking is all the stuff the HP central office used to do. We're lacking brand. We're lacking distribution. We're lacking money. We're lacking talent. We're lacking any stroke of the government whatsoever. We're lacking any ability to deal with the press.

• 1:02:06Speaker 02

  We're lacking all these things. We're lacking somebody we can call when the shit hits the fan. We're just kind of on our own, running an isolated island by ourselves. Basically, you can kind of tell where this is going as this is this idea of sort of HP 2.0, which is basically, can we construct in the context of a venture capital firm that is a minority investment in impact companies? Can we construct the modern equivalent of what would have been that HP central office from like 1960? And provide our companies with that kind of kind of overlay capability with all of that kind of reinforcement and brand and help and power that you would have had as a division of HP. But then, of course, it's a different deal. We're not in control. HP was in control of all his divisions. We're a minority investor, right? So we ride along with the founders. So it's a different kind of relationship. They don't work for us. But with the huge advantage that we have no need for strategic consistency.

• 1:02:52Speaker 02

  We're not an operating company. And so as a consequence, we are completely unbounded in terms of how many different sectors we can invest in. We're completely unbounded in terms of how many different companies we can invest in. Assuming we can find quality companies. We now, just to give you an example, we now have 250 companies active in the portfolio today where we own more than 10% of the company. HP or IBM at the peak of their power, they didn't have 250 divisions. They didn't have anywhere close to 250 divisions. There's a scalability in the venture model that in theory is much broader. We can provide like a much bigger umbrella across all these companies with the trade off that we don't have majority ownership. We have minority ownership and we don't have control. And so, yeah, it's sort of a Back to the Future thing, but completely evolved for the more appropriate model today, which is the incredibly aggressive world of power entrepreneur who really wants to run their own thing. The last thing they want is boss. We don't propose

• 1:03:37Speaker 02

  to be their boss, but we propose to kind of do all the things to help them along the way that otherwise would be missing.

• 1:03:41Patrick O'Shaughnessy?

  I love the inspiration from HP. Do you take any inspiration from what I'll call traditional East Coast financial firms, sort of traditional Wall Street banks or private equity firms, or it seems like a very, again, different set or way of doing things. Do you intend to borrow concepts from East Coast and blend them into the West Coast style of investing?

• 1:04:02Speaker 02

  Yeah, so the East Coast examples are, they're all from more than 100 years ago. So the answer is not from the last 100 years. Abstractly, right? What has been the role of the East Coast and kind of American business culture, society for the last 100, 150 years, right? It's been basically consolidation, consolidation, professionalization, scale. What has been the role of the West? The West is the frontier. That's kind of how the country got built out. It's not an accident. The coast ended up in these roles. Like, the West was always the frontier, up until ultimately the physical frontier was closed. Now we created these new virtual frontiers. The West or the Western mentality, and by the way, there are plenty of people on the East Coast with the Western mentality or with the frontier mentality. So there's no law that says people act a given way on either side of the Mississippi. But just generally speaking, you could say there's a West Coast mentality that says, let's invent something new. By the way, it's not just Silicon Valley.

• 1:04:46Speaker 02

  It's also like LA is another great example. It's like LA is where all the movies are made. Make a new movie. That's an LA thing. Let's own the movie studios in New York thing. It's the same thing in tech, right? Let's start a new tech company. That's a West Coast thing. That's a frontier thing. Let's take that company public and then like interrogate the shit out of it, quarterly earnings for the next 30 years, and demand that it give all the cash back and stop doing new things. That's an East Coast thing. Consolidation and control. They both have their roles. The American engine has been fantastic on both fronts for a very long time. We're best. It's actually fairly amazing if you think about it. We're best at both. We're best at the new ventures and we're also best at the scale multinationals. Our Fortune 500 multinationals are like just outstandingly capable of doing what they do in terms of like servicing customers all over the world. They're primarily run out of New York. They, for the most part, have stopped doing new things.

• 1:05:31Speaker 02

  But they're great. They're at like enormous scale and they've had a huge impact on the world and they generate huge amounts of cash and then they give that cash back to shareholders who don't know what to do with it. On the West Coast, we've been really good at the startup part. Of course, what the West Coast has not been good at is the scaling consolidation control part historically. My term for this, I call this little boy, big boy problem, which is we're the little boy. We start these companies, we get to a certain point and then we hand them off. They get adopted. They get adopted by new parents. Those parents live in fancy places in New York and those parents have very different expectations. The parents have very different requirements and maybe those parents are going to love our companies as much as we do, but probably not. Maybe they're going to want them to continue to do new things and invest in new R and D programs, probably not. One of my ambitions for the Valley, West Coast perspective, Silicon Valley kind of mentality, one of

• 1:06:15Speaker 02

  my ambitions is that we grow up over time and basically, you know, that we basically scale our ability to have our company scale. And this is one of the reasons like we've gone so heavily into growth investing ourselves at the firm is basically to be able to be with our companies for years later beyond the classic venture capital stages. We don't need to do the handoff. There's an opportunity to kind of cross that, but we're going to give it a shot.

• 1:06:33Patrick O'Shaughnessy?

  Do you think that obviously the traditional Wall Street firms, especially the younger ones, so maybe the West Coast mentality ones are more flexible, have gone from public investing down into private very aggressively and very quickly. And often they're more full stack style of investors, meaning they'll do debt, they'll do equity, they'll do all sorts of stuff in between. Do you think that the biggest Silicon Valley firms will go in the opposite direction, meaning, you know, I'll take a radical example, like Andreessen has a portfolio that's all public equities or something like that. Do you think that you'll meet the East Coast infringing on private investing with you investing in public companies?

• 1:07:09Speaker 02

  Oh yeah, for sure. And by the way, the best of hedge funds that do private growth, the best of them are also working their way down into venture. They're coming early, early in stack. We're working our way up. Right now, we're all private, but like it wouldn't be crazy if at some point we decided to continue to expand up the capital stack. The big thing there, I guess what I would say is like, we don't do it, we compete with some of these East Coast firms from time to time on a deal. That's not most of how we experience them, though. Most of how we experience them is as partners on our companies. So generally speaking, they're investing in companies that either we've backed or that other firms like ours have backed. So we end up working with them a lot more than we end up getting with them. I would actually say Like there's actually been a lot more cooperative kind of synergy as opposed to them being some huge threat. And I think it's worked out well for them. It's worked out well for us. The big thing that happened is I would say they are the aberration to the East Coast mentality.

• 1:07:52Speaker 02

  The big thing that happened was the East Coast mentality kicked in really hard after Enron. In particular, Enron and WorldCom. This is the thing that just amazes me about how this history played out, which is you had the dot com crash in 2000. Yeah, there were startups that didn't work, but there was also this like assets, you know, most of the money was telecom. They, so it was called at the time what T M T Tech Media Telecom. Most of the money that was lost was telecom. Telecom was like another zero on top of tech. And then WorldCom was like the big scandal. There were a bunch of others, but like WorldCom was the big scandal. And then Enron, you know, was this kind of bolt from the blue and they were in theory in the telecom business with this kind of bullshit. Trading thing where it turns out the phones on the trading floor weren't actually hooked up. Enron, WorldCom kind of became this giant scandal and then there was this just like enormous freak out.

• 1:08:34Speaker 02

  By the way, justifiably so by like investors and then politicians and then Wall Street and then regulators. And they were just like, holy shit, we can't let Enron, WorldCom happen again. And that led to these regulatory reforms like Sarbanes Oxley, you know, ultimately in the later years, you know, financial services, Dodd-Frank after financial crisis. And then those regulatory reforms, it's like Sarbanes Oxley was supposed to prevent another Enron or WorldCom. Dodd-Frank was supposed to like stop banks from getting to be too big to fail. What ended up happening is those regulations ended up being massive subsidies to the big companies. Then they ended up being massively punitive to startups. For A T and T to deal with Sarbanes Oxley is like easy because A T and T has 10,000 lawyers and accounts. 10,000 people in like regulatory affairs and like they've got the whole system like figured out already.

• 1:09:19Speaker 02

  And so it's just another process for them to work through. For a startup to deal with Sarbanes Oxley is totally different things. It's just a much, much harder fundamental gate towards building a company. Yeah, it's not the only one. There's a bunch of other things like this that happen. The East Coast mentality to, to prevent these big blowups basically implemented a set of reforms that had the effect of punishing startups. The result of that was the startups basically said, okay, fine. We just won't go public. We don't need to do starbase ox and all this other stuff if we don't go public as early. And so like, we'll just stay private for longer because if we're private, we only have accredited investors and all these regulations don't apply and it's going to be all fine. And so that led to this phenomenon where all these private companies just started staying private a lot longer. But they needed the financing, obviously, that they would have gotten once they had gone public or done secondary in the public market. And so then that led to the creation of this category of growth equity.

• 1:10:03Speaker 02

  And then, of course, the result of all this was an exacerbation of income inequality because it was a removal of high growth stocks, young growth stocks in the stock market, where anybody's retirement money can be invested in them. And it was a removal of all of those new companies from the public market and transfer only to people like us who run private money. Right? So the result of the reform was a withdrawal of economic opportunity from the population at large and the concentration of that economic opportunity in the hands of private equity managers. And so it's one of these like weird, the blowback of.

• 1:10:31Patrick O'Shaughnessy?

  Reverse outcomes, right?

• 1:10:32Speaker 02

  It's a regulatory capture playing out in another model. Anyway, my point is the result of that was the East Coast mentality won. They're called the New York DC mentality won in the sense of they just basically put a chokehold on IPOs for 20 years. They got what they wanted fundamentally. They got companies to stop going public. Companies kept developing. Firms like ours scaled up to do more private capital to keep them going. And then to your point, some East Coast investment firms, basically, I would say a small number of them have adapted. But it's like a dozen or so of those firms have adapted to come into private tech investing. Most East Coast firms, most money in the stock market is retirement money. Most of that money is managed by public managers that don't do privates and can't do privates. Most of that money is in mutual funds or index funds. They can't do privates. They're not allowed or they're index funds and they can't make any conscious choices whatsoever. As if that's a good idea.

• 1:11:18Speaker 02

  And so most of the money, basically, it's really dramatic. Most of the money that people need, whatever, seven, eight, nine, 10% gains over time on to be able to finance their retirements, most of that money doesn't have access to the most dynamic parts of the economy. I don't understand how that makes sense. If somebody were looking at that on a clean sheet of paper today, I don't think you would want that outcome, but it is the outcome that it is. And the implication from that is that this private growth investing phenomenon probably has real legs.

• 1:11:41Patrick O'Shaughnessy?

  Two closing questions for you. We started with the idea, the observation that you had famously that software is eating the world. Last year, you issued one that was maybe seemed less an observation, more of an imperative, which is it's time to build. I'd love you to just sum up that message. I think it's a great place to end. Thought it was a great article that came at a very interesting time. What is this imperative? Why is it time to build?

• 1:12:02Speaker 02

  Yeah, there was like the micro thing at the time, which was I wrote it the week that New York City put out the call for people, New York residents to take their rain ponchos to the local hospitals because they were running out of surgical gowns. This is on top of like the ventilator crisis and then this is on top of like, oh my God, are we even going to be able to bring drugs? And so it's just like, how has the most advanced industrial civilization history worked herself in a position where we can't like take surgical gowns? I kind of couldn't take it that week. The big broad thing is it's a civilizational question. It's actually the same. It's related to what we just talked about with the front here. We had a culture, we had a culture in the United States from inception through to like nineteen seventy. The culture was basically production. The culture was production. It was achieving things. It was building things. It was construction, development of nature for the purpose of basically making the life of man better.

• 1:12:47Speaker 02

  It was unapologetic and it was just like, we're going to do these things. We're going to build houses and we're going to like have those houses. They're going to have like heat and then they're going to have this new thing called air conditioning. And it's going to be great because it's going to make everybody's lives better. And then something basically changed in the sixties and seventies where we culturally decided to kind of really strongly tilt in a different direction. And I guess I would say that I think there are people with very good intent, strong arguments based on their own kind of moral views, that it was time to kind of make that change. And you know, that change is kind of represented by environmentalism is kind of the big one. But then there's other theories of basically just it's everything from animal rights to urban sprawl. All these arguments basically against building that emerged. Maybe it should be somewhere in the middle. Maybe there should be, I don't know, like a smart growth agenda or something like that. I just think we seem to have ended up too much in the ditch on this stuff.

• 1:13:33Speaker 02

  We seem to have ended too much in a state where basically we have a system, some people call it utocracy, in which to get basically approval to build anything of significance, you have to get so many people to say yes. That practically speaking, it's becoming impossible. But right back to housing, it's like, what would it take to build? The most obvious thing in the world is build another, you know, whatever million houses within, you know, the short commute distance to San Francisco. Well, it's just impossible, inconceivable, the way the political system is set up, incentives and everything. It's just like, there's just no way. I mean, much less a new freeway, much less a new bridge, much less anything of any size and significance. I was involved in building a new hospital at Stanford. I was involved in the original project planning back in the, I was on the board at the time, the early two thousands. And then the, we helped Manson and then the hospital was finally opened a couple of years ago.

• 1:14:12Speaker 02

  It's like an 18 year project. The process that you have to go through and the amount of money involved is just, I mean, mind boggling. So crazily extreme. It tilted in the direction of not doing these things. They sounded like a Kafka novel. Like, it's just absurd. What you have to go through and the number of authorities that have veto rights and the number of negotiations you have to have and the things that get extracted that have nothing to do with healthcare. It's just crazy. The point of the essay was, it's time to rebalance this. Like, it's time to get back to the idea of what counts as not the process, what counts as not the debate, the discussion. The this, the that, all the concerns. At the end of the day, what counts is if something actually happened. If something get built, if things get better as a result of that. I wanted to argue, basically, it's like, you could have a left-wing view on this and a right-wing view on this. The left-wing view on this is, to the extent the left-wing argument generally is the government should have more power, then the government should be scored more on its ability to build things.

• 1:14:56Speaker 02

  The right-wing view on this is that the market should build things, but in that case, then if you're on the right, like, you really need to live up to being pro-capitalism, anti-corporatism. Anti-corruption, anti-regulatory capture, anti-monopoly, anti oligopoly, anti-pronny capitalism. The institutional right has become, let's say, impure on those topics over the last 50 years, right? It's too entangled with the business. So I think both sides of the political spectrum could actually adapt to this. Interestingly, I got very positive feedback on this message, both from AOC's Chief of Staff on the left, who thought it was great. And Kevin McCarthy, Publican Speaker of the House, who thought it was great. I succeeded in crossing the trade and appealing to both parties. And then actually Boris Johnson, actually Dominic Cummings actually picked it up there for about a year. The, uh, the big message in the UK was, uh, Boris Johnson's podium was build, build, build.

• 1:15:41Speaker 02

  So we'll see where it goes, but at least I was trying to tilt the conversation at least a little bit in that direction.

• 1:15:45Patrick O'Shaughnessy?

  Well, I think it's a wonderful closing imperative. The last question I ask everybody is, what is the kindest thing that anyone's ever done for you?

• 1:15:52Speaker 02

  It's hard to say any answer for me, other than, you know, Jim Clark originally picking me up off the ground in Silicon Valley and starting a company with me. Let me generalize it out, because I get super nervous and rattled when I have to talk about emotional things.

• 1:16:04Speaker 02

  So as an engineer, the most amazing thing about the Silicon Valley ethos that people in the valley all get and understand and people outside the valley really don't get. And then I hear it all the time from people who come to the valley, from people who come from LA or New York or DC and they come to the valley and they join one of these companies, they become part of this ecosystem, you always hear the same thing like three years later, which is, I never realized what it would be like to be in an environment in which people genuinely want to help each other. They genuinely want to help each other advance in their careers in a way where it's not out of because they want something to do in the moment, not because they have some hidden agenda. But every entrepreneur has experienced this, you know, I'm starting a company, it's like people come out of the woodwork and say, hey, can I help, can I send you my friends, you know, can I do this, can I introduce you to the investor, you having a security issue, can I, you know, come in this weekend and help you figure it out. There's this incredible pay it forward ethic to the whole thing. My Hollywood friends always,

• 1:16:49Speaker 02

  they know about this, they're always laughing because it's like Hollywood is like famously the exact opposite. If there are two people in Hollywood and their friends and each of them is trying to make a movie, the famous thing is one of them will happily knife the other. They'd rather lose the friendship and see their friend make a movie. So anyways, I've been a beneficiary of this for a long time. I think part of it is just it's in the water, it's the pay it forward thing, which is other people have been nice and supportive to you and so you feel an obligation to contribute. But also a big part of it, and this goes back to this frontier concept, a big part is the sense of unbounded future possibility. So like in Hollywood, the reason why they're so mad at each other all the time is because there's only so much financing for so many movies. There's very large number of people want to make movies, there's only a small number of movies that are going to get made. And so basically it's like a zero sum kind of mentality. In the valley, like there's no practical limit on the number of new ideas for tech and there's no practical

• 1:17:34Speaker 02

  limit on the number of new startups. And by the way, there's no practical limit on the number of people who can participate. There's no practical limit on the number of people who can learn to write code, learn to do all the other things involved in building these companies. And so there's this sense, and a track record that validates this, there's this sense of there's no limit. If I have a friend and his startup succeeds, mine can also succeed. And in fact, we might succeed together. In fact, we might really help each other along the way. It's a positive some view of the world. And then you just look at the history of the industry like that's how it's worked. For a place that's so kind of hyper capitalist and aggressive and sharp edged, it's just amazingly helpful, supportive, happy, generous environment. I would just say, yeah, I've been a beneficiary of that for a very long time and I try to as best I can to do that.

• 1:18:11Patrick O'Shaughnessy?

  Mark, I wish we could do this for four hours. There's a million other things I wish I could ask you. This has been so much fun. You've been really generous with your time. Thank you so much.

• 1:18:18Speaker 02

  Thank you, Patrick. It's been great to be on.

• 1:18:21Patrick O'Shaughnessy?

  This episode was brought to you by Tegus. In this five-part mini-series, I sit down with Elliot Turner, the managing partner at RGA Investment Advisors, to talk about how he discovered Tegus, how Tegus helps him with his investing process, and how Tegus has made him a better investor. In this week's episode, Elliot and I discuss what features he wants to see from Tegus in the future. If you could improve the service in any way, how would you improve it?

• 1:18:45Speaker 03

  Oh, that's a great question. I mean, they keep moving things in interesting directions. One of the areas I saw a demo of from Tegus is building these packaged insights on companies. So there are some companies where when you type up the ticker, there's not like a handful of calls. There are like 100 of them. And from my seat, when I'm just starting to look at that name, I'm like, geez, which one would be the most value add for me to start on? And I don't have a clear signal in that sense. And so something that sifts through and curates maybe a few packaged nuggets or directs me to this is the most read call or this is the most highlighted call on the name? That's pretty interesting because anything

• 1:19:29Speaker 03

  that saves my time in that sense. Obviously, I want to cast a pretty wide net, but especially when I'm just getting started on something, I want to have an angle that I could hone in on and get focused and get the highest value upfront.

• 1:19:42Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.