Andreessen Horowitz Part II

Alright, backstory's out of the way, and Acquired is rolling three hours deep on the venture firm that changed the game for everyone — a16z. VC marketing? Check."Founder-friendly?" Check. Platform services? Check. Huge valuations and massive fund sizes? Check and check. We dissect it all in glorious detail, right down to the famous office library (located next to the Rosewood on Sand Hill, natch). The story of modern venture capital starts here. Let's Go!!! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Michael Mauboussin on persistence of returns across asset classes: https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdfTomorrow's Advance Man: https://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-manEpisode sources: https://docs.google.com/document/d/12jf9pwTdEuANtdOffUzSzvE0xEJptT0Or-gBSJgk8mg/edit?usp=sharing Carve Outs: Childhood's End: https://www.amazon.com/Childhoods-End-Arthur-C-Clarke/dp/110196703XMKBHD's Studio channel and tour: https://www.youtube.com/watch?v=pkuxIy3kFZMThe Godfather: https://www.imdb.com/title/tt0068646/Who Got the Truth on Spotify!! https://open.spotify.com/track/03X7SwpsCjZIofK8RFPwch?si=649d93b2be7743d5‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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

• 0:00Ben Gilbert?

  I need an M1 so that we can not have this very quiet little background noise that hums that we have to remove in our audio that annoys me to the nth degree. There's a million reasons I need an M1 Mac, but this one is clear and present. I can't wait. September.

• 0:32Ben Gilbert?

  Welcome to season nine, episode two of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:47David Rosenthal?

  And I'm David Rosenthal and I am an angel investor based in San Francisco.

• 0:54Ben Gilbert?

  And we are your hosts. Well, listeners, welcome to Andreessen Horowitz, part two. We last left Mark and Ben in their instant messenger conversation in 2009 with the famous first words, "We ought to start a venture capital firm." And I was thinking the same thing.

• 1:12David Rosenthal?

  Yeah. I think that conversation was actually, it was actually 2008.

• 1:16Ben Gilbert?

  2008. That makes more sense. Launched in 09.

• 1:19David Rosenthal?

  Takes a little while. We'll get into it. We'll get into it. It takes a little while to, you know, set up a venture firm, raise the money.

• 1:24Ben Gilbert?

  Right. You don't just like snap your fingers and have $300 million?

• 1:28Ben Gilbert?

  Well, today, listeners, we will cover the next 11 years from the firm's founding to today. This is the story of the VC firm that basically changed everything in the whole landscape. Super high valuations, massive fund sizes, criticism for both of those things, becoming an investment firm and a media company, popularizing the message that former operators make better VCs than career investors do. I mean, David, reflecting back, it's pretty crazy that A16Z is only 11, 12 years old.

• 1:57David Rosenthal?

  Wow.

• 1:59Ben Gilbert?

  Yeah, they became a big dominant force so quickly. To put it in perspective, they were founded two years after the iPhone came out.

• 2:07David Rosenthal?

  That's right. That's right. Pretty good time to start a venture capital firm.

• 2:12Ben Gilbert?

  Perfect timing. Well, listeners, two things to highlight if you like the show. One is our Slack. And when I say Slack, I do indeed mean the company that A16Z made three-ish billion dollars investing in.

• 2:24David Rosenthal?

  Do you mean TinySpec?

• 2:26Ben Gilbert?

  Oh, sorry. I do mean TinySpec. You're right. We've got a great discussion of these episodes, crypto, investment ideas, all good stuff with a community of 8,000 super smart people like yourself. Join at acquired.fm/slash/Slack. And the limited partner program, this is our members only community where we drop special for subscribers content. The most recent one was with Kyle Samani, who is the co-founder and managing director of MultiCoin Capital. We talked with him about how to manage a crypto fund, how it's different than managing a normal fund, which

• 3:02David Rosenthal?

  Very different, it turns out.

• 3:03Ben Gilbert?

  on this show.

• 3:05David Rosenthal?

  What was his line that was like, oh, because they have a hedge fund and a venture fund all doing crypto. And he was like, well, the demarcation is, you know, if time to liquidity is more than like six, nine months or so, we put that in the venture fund.

• 3:15Ben Gilbert?

  Oh, wow. Yeah, a whole completely different universe. If you want to listen to that or any of the other LP show episodes, or join us on our next upcoming Zoom call with LPs, you can click the link in the show notes or go to acquired.fm/LP. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:51David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 4:12Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:34David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:52Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right. Well, listeners, as usual, the show is not investment advice. David and I certainly hold equity in some of the companies that we're going to talk about on the show. So please do your own independent research. None of this is investment advice. It's for informational entertainment purposes only.

• 5:36David Rosenthal?

  And one other disclaimer, disclosure, I do have a new investing vehicle that I am super excited about. It is called Kindergarten Ventures and it is a angel fund that I've started with my buddy Nat Manning, who's the COO of Kettle, great company that we've talked about a bunch on this show. So as I said last time, a few of the Andreessen Horowitz GPs are small LPs in the fund. I don't think that that has had any influence on.

• 6:12Ben Gilbert?

  I've been keeping you honest.

• 6:13David Rosenthal?

  Yeah. I mean, Ben, you keep me honest here. I mean, I'm going to be pretty laudatory of Andreessen here, but I think I would have done that anyway. But you can keep me honest here.

• 6:21Ben Gilbert?

  Well, David, congratulations. Exciting. You are moving from angel to super angel in the 2008 parlance.

• 6:28David Rosenthal?

  That's right.

• 6:29Ben Gilbert?

  Pretty cool.

• 6:30David Rosenthal?

  And just like Ben and Mark originally, it's not just about seed investing. Really, it's about in a large part, all the great folks on acquired. We invest at any stage, any sector. We are super angels.

• 6:43Ben Gilbert?

  All right. You're starting to spoil stuff. Take us in. You're sounding exactly like one of the tent pole theses of the start of Andreessen Horowitz.

• 6:50David Rosenthal?

  Indeed, indeed. Well, we'll see where kindergarten goes over time. Okay. So as you said at the top of the show, we finished last time with the Ben Horowitz, not Ben Gilbert, gets off the obvious recruiting call from Doug Leone at Sequoia. He hangs up and he IMs Mark. I am, I love it. So you might be wondering like, huh, why aren't they starting a company? Why are they starting a venture firm? Well, venture was something that Mark, at least, had supposedly been interested in, you know, back from his first kind of early days in the valley. He says to the wonderful writer, Tad Friend, in the great New Yorker piece that we are

• 7:31David Rosenthal?

  going to keep referencing today, he says to him about venture capital, quote, "I always thought the entire venture thing was incredibly cool. Going to Kleiner Perkins with the high ceilings, the markers on the wall of all the great companies they IPO'd, Larry Ellison walking through, and at 11:00 AM, the biggest buffet you'd ever seen at a time when I was eating at Subway, it was the closest thing to a cathedral for nerds." That's some way to talk about the venture capital industry. So as we talked about, Mark and Ben, of course, have been doing their super angel investing thing. You know, this wasn't entirely a huge leap, but as many, many people would point out to them,

• 8:13David Rosenthal?

  and of course, as they knew themselves, building a venture capital firm that is going to like lead deals and beat out other venture capital firms to lead deals is a very, very different proposition than being an angel investor.

• 8:28Ben Gilbert?

  Yeah. I mean, in this angel investing they were doing, and we should say Mark and Ben did 36 deals together over just three years. So a deal a month with their own money of, I think about 200K of a max check size. They're pretty much not leading rounds. So they already don't have the dynamic of, you know, needing to be the one to set the terms and come in. That is about to hit them in a big way of a total difference between coming in as a participating and versus lead investor.

• 8:56David Rosenthal?

  Oh man, I'll say, having now made the opposite journey, it is way easier and way more fun not to be a lead investor, but that's a whole nother story. But like we said, it's a pretty interesting and definitely contrarian time to start a venture firm. Here we are in, you know, late 2008, early 2009. Of course, what's going on? The financial crisis. And so, you know, most other VCs, and if not VCs, certainly the LPs, they're all like tucking their tails and triaging their portfolios right now. You know, this is not about deploying more money or starting a new firm. Like Sequoia has literally just done the RIP good times presentation.

• 9:41David Rosenthal?

  You know, it's kind of crazy to like, think that, oh, we're going to go start a new firm right now. Yeah, it's wild. So here they are. And, you know, obviously we've talked about the last time, the big thesis that they have that there is no bubble. They're kind of all alone in shouting from the rooftops here that, hey, like, things are actually great in Silicon Valley. This is not like the dot com crash. The financial crisis is actually only going to be great for Silicon Valley startups. And of course, they are right about all this. But pretty much nobody else is saying this. And Tad would write in the New Yorker piece later, that A16Z was designed from the beginning to be a full throated argument about the future.

• 10:24David Rosenthal?

  Of course, the time when nobody else was making that argument. So they've got this insight. They've got the interest in VC and the drive to make it happen, to go build a firm. They're Marc Andreessen and Ben Horowitz, but they're still just two dudes. And if you want to pull off what they want to pull off, they're going to need a whole lot more than that. So they go to see who else but their old friend, Andy Rackliff. And Andy, by this point, of course, had stepped back from Benchmark and he's teaching at Stanford GSB. And he has just made the jump to become an entrepreneur himself. He has founded Wealthfront.

• 11:05David Rosenthal?

  But of course, knowing Andy, there is nothing that gets him more jazzed than the idea of a, in the words of Howard Marks, that he uses a correct non-consensus bet. And that is obviously exactly what Ben and Mark are trying to do here. So Andy tells him, this is great. I love you guys and I love this contrarian bet that you're making. But you want to be in the upper echelon of VC firms and you need a strategy to break in. And you see, we did this at Benchmark about 10 years ago when we started Benchmark. And we've talked about this a lot on the show, but what we did at Benchmark was we

• 11:46David Rosenthal?

  counter positioned against one of the two major incumbents at the time, which was Kleiner Perkins. Kleiner, as we've talked about, there was the Kretschu approach to venture capital.

• 11:58Ben Gilbert?

  All of our companies work together in different ways. It's sort of like, you know, they're like a mesh network and we sort of sit in the network as the capital provider, but they work with each other in all these different ways.

• 12:08David Rosenthal?

  Yup. And like, on the one hand, that was great. But on the other hand, you know, certainly some of the Kleiner entrepreneurs felt like they were pressured into doing deals and working with other Kleiner portfolio companies that didn't really make sense for them. So what Andy and Benchmark did is they said, there is no pressure from us to do anything else. We are going to treat you as sovereign states and help you make the best decisions for you. So that was one. The second piece of the Benchmark counter positioning against Kleiner, maybe this is the most important. The thing about Kleiner during its heyday was it really was John Doerr. And we got to do a whole episode on Kleiner itself and storied history even before

• 12:50David Rosenthal?

  John Doerr, but like the glory days, it was all John, you know, all their big wins from Netscape to Amazon beyond, it was John that sourced them and John was the reason why the entrepreneurs wanted to take Kleiner's money. But the thing about how it worked, that wasn't talked about a lot, was John would source the deals. He would be the face of Kleiner, the reason everybody wanted to work with them. But then he'd farm out the board seats to other partners and even associates. So how do you counter position against that? Benchmark is like, well, this is great. We're going to be a small, equal partnership. All the partners here are going to be great people you want on your board. You know, what you're getting, somebody from Benchmark, you're getting

• 13:34David Rosenthal?

  an equivalent, maybe not quite an equivalent, but they talked about like an equivalent of John Doerr and your partner is actually going to sit on your board. So then if you're Benchmark, you need to start talking about how important it is who your board member is.

• 13:51Ben Gilbert?

  Right. And it's sort of this like all about the individual. You form one trusted relationship. They aren't promising to do anything for you that, you know, we're not going to like staff up your company. We're not going to help you with PR. We're going to be the best financial investor and board member possible. And you're going to have this really tight one-to-one relationship with someone that you really, really want involved in your company personally.

• 14:15David Rosenthal?

  Totally. And I think it's worth doubly underlining this because obviously it is super important who your board member is. And the right advice from the right board member can make a huge difference. Today, we just take this for granted. It's like, you know, fish and water. You're like, oh, yes, of course, the board member that you have from your venture firm is super, super, super important. That wasn't the case. And you could actually ask the question of like, is that the truth? Period.

• 14:45Ben Gilbert?

  Totally. We're going to talk about a lot of things on this episode that Andreessen Horowitz introduced into common startup wisdom. This was the one that Benchmark introduced into common startup wisdom.

• 14:55David Rosenthal?

  Yep. And the reason they introduced this into startup wisdom was specifically to fight against Kleiner Perkins.

• 15:01Ben Gilbert?

  It was a strategy credit. It worked really well for them.

• 15:04David Rosenthal?

  Exactly. Exactly. So then, of course, the last piece of the Benchmark counterpositioning related to all of this and all working in concert together was Kleiner is this huge firm. You know, it's got lots of tiers of partners and lots of people there and lots of politics and lots of functions that aren't investing partners. So Benchmark, they said, we're going to do the opposite. We're going to be a small, flat, equal partnership. So we're all going to get on board in a way that politics at a bigger firm like Kleiner would sometimes make difficult. Of course, there's a lot of luck that goes into building a venture capital firm as well. And probably the most important thing for Benchmark was that they made that early investment in eBay and like all of this strategy and all this counterpositioning. Sure, that helped, but like.

• 15:51David Rosenthal?

  They got eBay, you know, nothing else kind of mattered after that. And that helped them ascend to the top of the venture capital heap. So now, okay, Mark and Ben, like, they started to know all this and they're hearing this from Andy and they're like, huh, okay, well, what are we gonna do? And, you know, remember, of course, they love Andy, but they hate Benchmark.

• 16:12Ben Gilbert?

  Yeah, and we should say, like, the way that Benchmark established these tenets that they hold true, the way that Andreessen Horowitz is about to, it's not pure marketing, at least from what I can tell in all the research. It is a self-examination of what are the things we hold to be true? And then what are the subset of those things that we can make a really loud marketing message about that we were kind of gonna do anyway, but play to a massive advantage for us?

• 16:37David Rosenthal?

  Yep. So they're like, well, we like this counter positioning thing, Ben and Mark are. Who are we going to counter position against? Not Kleiner and probably not Sequoia, like we talked about on the last episode. Like, you're gonna come at the king, you'd best not miss. And that just seems like really hard. Maybe we should counter position against Benchmark.

• 17:01Ben Gilbert?

  Our buddy Andy's not there.

• 17:04David Rosenthal?

  It's like the old saying, you either die a hero or you live long enough to see yourself become the villain, right?

• 17:09Ben Gilbert?

  Oh, and on that note, I know you're about to talk about this later. And so I won't disclose how Mark announced the existence of the fund. But in the first sentence of the interview that he did announcing the fund, he literally said the sentence, I'm crossing over into the dark side.

• 17:26David Rosenthal?

  That's actually great, because I cut that from the quote that I was gonna use. That's the perfect, perfect. So much later, Ben would actually just say point blank. He was like, yeah, we were always the anti-Benchmark. Our design was not to do what they did. And of course, he's referring to them telling him that he wasn't CEO material, but also just like in general, we're gonna do the opposite of what they do. So now the question becomes, okay, you know, Mark and Ben know what they're going to do. They're going to counter position against benchmark. How do they do that? Well, the obvious first thing is we don't fire founders here and we support young technical founders, help them become the best CEOs that they can be. And we're not going to do what David Byrne tried to do to us.

• 18:09Ben Gilbert?

  And I love the way they talk about this because clearly it's something they deeply believe, having both been computer science undergrads and gone on to become founders of companies. The way that they sort of describe it is without a synthetic network, without a network of what Andreessen Horowitz would become, a technical founder doesn't really have a chance of becoming a professional CEO. The pace of the company's growth is going to require a CEO network, a CEO's sort of understanding of how to organization build much faster than someone can develop those skills. So the thesis behind developing what would later become platform,

• 18:53Ben Gilbert?

  the entire VC ecosystem platform teams was really Mark and Ben saying, well, how can we synthetically create or simulate all the tools that a real professional CEO has? If you are a technical founder, if you are the innovator, because their core belief, they believe that the innovator should be the one who is running the company. And if that is true, oh my gosh, there's all these problems that now we have to like, help them fix.

• 19:19David Rosenthal?

  Totally. Well, now think about how this all fits back into these various VC firms strategies. So what was Kleiner's strategy for overcoming this? It was the Kretzsch, you know? Great. We're going to take all these founders and all these young companies. And how do we turbocharge them into being real companies and building their networks and doing deals? We're going to have them all work together and we have the best companies. And so that's great. Now think about the benchmark strategy, right? Of like, we're going to position against climate. What do you need if you're the benchmark strategy? You need CEOs who are grownups, who are capable of standing on their own and running the companies. Cause they're not going to get a lot of support on that front from benchmark. Cause it's just the partners.

• 20:03David Rosenthal?

  So now it starts to explain some of the behaviors here over the past few decades.

• 20:09Ben Gilbert?

  You show me the incentives, I'll show you the behavior.

• 20:12David Rosenthal?

  Exactly, exactly. Okay, so they start thinking about this, they're like, what are we gonna do? Well, we want to raise a big fund and we want to be a big firm. We're going to have a lot of management fees associated with that. And we, Mark and Ben, you know, we don't really need the management fee income streams. We've made plenty of money and we're used to as being entrepreneurs, not VCs, you know, not getting high ongoing salaries.

• 20:37Ben Gilbert?

  Lumpy cash flows.

• 20:38David Rosenthal?

  Exactly, exactly. So what if we take all these management fees and we staff up? We build a platform at Andreessen Horowitz. So 2.5% of $300 million is $7.5 million a year. That's a lot of money.

• 20:55Ben Gilbert?

  Right, and classically, the, when people say 2 and 20, it's 2% on average for the lifetime of the fund. So you can sort of say, in the back half, we're not going to be doing as much active work on this particular portfolio. So we'll take one and a half at the front end. We want to take two and a half to balance it out. But yeah, David, you're right. It's like, gosh, if we're not paying ourselves, which we should say for at least the first two years, Mark and Ben did not take a salary, we got a lot of cash we can spend on stuff.

• 21:21David Rosenthal?

  Yeah, on people and resources. So then you start thinking about this dynamic. You start thinking about the rest of the venture industry through Mark and Ben's lenses as former entrepreneurs. You know, if you've got these firms that are small partnerships, not that many people, but they're just getting these huge management fee streams. Well, it's kind of weird then that these VCs are telling entrepreneurs, oh, you know, you should take like $50,000 annual salaries, which is what was the norm back in these days. $50,000, $60,000 is your annual salary and you know, you should give us this big ownership, but we're going to make a few mill a year each, you know, rain or shine out of these management fees.

• 22:05David Rosenthal?

  Hmm. Interesting. So the next piece that they start thinking about is of how they can counter position. So Benchmark, more so than pretty much any other venture firm, even to this day, but lots of venture firms felt the same way. They had this Series A purist approach. And really this idea that still permeates venture to this day, that the Series A, that's the real craft of venture. That's the like, you know, the board, it's related to this board member thing that like, that round is the sacred, special round where the shoe leather really gets polished, so to speak.

• 22:46Ben Gilbert?

  And to say why, because in this very clear cut world, which we're not in now of these crazy names for rounds and incredible fluidity of rounds, there was not a seed asset class. There were no seed firms. And so the Series A was your first professional venture capital institution coming in and writing a check into your company, taking a board seat the first time you have real governance. And before that, you have whatever cowboy would help you as an angel investor, get to something that looked venture capital fundable.

• 23:19David Rosenthal?

  If that even happened at all. I mean, in many cases, the Series A, that was the very beginning because you needed a few million dollars to go buy servers and do all that. But by the time we're talking about here in 2008, 2009, the Series A has really become this like catbird seat for the venture capitalists because they can outsource all the real early stage risk to the seed stage with way less capital, you know, have these companies get going. And then once they kind of start to show product market fit, and a lot of the risk has been removed, then the Series A venture firms can come in, lead around, and there's still all this, you know, sort of hangover baggage with the round where

• 24:02David Rosenthal?

  it's like, well, it's the norm that whoever leads your Series A is going to get a huge ownership percentage in your company, like 25, 30% ownership. And it turns into this total bonanza for the venture firms who aren't really taking that much risk. So Mark and Ben are like, hmm, well, what if we say that Andreessen Horowitz will do any round at any time, we'll do seed, we'll do lots of seeds and we won't take board seats in the seed investments and you don't need that much capital, we won't give you that much capital and we won't take that much ownership. And then we'll do series As, sure, but we'll also do series Bs and we'll also do growth rounds.

• 24:48Ben Gilbert?

  So listeners who are not professional venture capitalists, listening to this, it kind of sounds like, okay, cool. Yeah. Like they'd have a different strategy. They don't focus on a stage. They just focus on lots of stages. And for anyone who has raised a fund before, you will know how insane this sounds. Like what venture capitalists classically pitch to LPs is our sweet spot investment is this. It is a company that looks like this. It is a stage that looks like this. It is an ownership percentage that looks like this. It is a check size that looks like this. And it's a set of governance rights that generally look like this. And we intend to do that 20 to 40 times. And that is how we will construct our portfolio. And so therefore, there can be a bunch of different variations among the companies as they go along. There'll

• 25:32Ben Gilbert?

  be winners, there'll be losers, but they'll all kind of start out like this. So that's what you're buying. And by starting a venture firm and being like, we're like stage agnostic, we're governance agnostic. It's just like, so wait, sorry, what's the thesis?

• 25:46David Rosenthal?

  Totally. It seems crazy. But, you know, again, they look out at the ecosystem and they're like, wait a minute, there's these super angels of which we've been them. We're doing great.

• 25:57Ben Gilbert?

  We're cleaning up on Twitter and Facebook and LinkedIn and Zynga, I think.

• 26:02David Rosenthal?

  Groupon, like all of these companies, we're in them, we're doing great at seed. Why on earth would we stop that? Then they look downstream past the series A. There's a whole set of venture firms at this point in time that all they do is they just ride the coattails of Sequoia and Benchmark and Kleiner. And they say, what series As did they do? Great. We're going to come in, we'll market up like 2X at the series B, we'll ride along. And they're doing great. And so Andreessen's like, you know, Andreessen Horowitz, they're like, we can blow these guys out of the water. Then they look across even further and they're like, whoa. There's this whole other asset class out there. There's like, I'm talking about like Summit and TA and Silver Lake, which is going to come back up. Now those guys, they're deploying

• 26:46David Rosenthal?

  a lot of capital. They're getting less multiple returns, but like the dollar returns that they're generating are enormous right now.

• 26:55Ben Gilbert?

  In pretty short periods of time with very, very protected downside. So like very low risk, low multiple, but fast return, big dollar amount investments.

• 27:05David Rosenthal?

  Totally. And they don't even pretend to offer any of the stuff that like venture firms pretend to offer. So like, huh, okay, great. So this whole set of things, this, we're going to build a big firm, people wise, we're going to use the management fee resources to build out platforms to help technical founder CEOs become CEOs.

• 27:28Ben Gilbert?

  And they would later call these networks, like each individual function, you know, recruiting or finance or acquiring enterprise customers. They call these networks at the firm.

• 27:39David Rosenthal?

  Yep. So we're going to do that. We're gonna not necessarily focus solely on series As. Like we'll do series As, series As are great, but we'll also do seeds. We'll also do growth rounds because we think there's opportunity there and we can break in. And then the governance thing, like sometimes we'll take board seats, sometimes we won't take board seats, but we don't necessarily need to. And maybe that'll help us scale. I would say all of that collectively becomes the counter positioning against benchmark. You know, and it works to varying degrees. Like on the whole, it works great. There are a few specific things that don't work. So like the seed and the governance in particular, I think these are good ideas and they work now, but at the time, they sort of inadvertently

• 28:23David Rosenthal?

  leave a pretty big flank exposed to old school VCs here, which becomes this signaling effect.

• 28:31Ben Gilbert?

  And this became talked about for like five to seven years after this was an issue.

• 28:35David Rosenthal?

  Oh my God. People are still talking about this like three, four years ago, which is insane.

• 28:39Ben Gilbert?

  All right. So what is it, David?

• 28:41David Rosenthal?

  So if Ben and Mark are going to go out there and do all these seeds and not take board seats, well, the question then becomes if they don't invest in the next round in the series A or later, is that going to send a really negative signal to the market of like, oh, well, Andreessen Horowitz had the inside information on this company because they did the seed and now they're doing the A in a competitor. Does that mean that the original company that they seeded is no good? Other VCs in private and in public vehemently attack Andreessen Horowitz on this front. The reality is the most exemplary cautionary tale about this is completely the opposite. And that is of course Instagram.

• 29:26Ben Gilbert?

  Instagram. Yep.

• 29:28David Rosenthal?

  Which is so great. So Andreessen, along with baseline, does the seed in Instagram and then chooses at the series A in one of the most boneheaded decisions of all time to instead back competitor pick please.

• 29:43Ben Gilbert?

  Well, right. Cause they ended up both being in their portfolio because Instagram started as bourbon pivoted into Instagram. Suddenly Andreessen Horowitz has a problem because they have two competing things in their portfolio and they're like, well, we got to pick one and we're picking pick please.

• 29:57David Rosenthal?

  Totally. So now what actually happens here? Like, oh, what you would think, you know, if you buy the narrative of the attack against Andreessen Horowitz. Oh, signaling effect Instagram, they're toast. Far from it. They go raise a series A from benchmark, from Matt Kohler at Benchmark. And of course, we know what happens there and what happens to pick please, which is nothing exciting. So the reality is the signaling effect kind of works more against the VC firm than against the companies. But, you know, hey.

• 30:26Ben Gilbert?

  So David, we've got this thing where the innovator should be running the company. Andreessen Horowitz is going to have all these networks that are going to augment that innovator and give them a CEO like, you know, resources at their disposal. So they can really be the professional CEO and the technologist who brought it into the world. They're going to spend a bunch of management fees to make this possible. They're going to raise a pretty big fund for the time, $300 million. They're doing wacky stuff with portfolio construction.

• 30:55David Rosenthal?

  Okay. So all this is great, right? They've got this great theory, the grand unified theory of counter positioning and, you know, market entry strategy into the venture industry, blah, blah, blah. All good. But Andy's like, you know, look, guys, there's this one other thing, which is the reality on the field. I've done a bunch of research here, you know, since I joined the faculty at GSB and I've concluded, you know, with data approved, what we all knew all along, which is that there's a very small, finite set of companies that get started in the valley every year that actually matter. And it is a blood sport to win the lead position as an investor in those companies. And you're fighting against benchmark and Sequoia and

• 31:38David Rosenthal?

  Kleiner and you can counter position all you want, but like, you're going to go fight against John Doerr and you're going to go fight against Bill Gurley and you're going to fight against Maritz and Leoni and all these guys. And how are you going to win? Just like, you know, the Mike Tyson quote, you've got your plan, you're going to, you know, it's going to work until you get punched in the mouth and they are going to punch you in the mouth. And how are they going to punch you in the mouth? Well, they're going to say things like, you know, yeah, Mark and Ben, like Mark and Ben sit at the browser and that's great and whatnot. But, you know, they haven't been VCs. They haven't been board members. They haven't been professionals here. But the other thing that they're going to say, and that's going to cut way deeper for you guys, is they're going to say that you guys don't have staying power. You know, as Don Valentine would have said back in the day, obviously not about Mark and Ben, but he would have said, where are the monuments?

• 32:23David Rosenthal?

  What's Netscape? What's Opsware? You know, you guys have built these good stories, good companies. They're not around anymore. Who's using Netscape? Nobody. So you talk this big game, but where's your eBay? Where's your Cisco? Where's your Oracle? Where's your Google? They aren't there. You want to work with us? We've got those monuments. So there's this great quote from the Fortune cover story when they launched the firm. But there's this quote in there that says, "Just five years ago, Andreessen's image was more that of a smart, amiable billionaire playboy who dabbled ineffectually at technology's fringes. He seemed more Paul Allen than Bill Gates." Then, in the same piece, this

• 33:07David Rosenthal?

  is from the launch of Andreessen Horowitz. Like, think about, you know, who was placing these quotes? There's a quote from Steve Case, somebody dinged up Steve Case to like, give a quote here. "Mark is like a rock star who had his first album hit big and then the next ones were not quite the same."

• 33:23Speaker 02

  Whoa.

• 33:25David Rosenthal?

  Brutal, right? Like they're getting punched in the mouth hard.

• 33:30Ben Gilbert?

  Wow, those are brutal. So David, you're implying then that in this punch you in the mouth landscape that's going on, the journalist is doing research for the story and they just get connected with people who are gonna, from day one, right out of the gate, beat the crap out of Mark and Ben's accomplishments.

• 33:46David Rosenthal?

  Yeah, like I'm sure Mark and Ben and the great people they were working with on the PR side, which we'll get into in a sec, they weren't the ones that pointed, pointed people to this quote.

• 33:58Ben Gilbert?

  The Steve Case thing is interesting, too, given that Mark reported to him for nine months as the CTO of AOL.

• 34:03David Rosenthal?

  Totally. There's actually another sentence to the quote where it really softens the blow, something like, people have a lot of respect for him, that he's persevered, or something like that. But the point, like, the damage is done here.

• 34:13Ben Gilbert?

  Yep.

• 34:14David Rosenthal?

  So they're like, huh, we're gonna have to deal with this. Fortunately, they know somebody who knows a thing or two about punching other people in the mouth, and that is their other old board member from the LoudCloud Opsware days, the original OG Hollywood super agent, Michael Ovitz.

• 34:38Ben Gilbert?

  Yeah.

• 34:39David Rosenthal?

  So great. We've talked a lot about Ovitz on this show, CAA, and the whole Disney debacle, where he goes and becomes president of Disney. And then we, of course, talked about him joining the LoudCloud board after that on the last episode. But I think if Andy was the, you know, the inspiration for the sort of highfalutin strategy of entries in Horowitz, Michael was the inspiration for the like, okay, how are we gonna get this done? So the quick story, you know, on Ovitz is he started in the late 60s in the mailroom of William Morris, you know, the storied, long-term Hollywood talent agency, and everybody started in the mailroom back in the days. And the dynamic in Hollywood was totally broken. Like, we're talking here about how

• 35:25David Rosenthal?

  The venture and startup dynamics were a little broken at this time. Like Hollywood was bad. The studios controlled everything. They held all the power. They held all the creative decisions. You know, the talent and the artists, the actors, the directors, the writers, et cetera. They were, they were more, but little more than indentured servants. And the agencies like William Morris, you know, they claimed to represent the talent, but they real, they knew who the real customers were, which were the studios.

• 35:56Ben Gilbert?

  I don't know if we've talked about it before on the show, but I've talked about it before with other folks in the Pioneer Square Labs context of how startup studios fit into the landscape. But I love this equivalence between the Hollywood and tech, where especially in the old school days, you sort of have the VCs, which are a lot like the studios. And there were three to five major VC firms with money. And there were three to five major studios with money that could greenlight a movie. And then of course, you've got the CEO founder, who's a lot like the director of a film. And then everyone else, including the actors who works on the film, is a lot like the team of the startup. And watching the way that the power dynamics evolved between these two ecosystems in parallel is really fascinating.

• 36:41David Rosenthal?

  Totally. So what Ovitz does, so he and a bunch of buddies from William Morris, they're like, screw this, there's gotta be a better way. They leave and they go start their own firm. It's exactly like Jerry Maguire. Jerry Maguire was actually about this guy, Lee Steinberg, in the sports agent world, but it's the same story. So they leave, they're gonna start a new firm and they're gonna focus on the talent, not the studios. They're gonna figure out how to deliver the power to the artists and the talent and take it away from the studios. So how do they do that? One, they package projects and talent together. And then they sell whole packages to studios and say, we'll sell the rights to you. But by doing that versus like, oh, we represent this actor and you studio, you're making this project.

• 37:26David Rosenthal?

  So they're like, no, no, no, we got the project. And the artists own the project and we packaged it. And we're gonna bid these studios off against one another to finance it at the highest price. So how do they do that? Well, they got to connect up the talent. They got to take the talent from being like each individual person for their own to like working together against the studios. How did they do that? Well, they transform what the firm from being, you know, each individual agent is a silo to we are a network. We're like a web network. They call it the franchise. And so anybody who's part of CAA, you know, your job is to have your clients, but to get

• 38:08David Rosenthal?

  them to work with all the other clients of the firm that are represented by-

• 38:12Ben Gilbert?

  A shared Rolodex.

• 38:13David Rosenthal?

  A shared Rolodex. And so to do that, everybody at CAA is a partner. No mailroom, no blah, blah, blah. Like, we're all here, we're all together. This is about the franchise.

• 38:24Ben Gilbert?

  And it's really fascinating in like a business strategy context, zooming out what they did. And this is a common discussion point on Strategery of like, what is the point of integration within a value chain? And what it used to be was at the studio level, because that's where the money would come from. And then they would get to aggregate all the resources together using their money and the fact that it wasn't that competitive, because there were very few people that they were competing against and they knew them very well and nobody wanted to lose their power. And when you start having CAA say, actually, we're going to package all this together. The point of integration shifted down the value chain, one click, to where now it was happening with CAA.

• 39:06David Rosenthal?

  Exactly.

• 39:08Ben Gilbert?

  And the important thing here is wherever the point of integration is, that's where you gain power. That's where you're able to become more than a commodity, where you're able to gain, basically, you're able to create margin, where you're able to get more cash for something than it costs you to assemble it.

• 39:25David Rosenthal?

  So what does CAA do? They create the projects. So like Jurassic Park, Lethal Weapon, Schindler's List. These are CAA projects. These are not studio projects. They pull them together and then they bid them out to the studio since now all of a sudden, all these studios bidding against one another, the price goes way up. The dollars flowing into the space goes way up and the artists all do way better. So Tom Cruise, Kevin Costner, Barbra Streisand, Steven Spielberg. You know, within a couple of years, CAA is just vacuuming up everybody. And so literally the term that they use that I think Ovitz coins are very, become said about CAA in Hollywood about all this is they become,

• 40:09David Rosenthal?

  quote, "The dream execution machine." You're an artist, you have a dream. CAA is your dream execution machine.

• 40:20Ben Gilbert?

  Great marketing.

• 40:21David Rosenthal?

  Oh my God. So Ben and Mark, they're like, oh, holy crap. This is so great. What better, what better analogy to use than we're going to go build the dream execution machine in startups?

• 40:36Ben Gilbert?

  Which happens to work particularly well because they're working with technical founders.

• 40:40David Rosenthal?

  Exactly.

• 40:41Ben Gilbert?

  You have the glint of a dream and the ability to create the sort of core piece of value, the core way a customer interacts with it and gets value out of the product. But like, you can't do all the other stuff. We are the dream execution machine. You should come to us.

• 40:56David Rosenthal?

  Yep. Yep. They're just like a director or a great actor or a great writer, et cetera. So the sort of last unwritten, but it didn't need to be written principle at CAA was, take no prisoners and we're going to burn the old system to the ground. Like F all of those people. And of course Ben and Mark have that same ethos about the venture ecosystem.

• 41:18Ben Gilbert?

  And whether theirs was written or not internally, it certainly became written externally in all of their communications. Like they pulled no punches in talking about how the entire existing incumbent industry sucked and people were greedy or we'll pull some quotes later, but they were not shy about being critical of the establishment.

• 41:37David Rosenthal?

  Totally. So this is the punch back in the mouth. Like, great. You're going to punch us in the mouth, say that we're, you know, has been rock stars who are one hit wonders. Like we're coming at you twice as hard.

• 41:51David Rosenthal?

  So that's what they do. And they also, you know, basically wholesale copy the firm building approach from CAA. So, you know, as you said, that platform and the networks that they build up, they hire a whole bunch of people. They have a biz dev network to connect founders with large company customers. They've got an executive recruiting network. They've got an engineer recruiting network. They've got a future financings like other venture firms network and an M&A network associated with that, too. You need an acquirer, we'll hook you up with the acquires. And then, of course, probably the most differentiated and important last piece of this is they have a PR network.

• 42:30Ben Gilbert?

  Yeah, which they wouldn't say is the most differentiated. The most differentiated, I think they would say is like the executive briefing center and our ability to, you know, galvanize a set of Fortune 500 companies to become your customers. But in reality, yes, they are masterful at PR.

• 42:45David Rosenthal?

  Well, Ben would say later, I had this quote later, but here's the perfect spot for it. He would say, literally, "We introduced a new concept to the field of VC, which was called marketing." And it's true. Nobody, you know, no venture firms were doing this for themselves or helping their companies with PR and marketing before Andreessen Horowitz.

• 43:07Ben Gilbert?

  Well, the interesting thing about why no venture firms were doing it about themselves was the commonly accepted wisdom is that opacity plays to our advantage. I think most people didn't actually think through it. They just thought, what have successful venture capitalists done in the past? And that was be opaque, don't make too much PR noise other than to claim your win when you have it. But you don't need to take these big positions and be brash and counter position publicly. And Andreessen Horowitz not only saw that as a thing they could exploit, but I can't remember if it was Mark or Ben, I was listening to on a podcast that we'll link to in the show notes, along with a lot of other sources we did for research for this one, brought up the fact that if you trace back the origins

• 43:50Ben Gilbert?

  of institutional firms, like venture capital firms, it comes from the investment banks of like the 40s and 50s who were opaque because they were financing wars. There was lots of reasons about why they wouldn't talk about where their returns were coming from or their excitement about the projects they were financing, whereas Mark and Ben are unabashed optimists about the future, Mark in particular, of just standing on the largest soapbox possible and preaching about how cool the future will be and how much better off everyone will be, both on average and in every spot in the distribution in the long run. So let's bring that closer as fast as possible and be really loud about the future that we see and about

• 44:34Ben Gilbert?

  the companies that we're investing in to build it and how much we believe in that and how unapologetic we are about that.

• 44:40David Rosenthal?

  Yeah.

• 44:40Ben Gilbert?

  And that was just totally different than the commonly accepted wisdom of how venture capitalists should go to market.

• 44:47David Rosenthal?

  Yeah. Well, two things. One, I think the version of hiding the war financing of investment bankers that VCs were doing here is they're hiding the management fees. Like, come on, you got a 10-person organization, half of which are assistants, and you're making 20 mil across your funds in management fees a year. Like, I don't want to shout that from the rooftops if I'm a VC firm.

• 45:08Ben Gilbert?

  Or brag about how I'm putting 2 million into work to own 30 to 40% of a company.

• 45:13David Rosenthal?

  Yeah, exactly. Then the other thing, though, like, the flip side is if you are going to go be unabashed about pounding the table about what you're doing in the future, if you're an entrepreneur who you think you're part of building that future, God, now you've got a champion. This is great.

• 45:29Ben Gilbert?

  Yep.

• 45:30David Rosenthal?

  So there's one other person along these lines that they go see before launching the firm, which is the number one, hands down, best PR person in Silicon Valley at the time, Margaret Wenmacher's at the Outcast PR agency. So Margaret had co-founded Outcast and they had all the best clients, like, all the best clients, Facebook, Salesforce, VMware, and they worked with them from like, the time they were nobodies, still up through, you know, being huge companies. Amazon, they did the Kindle launch and still work, may to this day, still work with the Kindle team. So the story of how they get connected is, Margaret tells this on an

• 46:14David Rosenthal?

  A16Z podcast episode, she says that one of the companies that Mark and Ben had been angels in, wanted to work with Outcast, but Facebook blocked it and said it was a conflict and wouldn't let Outcast work with them. So Mark had just joined the board of Facebook and he gets involved in trying to smooth this all over and he's like, wow. Margaret is really amazing and I see at Facebook like what she's doing there. So he gins up an excuse to get her contact info, calls her up supposedly to talk about this situation. And instead brings her to the creamery in Palo Alto, sits down with Ben and they just like, talk the whole time about how they're going to launch a venture capital firm. I've got another project for you, which is great. So Margaret's like, okay, you know, like we work with venture capital firms. I can do this. What are you going to call the firm?

• 47:00David Rosenthal?

  And they're like, we're going to name it Andreessen Horowitz. She's like, that is a terrible idea. You're talking about this big game about how you're going to be a franchise. You're not going to be about the partners. It's all about the entrepreneurs and network and you're literally going to put your own names on the door. Like, are you serious?

• 47:17David Rosenthal?

  And they're like, no, no, no, no, no. It's not what you think. We did a whole big branding exercise about this. We hired a big branding firm. We did all this work and we decided we need to do this for two reasons. One, Andreessen, Mark Andreessen is a known quantity. He invented the browser.

• 47:32Ben Gilbert?

  It's already a brand.

• 47:33David Rosenthal?

  It's already a brand. He's already a brand. So we can draft off of that to get going. And then, once we get going, we transition from Andreessen Horowitz to a 16Z, which is A to Z. So supposedly the story is, I guess it's probably true that people used to abbreviate internationalization to.

• 47:56Ben Gilbert?

  Oh, I actually, no, it's definitely true. My first job when I was 14 was as a product test engineer at this medical printer company in Cleveland. And.

• 48:05David Rosenthal?

  I did not know that. That's awesome. We're learning some Ben Gilbert history.

• 48:09Ben Gilbert?

  Yeah. And I did some internationalization work, which you only need to type that once before you're like, well, I never want to type that word again. And that is abbreviated I18N.

• 48:20David Rosenthal?

  So people really do do this.

• 48:22Ben Gilbert?

  Absolutely. And there's another one. I think it's localization. Might be L something N, L16N or L11N, something. I can't remember how many letters, but yeah.

• 48:32David Rosenthal?

  Interesting. So they're like, well, it's perfect. You know, it's kind of a geeky reference.

• 48:37Ben Gilbert?

  Super esoteric.

• 48:38David Rosenthal?

  Super esoteric, but it's A to Z and we're going to do A to Z at Andreessen Horowitz. We'll do any round A to Z. This is great.

• 48:47Ben Gilbert?

  By the way, you'll get a heads up that Mark and Ben are going to step back from the firm when they actually formally changed the name to A16Z. I was looking for it in this most recent visual refresh that they did. I'm like, oh, is it time? Are they actually flipping it to A16Z? But nope, nope. The official logo, as you'll see on the art for this episode, is still Andreessen Horowitz.

• 49:08David Rosenthal?

  Still Andreessen Horowitz. Interesting. It's got to be coming. I mean, all across the website, everywhere and all the media they do, it's A16Z. It's not Andreessen Horowitz.

• 49:17Ben Gilbert?

  Yeah, but you know, it's still the unofficial moniker.

• 49:21David Rosenthal?

  Still there, baby. So there's one other thing, one other benefit about the name, which we know very, very well at Acquired, they're going to be listed first in the phone book.

• 49:31Ben Gilbert?

  Yeah, huge advantage.

• 49:33David Rosenthal?

  Huge advantage. I mean, it literally is a huge advantage. You know, anytime that a reporter's writing a piece about them, talking about various venture capital firms, you know, as much as not, they're just going to alphabetize stuff. And who's going to come first? Andreessen Horowitz is going to come first.

• 49:49Ben Gilbert?

  We happen to be just very lucky that podcast clients are not terribly sophisticated in how they do sorting. And so whenever you subscribe to a show, it just displays them in alphabetical order.

• 49:58David Rosenthal?

  Totally. So Mark, it's like, yeah, all right, whatever. Fine.

• 50:05David Rosenthal?

  All right. You guys have done a lot of justification to put your names on the door.

• 50:09Ben Gilbert?

  Rationalize, rationalize, rationalize. Great.

• 50:11David Rosenthal?

  Yep. But what you need is you need to build up hype and you need a cover story. So what do you want to do? What outlets do you want to go on? Where's your cover story? You know, I can get you whatever you want. What do you want to do? So February of 2009, Mark goes on Charlie Rose.

• 50:30Ben Gilbert?

  Even 15 years later, it holds up really well.

• 50:32David Rosenthal?

  Yeah, it was really good. So landing Mark on the show when there's no reason for, it's not like he has a new company or anything like there's no.

• 50:40Ben Gilbert?

  In fact, the funniest thing is that I tweeted this from the Acquired account last night. There's some point where it brings up the little like title tag underneath and it says, Mark Andreessen, I think it's founder, yeah, founder Ning.

• 50:55Ben Gilbert?

  You're like founder of Ning, like it was true at the time, but like, did anyone care about Ning? Not really.

• 51:02David Rosenthal?

  That's the best you can come up with?

• 51:03Ben Gilbert?

  Yeah. We should be clear. Like he is on the board of Facebook. Like he's like involved in some like stuff that's going crazy. He's an investor in Twitter and Twitter is in like its third month of like vertical line growth. He's not just the Netscape guy. He's involved in something that these companies that are part of a cultural phenomenon at the moment.

• 51:24David Rosenthal?

  Totally. Still, it was a pretty big win for OutKast to get him on the show. So Charlie starts off and says, you know, when we interview people like you, we always have to ask the question, what's the hottest idea there in Silicon Valley? What's the next big idea? So Mark replies, well, maybe this goes off track from your question. He's great at redirecting. He's obviously had some training, but I think the hottest idea is that innovation is actually alive and well. Remember this is February 2009, but look, there are a lot of people out there who are arguing the other side of that. So he's already setting up like we are the champions of innovation. Only we can save you. Then Charlie asks him about rumors

• 52:09David Rosenthal?

  he's been hearing that Mark is starting a venture capital firm.

• 52:14Ben Gilbert?

  Like rumors you've been hearing. This is why he's on the show. Like generous of you to give him.

• 52:18David Rosenthal?

  Rumors he's been hearing from Mark that you are starting a venture capital firm.

• 52:23Ben Gilbert?

  And you have to realize, before you finish, like I think it's worth planting the seed. I watched this interview because I, I was reading an article and I was like, oh, this article says that he announced it on the show. Like I should go watch the Charlie Rose interview where he announces it. And I start watching it and like I get 20 minutes in and I'm like, this isn't about Andreessen Horowitz. And then I remembered like exactly what you opened with. Obviously it wasn't a brand yet. He wasn't known for being an investor yet. And so if you're making the pitch to Charlie Rose of you need to have this guy on the show. Charlie's throwing Mark a bone by letting him mention his new project to galvanize it on this show. And so of course, it only occupies three minutes of a 50 minute interview.

• 53:07David Rosenthal?

  So Mark replies with, as he said at the top of the show, the, yes, I'm going to the dark side. But then he says, so I'm creating a fund. And as you know, our claim to fame is we've actually been entrepreneurs. We're by entrepreneurs for entrepreneurs. We've done it. We've been on that side of the table for a long time. We know what it's like.

• 53:29Ben Gilbert?

  Yet another way they're counter positioning. It's like, oh my gosh, these professional investors out there, you don't want to work with them. You want to work with us because we've been in your shoes, which is now like the dominant dogma that VCs feed to founders. And then just kind of uncommon, like they were the first.

• 53:48David Rosenthal?

  You heard it here first on Charlie Rose.

• 53:50Ben Gilbert?

  Yeah.

• 53:51David Rosenthal?

  Yeah. It's actually really funny. Did you get to the part later in the episode where they're talking about like various new seed stage companies in Silicon Valley? And Mark starts talking about this really interesting guy who's starting a company and he's proven demand for it.

• 54:08Ben Gilbert?

  Yes. He describes like what we do at PSL, like the validation process of like driving traffic and having a brand and testing conversions.

• 54:15David Rosenthal?

  He just built a landing page. There's no product. Did you get to the part where he says who it is?

• 54:19Ben Gilbert?

  Yes. It's Andrew Chen.

• 54:21David Rosenthal?

  It's Andrew Chen.

• 54:22Ben Gilbert?

  Who would become his partner 10 years later.

• 54:24David Rosenthal?

  So great. So great. And he's like trying to remember, oh, what was that guy's name?

• 54:28Ben Gilbert?

  Right. He pitched me on this thing. I think he's getting close to having a round that's coming together. Good for him. And of course, like this is pre Uber. Like Andrew hadn't even done the growth thing at Uber yet.

• 54:37David Rosenthal?

  Oh, so great. These artifacts of history. I just love them.

• 54:40Ben Gilbert?

  It's like when Don Valentine holds up the resume and it turns out to be Alfred Linz. Like, it's like that kind of reference.

• 54:45David Rosenthal?

  It's one of those moments. Totally.

• 54:48Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 55:02David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 55:16Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 55:26David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 55:44Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 56:00David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 56:16Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 56:26David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So, the actual...

• 56:40David Rosenthal?

  Big cover story reveal, as we've said, July 2009, cover story Fortune magazine. Marcus, I think not barefoot in this one on a throne. I actually didn't see what the image was. I'd be very curious.

• 56:53Ben Gilbert?

  I'll look it up while you talk.

• 56:55David Rosenthal?

  Great. They announce Andreessen Horowitz $300 million fund, which was very large at the time, especially for a first time fund. The piece starts off with the old Netscape email story about that we told last time about Ben emailing Mark about the launch back at Netscape and Mark replying like, next time, do the effing interview yourself, F you.

• 57:19Ben Gilbert?

  Yeah.

• 57:21David Rosenthal?

  And then this is where the quote from Mark of this is why I should not run another company comes up, which of course, like this is the perfect, oh yes, we're starting a venture capital firm because I shouldn't run another company. Ha, ha, ha.

• 57:33Ben Gilbert?

  Perfect. So the cover image is this like pretty hokey Uncle Sam gag where it's Mark pointing at the camera and it says, I want you to get the future. And David, I'll, I'll hold it up so you can see it here in the camera.

• 57:47David Rosenthal?

  Oh my God, that's so great. I want you to get the future. So present, given that future would be the future for them. That's awesome. Okay. So a couple of quotes later in the article, first, quote, entrepreneurs are sure to be attracted to Andreessen, drafting off the Andreessen brand here, who expresses more kinship with founders than with his peers in the finance world. One blog post that Mark has written titled, "The Truth About Venture Capitalists Raised The Question, VCs, Soulless and Rapacious Capitalists, or Surprisingly Generous Philanthropists."

• 58:28David Rosenthal?

  Two guesses which side of the coin he comes down on in that piece. Talk about punching back in the mouth.

• 58:34Ben Gilbert?

  It's like, how could you even have listed the second one? It's like, of course it's not the second one.

• 58:38David Rosenthal?

  Yeah.

• 58:41Ben Gilbert?

  Has anyone in John Doerr's life or Don Valentine's life ever accused them of being merely a philanthropist? Like, no, come on. It's the readers of Fortune, too.

• 58:51David Rosenthal?

  They do some great philanthropy, but

• 58:53Ben Gilbert?

  For sure, but not through Sequoia and Kleiner Perkins.

• 58:56David Rosenthal?

  No, definitely not.

• 58:58Ben Gilbert?

  I mean, it's a value creator for the world. Clearly, I believe that, or I wouldn't be in this line of work and you and us doing this show and everyone listening. But like, it's not philanthropy.

• 59:07David Rosenthal?

  It's just so easy for Mark to set up these straw men here. But the punches are flying in this article. We've already alluded to this a little bit. So later in the piece, another quote, "The Andreessen Horowitz strategy of investing in a menagerie of startups could pose hazards." And here's a direct quote in the article, "If I were one of those guys whose company stumbles, will they, they being Mark and Ben, be there to help me, or will they have time? Says Paul Holland, general partner at Foundation Capital, a Silicon Valley venture firm. Where the pain part of it comes is when you get up to those 60 or 70 investments, it will be an interesting chore to keep track of all that."

• 59:53David Rosenthal?

  Bad idea to go on the record here, Paul.

• 59:56Ben Gilbert?

  It's like everyone's just finding a way to talk their own book. It's like, whatever my strategy is, is superior because XYZ, whatever they're doing is stupid because of XYZ.

• 1:00:04David Rosenthal?

  Yep, totally, totally. So it lands with a big splash. They're in business. They got this $300 million fund. It's summer 2009. I think, according to PitchBook, the very first check they write is actually a small, very small check early. I think they hadn't even done a final close on the fund into, do you know the company, Ben?

• 1:00:24Ben Gilbert?

  Is it Seattle based?

• 1:00:25David Rosenthal?

  Not a Seattle based company. This is a very small check that they write.

• 1:00:28Ben Gilbert?

  No.

• 1:00:29David Rosenthal?

  Into a larger round, a Series C that is led by somebody else of a then, this is like at the end of 2008. So it must have been just like a first close on the fund, like a warehoused investment or something like that. A then very, very hot company, end of 2008 in Silicon Valley. Not Facebook, not Twitter. Another social media company.

• 1:00:53Ben Gilbert?

  LinkedIn?

• 1:00:53David Rosenthal?

  Nope. Dig. Dig.com.

• 1:00:56Ben Gilbert?

  Dig. I knew he was, I thought that was a personal investment.

• 1:01:00David Rosenthal?

  I think it was, but I think they managed to get a little bit of fund money into their

• 1:01:05Ben Gilbert?

  Fascinating. Man, I was obsessed with Dig.

• 1:01:07David Rosenthal?

  Ah, so great. Kevin Rose. Amazing.

• 1:01:10Ben Gilbert?

  In the Reddit versus Dig war, I was so team Dig. It's like better designed. It makes more sense. I watched Dig Nation. I think every episode of Dig Nation, I was all in.

• 1:01:21David Rosenthal?

  So great. So great. Me too. Oh, it was the best. So that was the first. Then the first like real, actual like large check round that they lead is a Seattle company. Apptio.

• 1:01:33Ben Gilbert?

  Apptio. While doing research for this episode, I was on a bike ride and I rode past the Apptio building and I was like listening to some podcast interviews with Mark and Ben and I took a selfie and sent it to David and I was like, doing research.

• 1:01:46David Rosenthal?

  And the irony is I was going to a Giants game in San Francisco right at the same time. And when I get out of the Uber, like a block away from the Giants stadium, I get out right in front of Andreessen Horowitz's new San Francisco office building with the, with the big sign up front. I didn't notice if it was a 16C or Andreessen Horowitz. I think it was Andreessen Horowitz.

• 1:02:08Ben Gilbert?

  It's Andreessen Horowitz. Yeah. Yeah. You know, if they're putting it on the sign that the intention is for it to stay around for at least a few more years.

• 1:02:14David Rosenthal?

  At least a few more years.

• 1:02:16Ben Gilbert?

  But yeah, the Apptio investment, I mean, it's a co-investment with both of our, our former employer, Madrona.

• 1:02:21David Rosenthal?

  Yep. And Greylock, I think, too?

• 1:02:24Ben Gilbert?

  Yeah. And I think they had worked with Sunny in the past, the founder at, was it at LoudCloud?

• 1:02:31David Rosenthal?

  So I think Sunny's previous company had been acquired into LoudCloud.

• 1:02:36Ben Gilbert?

  But that was really emblematic of, part of what the thesis was at that point is we've worked with these amazing people over the course of our careers. We're going to be a network-driven firm and they didn't have the firepower yet to be a thesis-driven firm. Like now they're extremely thesis-driven. But at that point, it was like, oh, this guy's an entrepreneur and starting a company or it was, I think, already a company in flight. Like absolutely, we should invest in. We know him very well. He's a great employee.

• 1:03:03David Rosenthal?

  Totally. Well, so one of their other first checks.

• 1:03:08Ben Gilbert?

  Speaking of stage agnostic.

• 1:03:09David Rosenthal?

  Oh, speaking of that same, you know, we're going to invest in the in the Opsware LoudCloud diaspora. Great, great indeed. Truly great people. I think this is one of their first, like, five or 10 investments. Rockmelt.

• 1:03:23Ben Gilbert?

  Rockmelt.

• 1:03:24David Rosenthal?

  Our boy, great friend of the show.

• 1:03:27Ben Gilbert?

  Eric Fischria.

• 1:03:28David Rosenthal?

  Former Opsware VP of Marketing, future Benchmark Capital General Partner, Eric Fischria.

• 1:03:36Ben Gilbert?

  Pretty cool.

• 1:03:37David Rosenthal?

  So funny that they let us around. Benchmark, I don't think, was an investor in Rockmelt.

• 1:03:42Ben Gilbert?

  Well, the other funny thing about that is that it was supposed to be a next generation web browser. And obviously, like, Mark knows a thing or two about web browsers. And Rockmelt was like, you know, what if the browser had built in social characteristics? And could bring in your, your news feed and Twitter and all this stuff right into the browser? So it was like a sweet spot investment for Mark and Ben having worked directly with Eric. And then also, you know, Mark saying, that seems plausible.

• 1:04:06David Rosenthal?

  Yep, totally. It was. It was a great idea. It was, I remember using it. I thought the browser was great. It was built on Chromium. You know, it was, in many ways, it was brave before, it was brave too early and before crypto was a thing.

• 1:04:19Ben Gilbert?

  Yeah. Okay. Do you know what I was referring to, speaking of stage agnostic?

• 1:04:24David Rosenthal?

  You're talking about their $50 million investment in September 2009?

• 1:04:30Ben Gilbert?

  In the first year of operations of the fund out of a $300 million fund.

• 1:04:34David Rosenthal?

  You're just gonna put one sixth of it.

• 1:04:36Ben Gilbert?

  15 billion into one company that ended up looking genius. But boy, did this cause a lot of kerfuffle and criticism when they did it.

• 1:04:43David Rosenthal?

  Boy, did it ever. September 2009, $50 million deployed alongside Silver Lake.

• 1:04:55Ben Gilbert?

  The private equity firm, Silver Lake.

• 1:04:57David Rosenthal?

  Tech private equity firm, Silver Lake, who I believe the Silver Lake headquarters are in the same Rosewood Office Park on Sand Hill Road that the Andreessen headquarters are in. Maybe they talked about it at lunch at the Rosewood one day. We haven't talked about the headquarters on, literally in the Rosewood complex on Sand Hill. Like can't get any better than that.

• 1:05:18Ben Gilbert?

  Nope.

• 1:05:19David Rosenthal?

  So yeah, $50 million into the spin out of Skype from eBay. So the whole transaction, a $2 billion purchase of 65% of Skype from eBay. Worked out pretty well, but they probably should have spun out PayPal instead of Skype. That would have been a lot better.

• 1:05:38Ben Gilbert?

  Hey, I mean, well, they did eventually, but both of them ended up being really fantastic ideas. Both of them created a lot more value independently.

• 1:05:47David Rosenthal?

  Oh, I did. But yeah, Andreessen Horowitz wasn't part of the PayPal.

• 1:05:51Ben Gilbert?

  Early stage investors often talk about how there's a minimum ownership percentage that they need to hit in order for it to be meaningful for the, the fund return, which is true if you're only deploying a very small percentage of your fund. But this is a case where they used $50 million to buy 1.8% of Skype. So on the one hand, you're like, oh man, that 1.8% like, gosh, we need to own a lot more for this to be meaningful for our fund. However, since you were putting 50 million to work, that even if you got like a 2X on that, which is not great by venture standards for a normal early stage investment. But I mean, that really is meaningful toward helping to return the fund. Yeah.

• 1:06:31David Rosenthal?

  Yeah. And they ended up getting what? Like a 4X on it?

• 1:06:36Ben Gilbert?

  A 3X. Yeah. And it was quickly, it was just a year and a half. It ended up turning into 153 million for them.

• 1:06:42David Rosenthal?

  Yeah. So a couple of things on this. One, Mark, it'd be back to like, okay, what are we, what are we going to do here at Andreessen? This is going to become a case study. So he helps broker a Facebook partnership for Skype, uh, which I remember this. Remember when Facebook integrated Skype?

• 1:06:59Ben Gilbert?

  Yes.

• 1:06:59David Rosenthal?

  For video calling?

• 1:07:00Ben Gilbert?

  In Messenger.

• 1:07:01David Rosenthal?

  Yeah, man, huge. Could you imagine something like that happening today? No. No effing way.

• 1:07:07Ben Gilbert?

  No.

• 1:07:08David Rosenthal?

  That was all Mark. And then he helps recruit Tony Bates to come in as CEO. Tony from Cisco was a rising star there. And then in a later Fortune piece that Mark would place, another great one, talking about the deal. Quote, "The clincher was Bates's meeting with Andreessen. Quote, "I'd always been a big admirer, but never met him," Bates says of Andreessen. "Going into the Andreessen Horowitz office was an experience. They have this wonderful library in the lobby and I looked for a couple of books that were special to me. One was Neuromancer by William Gibson. I couldn't find it, so that became a good opening to the conversation."

• 1:07:49Ben Gilbert?

  Ah, and I think it's Mark's personal library is the library in the lobby.

• 1:07:54David Rosenthal?

  But you can just see the whole mystique, the firm, the franchise, all of this being woven together here.

• 1:08:01Ben Gilbert?

  Yep.

• 1:08:01David Rosenthal?

  And it's happening in public in Fortune magazine.

• 1:08:04Ben Gilbert?

  In the press.

• 1:08:05David Rosenthal?

  Yeah, so great.

• 1:08:06Ben Gilbert?

  Yeah. There's another great little end of the story, which is there's a blog post where Ben Horowitz said that the Skype deal generated a tremendous amount of controversy for us. That controversy ended this morning. And of course, this is when the deal gets done.

• 1:08:21David Rosenthal?

  What was it, nine and a half billion dollars that Microsoft acquired it for?

• 1:08:24Ben Gilbert?

  I think eight and a half, somewhere in that neighborhood.

• 1:08:26David Rosenthal?

  Oh, eight and a half, that's right. Still, pretty, pretty nice, quick return. Unfortunately, shortly after this, right around this time, I don't know, I keep saying the biggest mistake in the firm's life, but the reality is Instagram only got acquired for a billion dollars. Like, there were two mistakes. One, Andreessen screws up not continuing to invest in Instagram. Two, Instagram sells to Facebook for a billion dollars.

• 1:08:52Ben Gilbert?

  Versus a, I don't know, 200 billion, 500 billion, some massive company inside of Facebook that it is today.

• 1:08:58David Rosenthal?

  Ah, totally. So sad. So that was March 2010. Fortunately though, also in early 2010, they make a great decision.

• 1:09:08Ben Gilbert?

  Wait, David, I just have to pause for one quick second and say Instagram was definitely not their biggest miss ever. Their biggest miss ever is definitely Uber, right?

• 1:09:19David Rosenthal?

  That's coming, don't worry, don't worry.

• 1:09:20Ben Gilbert?

  Okay.

• 1:09:21David Rosenthal?

  Yeah, no, you're right. Not the biggest miss for Andreessen, but Silicon Valley's biggest miss of the past 15 years was Instagram being sold to Facebook.

• 1:09:30Ben Gilbert?

  Accrued to Facebook shareholders, but not, not the rest of the venture ecosystem.

• 1:09:34David Rosenthal?

  Totally. That's a whole nother rabbit hole that we've been down many times. So a great decision that they make in early 2010 is they lead the Series A of Okta, the identity company, which they would then own, what, 18% at IPO, I think?

• 1:09:53Ben Gilbert?

  Yep, they owned just a hair under 20% pre-money at the IPO before the new, uh, the IPO cash came in.

• 1:09:59David Rosenthal?

  So that, and what was IPO valuation was 6 billion? Is that right?

• 1:10:04Ben Gilbert?

  6 billion and today it's, what is it? 33 billion? That company has continued to just be a monster.

• 1:10:11David Rosenthal?

  Yeah. So, and this is out of a $300 million fund. So at IPO, their stake was worth?

• 1:10:18Ben Gilbert?

  Call it one and a half to 2 billion.

• 1:10:20David Rosenthal?

  Yeah.

• 1:10:20Ben Gilbert?

  At IPO.

• 1:10:21David Rosenthal?

  At IPO in this one company. And if they've held to today.

• 1:10:25Ben Gilbert?

  Which it's unlikely, given it was a fund one for them and.

• 1:10:28David Rosenthal?

  Totally. And I'm sure, you know, they distributed over time. So they probably captured some of this upside. But just as a thought exercise, what 20% of or 15% of that's what 5 billion ish?

• 1:10:40Ben Gilbert?

  Ish.

• 1:10:41David Rosenthal?

  Yeah. Not bad. Not bad.

• 1:10:44Ben Gilbert?

  And Okta, this is another one that like Mark talks about publicly as we were totally laughed at. Identity providers were a thing already and like Microsoft with Active Directory, like it was owned. But the CEO of Okta, Todd McKinnon, had this like big thesis around the shift to the cloud. Means that there's time for a new identity provider. There's room for a new person to come in and none of the incumbents are going to be able to react to it. And Mark always talks about that, like, this is the kind of thing that we loved hearing. When there's like a rearranging of the technology paradigms that are used. And right now it's just by a small, select set of people, but over time everyone will shift to the cloud. But yeah, he said they were totally laughed at for doing the Okta deal because it was, uh,

• 1:11:27Ben Gilbert?

  very against collective wisdom that that would be successful.

• 1:11:30David Rosenthal?

  Well, two things. One, it even goes deeper than that because Tim Howes, who was early net to keep guy. And then co-founder of LoudCloud with Ben and Mark and Sikri and everybody. He invented, uh, LDAP, the Directory Access Protocol. So they knew a lot about this. And then the other thing, you know, just everything you said reminds me of the, you know, the classic Sequoia question, the why now? Why not? Well, it was a great why now for Okta. The cloud was changing everything.

• 1:11:54Ben Gilbert?

  There weren't like a lot of companies around this time and even for the next five years where just saying, hey, we're going to do a thing that's already sort of a settled frontier and a very settled frontier in the on-premise world, but we're going to bet big on cloud and we're going to architect it in such a way that like, we're not even compatible with the on-premise world. If they mistimed the enterprise shift to cloud, the whole thing would have gone under because there would have been no way to be. I'm thinking specifically of like a snowflake, the cloud-based data warehouse. You had to be binary in your bet and say like, we believe in this thesis at this timing. And obviously with Okta and Snowflake, it paid off, but you know, with other cloud bets like LoudCloud, it did not.

• 1:12:34David Rosenthal?

  The timing was not right. The why now was not, not great. Well, actually it was great. It was a good story. It just didn't play out well. So they're spending money as, let's see, maybe their, their VC enemies would say drunken sailors, maybe would be a good term at this point. You know, we're still, we're in like the early parts of 2010. They've done 50 mil into Skype. They've done all of these deals. They're doing tons of seed deals on top of it. It's a lot. They're almost out of cash, you know, and they're reserving half the fund for follow-ons. So they only have 150 mil of new money to deploy. So they're like, we gotta go raise another fund. And so this actually just came out recently.

• 1:13:16David Rosenthal?

  I saw this in, I forget which publication this was in, but a quote recently that Ben said in, this is a quote, Horowitz said in a recent Clubhouse interview that when the duo were raising their first investment fund of 300 million, a big sum for a VC firm at the time, indeed, Andreessen told him they needed to raise a second, much bigger fund right away. And here's a quote, "In fundraising and in venture capital, strength leads to strength," Andreessen said, according to Horowitz.

• 1:13:50Ben Gilbert?

  It's so true.

• 1:13:51David Rosenthal?

  Oh, boy. Strength leads to strength. It's so true. It's so funny and it's so true.

• 1:13:56Ben Gilbert?

  Have you read the Michael Mobison paper on persistent differential returns by asset class?

• 1:14:02David Rosenthal?

  I have.

• 1:14:03Ben Gilbert?

  We'll put a link in the sources, but for those who haven't read it, there's all this data to support the fact that like you look on one side of the spectrum at like hedge fund managers, and if you're the top performing hedge fund manager this year, it has almost no bearing on whether you will be a top performer five years from now, maybe not even one year from now. But if you look all the way on the other side of the spectrum at venture capital, and because he's a good academic, he doesn't presume to state the cause, he just states that there is a correlation, that the top performing firms stay the top performing firms for a long time. You know, if you're the top performing venture investor this year, it's very likely that you will be 10 years from now. And so, or at least one of the

• 1:14:43Ben Gilbert?

  top performing ones. And the sort of postulate is that, well, strength follows strength, that when you do the best deals, you then start to realize the flywheel of getting the best entrepreneurs that are referred to you.

• 1:14:56David Rosenthal?

  Totally. I mean, this is everything that we talked, we spent the last hour and a half talking about of like, how are Mark and Ben going to break in to this dynamic? I mean, I remember, I think I've maybe talked about this on an episode in the past, but back when I was a even younger whippersnapper, just starting out in VC at Madrona, I got a chance to get drinks with Bill Gurley once, and I was like so eager, I had like all my questions prepared, you know, I was literally like, I had like a notebook, and the biggest one I wanted to ask him was like, Bill, tell me the secret, like, what is the secret to success in venture capital? And he just kind of looked at me and he was like, David, the secret to success in venture capital is success in venture capital.

• 1:15:39David Rosenthal?

  It's so true. You have success and that gets you more success. You don't have success, good luck.

• 1:15:44Ben Gilbert?

  And to Mark's point here, it also is true in startups. Like if you are massively out raising everyone else in your category, like you're gonna be able to kind of keep that mind share of the category leader, you're going to be able to recruit the best executives, you're going to be able to land those customers. So there is this, on the one hand, it's hype, and on the other hand, hype is a self fulfilling prophecy in a lot of ways.

• 1:16:08David Rosenthal?

  Totally true. I mean, God, what a great encapsulation of startups and

• 1:16:14David Rosenthal?

  everything. It is hype, but it's also real. Anyway, so they go out, summer 2010, and they raise a second fund. One year after deploying an already large $300 million fund, they raise a $650 million second fund in 2010. This was nuts. This was like an atom bomb going off in the industry. Two reasons. A, that is so much money. I mean, when I was at Madrona at the time, we were investing out of a $250 million fund, and we were a 20-year-old firm.

• 1:16:47Ben Gilbert?

  It's still pretty closely after the financial crisis.

• 1:16:50David Rosenthal?

  Yeah, I mean, 2010, 2010, the pace, like the idea that you would blow, quote unquote, blow $300 million worth of a fund in one year and be back a year later to your LPs to go raise another fund. This was crazy. You know, the established VC firms, they were still coming off the hangover from the dot com bust where they stretched their 99 funds for like four, five, six years. You know, we did that special with Ho at Alto is talking about how they had to stretch a fund. God, how long was it? Like six, seven, eight years before they could raise their next one? So this is just like wild what's

• 1:17:31David Rosenthal?

  happening here. And the press eats it all up. Now, the other thing that raising now having almost a billion dollars in capital under management gives them is even more management fees to go out and recruit more people. So this is when they go back to Margaret, who's been just doing a bang up job for them on PR. And they're like,

• 1:17:51Ben Gilbert?

  Which we should say, when you say a lot, like this is $16 million of new fees coming in every year, or about 15. So like, you got a budget.

• 1:18:00David Rosenthal?

  You got a budget. How about you leave Outcast and join Andreessen Horowitz full time? Now, this wasn't totally crazy because she had already sold Outcast to a holding company. So she had founded it, co-founded it, but it had been sold and they had just brought in a separate CEO. So she comes and, you know, full-time joins as a, as head of marketing for Andreessen. No venture firm had a head of marketing before this. They also bring on Jeff Stump to run talent. They bring on John O'Farrell, who was head of biz dev, I think, at Opsware as a GP. Now, interestingly, he had not obviously been a CEO, despite the, the mantra of,

• 1:18:40David Rosenthal?

  we only have CEOs as GPs here. But anyway, it works out well. So what do they do? You know, they've had the strength. They now have more strength. They keep the foot on the gas. They keep deploying the money quickly. So early 2011, this is crazy. And like totally works out great for them, but gets pilloried in the industry at the time. They take all this money. They start going and buying private secondary shares in pre-IPO companies like Facebook, Twitter, and Groupon. I don't know how well Groupon worked out for them, but they deploy, what was I think, like over $80 million into buying pre-IPO secondaries in these companies.

• 1:19:21Ben Gilbert?

  Wild. Which they probably were investing like exactly the upper limit of each fund in secondaries because they weren't a registered investment advisory yet. They were just a regular venture firm.

• 1:19:31David Rosenthal?

  Yep, that makes sense.

• 1:19:33Ben Gilbert?

  Which is what? 20% per firm is what you can do into?

• 1:19:36David Rosenthal?

  Yep. 20% per fund. So 20% of 650 would have been like, I don't know, 120, 130 million. So I bet they did.

• 1:19:44Ben Gilbert?

  It's like up to that, give themselves a little breathing room. That's how you come up with the 80.

• 1:19:49David Rosenthal?

  Yep. It may have been more than 80, too. That may have been just Facebook. Anyway, so then in April of 2011, they lead a hotly contested Series B for a little gaming company making a game called Glitch.

• 1:20:05Ben Gilbert?

  Tiny Speck.

• 1:20:06David Rosenthal?

  The name of Tiny Speck.

• 1:20:10David Rosenthal?

  Mark had invested in the seed for TinySpec personally. And then in the previous fund, Andreessen Horowitz had put a little bit in, in the A that Excel had led. And of course, the head, the CEO of TinySpec is Stuart Butterfield.

• 1:20:26Ben Gilbert?

  Stuart Butterfield, I know that name.

• 1:20:27David Rosenthal?

  So shortly after, like very shortly after, I believe, Andreessen Invest leads this round, this Series B, Stuart sends an email to the board. Quote, we've had this quote unacquired before. "I do not feel that we are pouring gas on a fire here. More like pouring good whiskey on a drugstore heating pad. It is unlikely to burst into flames." And he means that in a, in a, bursting into flames being good for the company, not bursting into flames being quite bad for this new Andreessen Horowitz investment.

• 1:21:00Ben Gilbert?

  Well, I loved his honesty. I mean, it's great.

• 1:21:03David Rosenthal?

  Yeah, just keeping it real. So he recommends, you know, they sort of all figured out as board. And I think, you know, Mark's involved in all this and, all right, well, what else are we going to do? We don't necessarily want the money back and, you know, they pivot into.

• 1:21:15Ben Gilbert?

  By the way, this is why repeat entrepreneurs, like there's a lot of negative things about sort of like serial or repeat entrepreneurs that get a lot of criticism, like it's not their life's work, they've already made their money. There's a lot of like reasons to be a little bit careful. But this is one way where it massively plays to the company's advantage that Stuart from Flickr knew what bursting into flames felt like. You could call it escape velocity. You could call it getting real traction or product market fit or starting the flight, whatever it is. Stuart knew what that felt like, much like Mark did from his Netscape experience. And this wasn't it.

• 1:21:51David Rosenthal?

  It was not it. No, it was not. So of course they pivot into this little front end that they'd built on, was it on IRC?

• 1:22:00Ben Gilbert?

  IRC, yeah, it was like extensions on top of IRC.

• 1:22:02David Rosenthal?

  Yeah, extensions on IRC for workplace communication that they were using internally. Decide to call it Slack. They call up our, our friends, Andrew and, and the crew at Metal Lab. Andrew, now of course of Tiny Capital, get Metal Lab to design the UI, take it to market as a product called Slack. Nah, works out pretty well for everybody involved.

• 1:22:24Ben Gilbert?

  That it did. And I threw out that three billion number earlier. A lot of these exit numbers are estimated since it's not like we actually know Andreessen Horowitz's returns, but we can back into it based on what we think they own from participating in various rounds or what they owned at IPO and when we think they may have liquidated. Assuming that they held it from IPO to the 18 months afterwards till the Salesforce transaction, it would have been about a $3 billion outcome. So, uh, very good decision for Andreessen Horowitz to let Stuart keep running with the money, even though, uh, you know, the game was not bursting into flames.

• 1:22:58David Rosenthal?

  Yeah, that's a good couple of multiples on that. Huge $650 million fund too. How would they ever return that? Oh, boy.

• 1:23:06Ben Gilbert?

  And when you say, how would they ever return that? That's because that was the like knock on Andreessen Horowitz at the time. That was the like bare narrative was like, these guys rate this huge fund. There's no way.

• 1:23:15David Rosenthal?

  $650 million venture fund. Can anybody return that amount of capital, let alone these new guys? So 2011, oh boy, what a schizophrenic year. Here are some of the investments that they made in 2011. Do you remember Shoe Dazzle?

• 1:23:30Ben Gilbert?

  I do.

• 1:23:30David Rosenthal?

  Yep. Shoe Dazzle, Jawbone. How about that one?

• 1:23:33Ben Gilbert?

  Oh yeah. That, oh yeah. Everyone lost money on that.

• 1:23:35David Rosenthal?

  Oh boy. He gives a great quote from Mark, I forget where, maybe it was in the New York a piece, uh, saying that Jawbone is the new Sony. Ooh, not quite.

• 1:23:44Ben Gilbert?

  I mean, such an unbelievable, cool technology innovation that just, yeah.

• 1:23:49David Rosenthal?

  Yeah. Uh, Lightro Camera. Remember that one?

• 1:23:52Ben Gilbert?

  Oh yeah.

• 1:23:53David Rosenthal?

  Yep. Yep. How about this one? Fab.com.

• 1:23:57Ben Gilbert?

  Jason Goldberg.

• 1:23:58David Rosenthal?

  Yeah. Oh boy. That was a flame out, unfortunately.

• 1:24:03Ben Gilbert?

  And there was a lot of other big name folks. Speaking of dig, Kevin Rose was involved in that one too.

• 1:24:08David Rosenthal?

  Oh, in Fab, was he?

• 1:24:09Ben Gilbert?

  Yeah, I bought some stuff on Fab. They had really unique merchandise.

• 1:24:12David Rosenthal?

  Yeah, I did too. It was cool, but man, burned through a lot of money, but it doesn't matter because also in 2011, they bring on a new general partner. They bring on a few new general partners, I think, but one in particular, Jeff Jordan. Boom. Wow. So Jeff, I believe started his career in the Disney, the famous Disney strat planning group. I think he worked for Meg Whitman there.

• 1:24:36Ben Gilbert?

  Hmm. I didn't realize that. Yet another, that's quite the mafia.

• 1:24:40David Rosenthal?

  Yeah, totally. I think that's how he, if I'm remembering this right, I think this is how he ended up at eBay. And of course, at eBay, he was North America GM and then championed the PayPal acquisition and ran PayPal within eBay. Pretty good. Then after that, remember, he left and became CEO of OpenTable, who was OpenTable's main venture capitalist and board member, Bill Gurley.

• 1:25:07Ben Gilbert?

  Ah, wow.

• 1:25:09David Rosenthal?

  The bet noir of Andreessen Horowitz. But Jeff becomes one of the best consumer investors of the last decade at Andreessen Horowitz.

• 1:25:20Ben Gilbert?

  He would go on to do the Airbnb investment, right?

• 1:25:22David Rosenthal?

  Oh, yeah. In 2011, right after joining. So I believe the first right after joining, Pinterest.

• 1:25:28Ben Gilbert?

  Wow.

• 1:25:29David Rosenthal?

  Pretty good. Then Airbnb, then Instacart, then a firm, a couple of years later, many others. He's done so well that in 2019, he actually became a managing partner. They made him a managing partner of Andreessen Horowitz, the firm alongside Mark and Ben and Scott Cooper, who's also a managing partner, but more like the COO of Andreessen.

• 1:25:52Ben Gilbert?

  And I get the sense it's sort of the four of them are like really the sort of stewards of the firm at this point.

• 1:25:57David Rosenthal?

  Yeah. Oh, that's a good word. That's a, you know, that's what Sequoia calls the, yeah, the Sequoia stewards. They're the four stewards of Andreessen Horowitz. So quick recap. This, and this is just a small sampling of the 2011 deals at Andreessen Horowitz. According to PitchBook, Shoe Dazzle, Jawbone, Bump, Lytro, Fab, Airbnb, Pinterest, Stripe, Nysara, Tiny Speck, Facebook, Twitter, Groupon.

• 1:26:21David Rosenthal?

  What a collection.

• 1:26:22Ben Gilbert?

  Whoa. Also, they did Stripe?

• 1:26:24David Rosenthal?

  They did. The seed. They didn't lead it, but they were part of the seed.

• 1:26:28Ben Gilbert?

  Fascinating.

• 1:26:29David Rosenthal?

  Yeah, man, slugging percentage, not batting average. But Ben, you've already, you've already alluded to it. You've already spoiled the biggest mistake in the history of Andreessen Horowitz that they make in 2011. I was gonna ask if you knew what it was, but obviously you know what it is.

• 1:26:44Ben Gilbert?

  Which would lead to a subsequent success, like a multi-billion dollar success, but.

• 1:26:49David Rosenthal?

  Yeah. Uber, fall of 2011. Oh, this is brutal. Brad Stone does great reporting on this in the upstarts. Andreessen Horowitz is in line, specifically Jeff Jordan. Man, could you imagine what a monster year it already was for Jeff? Pinterest, Airbnb, all in the same year. He's in line handshake on a deal to lead Uber's Series B. And of course, who was Uber's Series A investor?

• 1:27:16Ben Gilbert?

  Benchmark.

• 1:27:16David Rosenthal?

  Benchmark and Bill Gurley. And, you know, we got this huge feud between the firms, but like, hey, you know, Bill Gurley was on Jeff's board. Like, they're great. They know each other. We're gonna, we're gonna make the peace here. Handshake deal. It's all done. Jeff is gonna lead it. Hot streak is gonna continue. Mark's involved. Everybody's shaking hands on a deal at a slightly over $300 million post-money valuation for Uber's Series B.

• 1:27:44Ben Gilbert?

  God, this reminds me of the Berkshire episode when Warren buys Berkshire.

• 1:27:48David Rosenthal?

  Oh, no, it's brutal. God, it's so brutal. So, somebody, and Brad kinda implies in the upstarts that it was Mark himself, starts to get cold feet about the deal. He takes Travis out to dinner and he tells him at dinner, they still want to do the deal, but they can only do 220 post, not 305 or 310 or whatever it was supposed to be. That's a pretty big haircut. Gets worse. Supposedly Travis was still gonna take the deal. He really wanted Andreessen Horowitz to be the lead. He like, all the marketing had worked. He was gonna do it.

• 1:28:30David Rosenthal?

  But then the actual term sheet arrives and in the actual term sheet, they must have really had cold feet. Like they, they didn't want to do this deal.

• 1:28:38Ben Gilbert?

  This is half assing your way into a term sheet right here.

• 1:28:41David Rosenthal?

  This is limping across the finish line. If I've ever seen it, they put a huge new option pool refresh in there, which of course would dilute it existing shareholders and particularly the entrepreneurs even more. And that's the straw that breaks the camel's back. Travis is like, he very politely tells them he's not going to take the term sheet. Yeah, right. Typical Travis fashion. Uh, nope. Scorched earth. Big mistake. Big.

• 1:29:07Ben Gilbert?

  And is it Menlo that ends up doing the deal?

• 1:29:09David Rosenthal?

  Menlo, who was supposed, according to Brad, the stalking horse for the deal on valuation. They come in, they're like, oh yeah, we'll do, we'll do. You want over a 300 post? No problem. We got that. Uh, which ironically is the Andreessen Horowitz playbook that everybody's dashing them on.

• 1:29:26Ben Gilbert?

  Right. Andreessen Horowitz has conditioned us all that we can pay 50 to 100% more than we thought for deals. And you know, not only will we win them, but that may actually work out for us well in the future.

• 1:29:37David Rosenthal?

  And it worked out real well for Menlo. Not Andreessen Horowitz. Huh. So sad for Andreessen. Great for Menlo.

• 1:29:45Ben Gilbert?

  Of course they would go on to invest in Lyft and own, let me go look at my, uh, my best guest data here. I think they owned about 6% at IPO. And so if you think about like, when the lockup would have ended, it'd be about a $16 billion market cap at that point. Like they ended up with a billion dollar stake of Lyft at the time that they could liquidate.

• 1:30:08David Rosenthal?

  And you know, if you want to get really nerdy about this, we covered this, of course, on our Lyft and Uber episodes back in the day. You know, at this time, while this series B is happening, Uber's a black card company. Like, nobody's doing peer-to-peer ride-sharing yet. Nobody. And it wasn't until 2013, when Lyft would be the one that would pioneer, take the home mobile's playbook and do true peer-to-peer ride-sharing. And that's when Andreessen invested in Lyft. They saw, you know, the future.

• 1:30:35Ben Gilbert?

  And then Uber launches Uber X and the war is on.

• 1:30:38David Rosenthal?

  Exactly. Don't really want to cross Travis Kalanick.

• 1:30:43Ben Gilbert?

  But just to be like, super crisp about this, it's a huge, huge loss. Like, sure, Lyft ended up being worth $16 billion. Uber at that point was worth 80 billion.

• 1:30:54David Rosenthal?

  Yeah.

• 1:30:54Ben Gilbert?

  I mean, it would have been a completely different fund dynamic if they were in Uber instead of Lyft.

• 1:30:59David Rosenthal?

  Totally. Huge loss. Man, 2011, what a freaking year for tech, period. But also for Andreessen Horowitz, do you know what else happens in 2011?

• 1:31:11Ben Gilbert?

  Ooh.

• 1:31:12David Rosenthal?

  Literally right before the Uber deal goes down, which just makes it all the more mind-bending that Mark would get cold feet here.

• 1:31:20Ben Gilbert?

  No.

• 1:31:21David Rosenthal?

  Software is eating the world.

• 1:31:23Ben Gilbert?

  Oh, my gosh. That's when he published the op-ed?

• 1:31:25David Rosenthal?

  August 2011, right before the Uber deal goes down. Yeah, op-ed in the Wall Street Journal. Crazy. I mean, the piece itself, like, it's kind of a masterwork of arguing this, there is no bubble thesis. I mean, at this point in time, people still think, like, you know, tech is overvalued. You know, we're still in the shadow of the financial crisis. You know, Mark talks about in the piece, he says, this is a quote, "Today's stock market actually hates technology, as shown by the all-time low price-to-earnings ratios for major public technology companies. Apple, for example, has a P/E ratio of around 15.2,

• 1:32:08David Rosenthal?

  the same as the broader stock market, despite Apple's immense profitability and dominant market position." Yeah, I mean, Chris, today, Apple's P/E ratio is 32 and a half. Microsoft is 39, Amazon is 69. The market did hate tech or just didn't recognize tech at this point in time.

• 1:32:26Ben Gilbert?

  Which is fascinating because those companies did have unbelievable gross margin profiles and continually high growth rates for public companies. So it is, I mean, not as high as they have now. Like, it's crazy to watch all these companies continue to grow the rate at which they're accelerating even today, even later in their life. But yeah, at that point, he's totally right that investors in public markets hadn't really realized this about tech companies yet. The other thing that he sort of sharpens his pencil on this point later, I don't think he makes it as directly in the software is eating the world thesis, but he now argues, look, compute costs are just going to zero. Like, truly, it's going to asymptotically approach zero.

• 1:33:07Ben Gilbert?

  And so at some point, if you have infinite free compute, which we should say, like, that does require continuous innovations in energy because it does take a lot of energy to do stuff, and that's the big knock on crypto.

• 1:33:20David Rosenthal?

  But, but hey, Moore's law.

• 1:33:22Ben Gilbert?

  Let's make the assumption that compute asymptotically approaches a cost of $0. Then truly, software can just continue to, the question becomes, what's the interesting thing that you can do with software, even if you have to have it do a lot of compute to do the thing that you want it to do?

• 1:33:38David Rosenthal?

  Well, the thing that's so cool that I didn't put together until doing the research for this episode, remember last time we talked about the Mike Moritz line that I don't think is public? I think it's kind of more like an internal sort of Sequoia saying that every successive generation of technology companies should be in order of magnitude bigger because of Moore's law, because the cost of compute declines. That means that you can address, every successive generation can address in order of magnitude more industries, more people, and thus the outcome should be bigger and every fund's performance should surpass the last. It's the same argument as software is eating the world. It's exactly the same.

• 1:34:18Ben Gilbert?

  That's a great point.

• 1:34:19David Rosenthal?

  Argument. Compute cost declines, and Mark says in the piece, more and more major businesses and industries are being run on software and delivered as online services from movies to agriculture to national defense. Over the next 10 years, I expect more industries to be disrupted by software with new world beating Silicon Valley companies doing the disruption in more cases than not.

• 1:34:40Ben Gilbert?

  Huh.

• 1:34:41David Rosenthal?

  That's exactly what happens.

• 1:34:42Ben Gilbert?

  The only thing I will disagree with in your comment is that every successive generation of funds should be that much better than the previous because as we've seen, even in the earliest stages, price goes up. And so your entry point continues to be higher and higher, even though, as you're pointing out, your exit value or the addressable market of every single company continues to be greater and greater as software companies.

• 1:35:05David Rosenthal?

  Look at you making the Andreessen Horowitz argument.

• 1:35:08Ben Gilbert?

  Someone's got to make it here on this.

• 1:35:09David Rosenthal?

  I love it. I love it.

• 1:35:10Ben Gilbert?

  Optimistic program.

• 1:35:12David Rosenthal?

  So great. So great.

• 1:35:13Ben Gilbert?

  And also then there is this question of like, will that always be true? Like, there's 3 billion people on Facebook now. At some point, if you saturate the entire global population with compute at their fingertips and you take up 24 hours of their day and you have 100% of their value creating activities, AKA their jobs, running on software, like at some point, especially because the population's not growing, it would seem that you no longer have an order of magnitude greater addressable market than in the previous year. But we're probably very far from that horizon or an order of magnitude more than the previous decade.

• 1:35:51David Rosenthal?

  Well, and I think it looks like now that crypto is going to be the next answer to that, right? Like, what is the next value of Moore's Law accelerating and decreasing? You know, you said like, a lot of energy.

• 1:36:02Ben Gilbert?

  Ooh, David Rosenthal calling it here on air.

• 1:36:05David Rosenthal?

  Well, I think Andreessen Horowitz has been calling it for a while, so.

• 1:36:08Ben Gilbert?

  2013.

• 1:36:09David Rosenthal?

  Uh, okay. So back to that. So after software is eating the world at the end of 2011, in January 2012, they go out and they raise Fund III, one and a half billion dollars. Oh my gosh, get at me.

• 1:36:24Ben Gilbert?

  You thought we were big before. Watch this.

• 1:36:26David Rosenthal?

  Watch this. So that one and a half billion dollar fund, get this, was 7.5% of all of the venture money raised globally in 2012.

• 1:36:40Ben Gilbert?

  Whoa.

• 1:36:42David Rosenthal?

  One fund, one firm.

• 1:36:44Ben Gilbert?

  Wow. That's wild.

• 1:36:46David Rosenthal?

  Isn't that crazy?

• 1:36:47Ben Gilbert?

  It's interesting because it's basically like, in a lot of ways, Andreessen Horowitz was just slightly out of step with the growth of the rest of the venture ecosystem. And they took advantage of these like arbitrageable moments where like the one that you were talking about where they realized, wait a minute. There's actually less risk in Series A than there used to be because there's all these seed investors. So therefore, we should invest at Series A because we can kind of get paid too much in equity for the risk that we're taking, or more appropriately, other people are getting paid too much in equity for the risk that they're taking. So we can price higher. And they're kind of doing it again here where this is really like two years before the race is

• 1:37:29Ben Gilbert?

  really on in raising massive, massive funds. So they can kind of play that to their advantage, too.

• 1:37:34David Rosenthal?

  Yep. And what's the other piece of the arbitrage here? It's the summits, it's the TAs, it's the Silver Lakes. So, you know, they raise a $1.5 billion venture fund, 7.5% of all venture, you know, money raised in 2012, but a big portion of that isn't going to venture in the same way. So pretty quickly after they raised the fund, they do, at the time, you're like, this was nuts, $100 million Series A in GitHub.

• 1:38:01Ben Gilbert?

  GitHub, that's right.

• 1:38:02David Rosenthal?

  GitHub, yep.

• 1:38:03Ben Gilbert?

  And that was like the first real capital that GitHub had raised, right?

• 1:38:06David Rosenthal?

  It had been bootstrapped all the way. Yeah, yeah, it was the first real capital. So this wasn't a Series A. You know, this was the type of deal that a generation earlier, you know, Summit or Insider, Silver Lake, or whoever would be doing.

• 1:38:16Ben Gilbert?

  And this was like the largest quote unquote Series A ever.

• 1:38:19David Rosenthal?

  Oh, masterful PR and branding of this as a Series A. There's no way in hell this was a Series A. But anyway.

• 1:38:27Ben Gilbert?

  I think they bought 10% of the company or something.

• 1:38:30David Rosenthal?

  Yeah, I think even more. I think it was a 750 post-money valuation. So.

• 1:38:35Ben Gilbert?

  That sounds familiar.

• 1:38:36David Rosenthal?

  Yeah, whatever, you know, slightly more than 10%.

• 1:38:39Ben Gilbert?

  I do know that they would end up making $1 billion on this, in this, the ultimate sale to Microsoft in 2018.

• 1:38:46David Rosenthal?

  Yep. So that almost returns the whole fund, right? I mean, this is how that type of investing works is like very low downside, you know, still pretty high upside. I mean, they 10x that money, right?

• 1:38:57Ben Gilbert?

  Yeah, again, going back to before, a 10x, actually not interesting to an early stage investor. You kind of need to be in that 50 to 100x territory to make the portfolio math work for that to be the big winner in the portfolio. However, if you're investing $100 million out of your $1.6 billion fund, then like that $100 million 10x-ing, very impactful for the fund.

• 1:39:20David Rosenthal?

  Very impactful. Yep, totally. So later in 2012.

• 1:39:27David Rosenthal?

  Chris Dixon joins the firm and Chris, of course, was a very, very well-known New York entrepreneur, venture capitalist. He started Site Advisor and then Hunch, which was acquired by eBay. He'd started Founder Collective, the seed VC firm. He'd been part of Bessemer earlier in his career. People, I remember, because I used to live in New York, people really identified him with like New York venture capital. He's like, "Go into Silicon Valley, join in Andreessen Horowitz." This was big news. And shortly after he gets there, in 2013, he leads a Series B.

• 1:40:04Ben Gilbert?

  Coinbase?

• 1:40:04David Rosenthal?

  $25 million in Coinbase at a 150 post. Wow. Oh, man. Really overpaying for that one.

• 1:40:12Ben Gilbert?

  150 posts. What does this thing even do? Crypto?

• 1:40:15David Rosenthal?

  Here's the kicker. Over the years, Andreessen Horowitz would keep buying shares from other investors. So other early investors were selling shares, including USB and others. And Andreessen was just buying, buying, buying, buying. Man, I mean, this is like Ventures of Power Law. We're talking about so many great outcomes here. Like this one dwarfs everything, everything else. At the DPO, Andreessen Horowitz's stake earlier this year in Coinbase is worth $11 billion.

• 1:40:47David Rosenthal?

  Oh, my God. That's 7X that entire $1.5 billion fund. Like, oh, my God.

• 1:40:54Ben Gilbert?

  Thank God for the investors in that $1.6 billion fund that that Coinbase investment was out of this fund instead of one of the smaller funds, because returning a $1.6 billion fund, no easy feat. But if you have one $11 billion return in there, okay.

• 1:41:10David Rosenthal?

  Yeah. And this is the whole thesis, right? It's like, these outcomes are bigger than you think. There is no bubble. These valuations are not just justified, but like the crazy prices we're paying now, we're getting the deal.

• 1:41:21Ben Gilbert?

  It's wild.

• 1:41:22David Rosenthal?

  It's wild. They invest, all told, in 76 new companies in 2012. In 2013, they had another 97 new companies, including Lyft and PagerDuty, which is going to be another great win for them. Robinhood, they only do the seed in Robinhood. I think it don't continue until.

• 1:41:41Ben Gilbert?

  I think that's right. I think until like 2020 or something, and they did it with the growth fund.

• 1:41:45David Rosenthal?

  Yeah, yeah. Oculus.

• 1:41:48Ben Gilbert?

  By the way, all this great data that we're finding from our friends of the show at PitchBook, just an awesome resource for digging through this and figuring out who participated in what round.

• 1:41:56David Rosenthal?

  Totally. Oh, so great for this episode. Databricks is in 2013, which is still private, but that's going to be a monster for them.

• 1:42:05Ben Gilbert?

  Most recently valued at 28 billion, they led the seed round and have participated in, I think, every round since. I bet they own a ton of that company.

• 1:42:13David Rosenthal?

  I bet. Yeah. Can't wait to see that S1. I just love this episode. We've got so much great stuff and we've got to so much funny stuff, too. Zenefits, that was 2013.

• 1:42:24Ben Gilbert?

  Oh, I forgot. They were in Zenefits.

• 1:42:26David Rosenthal?

  Oh, they were the big ones in Zenefits. They were. They were holding that bag for sure. Clinkl, remember Clinkl?

• 1:42:33Ben Gilbert?

  Oh, yeah.

• 1:42:34David Rosenthal?

  Oh, boy. One of my GSP classmates spent his summer at Clinkl. He didn't go back full time. That was a good choice. And then the kicker, this may be my favorite part of the whole episode. In 2013, they banned together, Band of Brothers, Three Musketeers, it ends up being called, with Google Ventures and Kleiner Perkins to create the Google Glass Collective.

• 1:43:02David Rosenthal?

  This is the most ridiculous thing ever. It wasn't a fund. It wasn't like a, like their crypto fund or their bio fund that we're going to talk about in a minute here. It was a collective where the three firms said they were going to share Google Glass-related deal flow, but no actual commitment to invest in any of them.

• 1:43:17Ben Gilbert?

  Oh, my God. What? That's an incredible PR. Like, to be able to plant that story is impressive work because like, that's a non-story.

• 1:43:26David Rosenthal?

  It's a total non-story.

• 1:43:27Ben Gilbert?

  Like, I agree to share deals with other investors all the time. That's a non-story.

• 1:43:32David Rosenthal?

  So there's, you know, huge press release. There's an event, a big TechCrunch piece. Money quote from Marc Andreessen in the TechCrunch piece. You put on glass and you say, "Yep, that's the future." Yep, that's the future, Mark.

• 1:43:48David Rosenthal?

  Can't win them all. Can't win them all.

• 1:43:50Ben Gilbert?

  I do legitimately think augmented reality, both visually and audio is the next big compute platform.

• 1:43:59David Rosenthal?

  Oh, totally. Yeah.

• 1:44:00Ben Gilbert?

  But was Google Glass? No.

• 1:44:02David Rosenthal?

  Uh, they're so great. We tweeted the photo of Bill Maris from Google Ventures and John Doerr from Kleiner and Mark Andreessen wearing, wearing the Google Glasses and posing on Sand Hill. Oh my God, what a classic photo. It's just great. Despite all that, things continue to go pretty well. In 2014, Mark gets really into Twitter. He tweets something like-

• 1:44:27Ben Gilbert?

  It was over 100 times a day.

• 1:44:29David Rosenthal?

  Despite being an angel investor in Twitter, he had only tweeted twice before 2014. I remember thinking that was ridiculous back in the day that like all these people who were talking about how they invested in Twitter and blah, blah, blah, had never actually participated on the platform. I think Fred Wilson was the only one who like actually was active on the platform. But then for whatever reason, in 2014, Mark decides, oh, yeah, I'm going to get really into this. He tweets like 20,000 times in six months.

• 1:44:56Ben Gilbert?

  It's wild. And he was like the best person to follow because like if you were interested in mental models and exploring wacky futuristic ideas, like it was a buffet table of that.

• 1:45:07David Rosenthal?

  Yep. He actually, people, you know, of course, also creates press and everybody wants to know, why is he tweeting so much? And like, it's so great. And he says in some interview, he says, he loves Twitter because quote, reporters are obsessed with it. It's like a tube and I have loudspeakers installed in every reporting cubicle around the world.

• 1:45:28David Rosenthal?

  So great. Uh, March of 2014, they close another one and a half billion dollar fund, just a little over two years after Fund Three, the one and a half billion dollar fund.

• 1:45:38Ben Gilbert?

  So assets under management here are about $4 billion.

• 1:45:40David Rosenthal?

  Yep. They do Instacart, they do Reddit, they do Magic Leap, they uh, do-

• 1:45:48David Rosenthal?

  All sorts of stuff. Interestingly, though, the pace actually steps down a little bit. They stopped doing quite as many seeds during this time period. They've now since stepped back up the seeds, but I think maybe they started listening to folks about the signaling talk, or maybe entrepreneurs were actually listening to the signaling effect.

• 1:46:08Ben Gilbert?

  It was resonating with people.

• 1:46:09David Rosenthal?

  It was.

• 1:46:10Ben Gilbert?

  David, like to recall a conversation we had when you were starting your venture firm in, when was that, 2016?

• 1:46:16David Rosenthal?

  2018, yeah.

• 1:46:18Ben Gilbert?

  This was part of the thesis. You were like, well, no one wants to raise seed rounds from the series A firms because of the signaling risk. So we're a pure play seed firm, and I think that makes a lot of sense. And that was the professionalization of the asset class of seed happened because of that.

• 1:46:34David Rosenthal?

  Of the signaling effect.

• 1:46:35Ben Gilbert?

  Yeah.

• 1:46:36David Rosenthal?

  Yeah, totally. It's just so funny. It's completely disappeared now.

• 1:46:40Ben Gilbert?

  Yeah, well, in so many ways, everyone has followed Andreessen Horowitz's lead in truly every way. The one that we're describing here is kind of shrugging a little bit on what stage is the right one for me and how much do I need to stick to my knitting and, you know, how much does signal matter?

• 1:46:58David Rosenthal?

  Yep. So, okay, in 2015, finally, The New Yorker piece comes out. It's so good. It's so damn good. You gotta go read it.

• 1:47:08Ben Gilbert?

  Tomorrow's advance man.

• 1:47:10David Rosenthal?

  Tad Friend is such a good writer. And this is like, you know, once every year, couple of years, The New Yorker is like, we're going to do a profile on an industry. And they talk about this on the, on the A16Z podcast and like, I think it's the episode with Mark, like the opportunity to have the profile on venture capital in The New Yorker and to have Mark Andreessen be like the mouthpiece for it. Oh, it's so great. So I'm just gonna, it's okay. Can I read a couple of lines? Cause these are

• 1:47:41Ben Gilbert?

  Please do. Yeah.

• 1:47:41David Rosenthal?

  These are so good. Okay. So first off, the piece starts off with a little vignette of Mixpanel, which of course was a big Andreessen investment. And talking to the founder, Suhei Aldoche, you know, about his experience raising venture capital and whatnot. And he says, oh, this quote is so good. Mediocre VCs want to see that your company has traction. The top VCs want you to show them that you can invent the future.

• 1:48:09David Rosenthal?

  It's so funny and it's so true. It's just great. Let's see. Andreessen Horowitz modeled their brand strategy not on the industry's elite, but on Larry Ellison's Oracle and its aggressive marketing during the enterprise software wars. For one investor in their funds, Princeton University's Chief Investment Officer, Andrew Golden, it became a running joke how long it would take other firms to complain about Andreessen Horowitz. In the early days, it was within two minutes, he says.

• 1:48:40David Rosenthal?

  Here we go. This might be my favorite part. One morning, as I sat down to breakfast with Andreessen, a rival VC sent me a long email about A16Z's holdings. The VC estimated that because Andreessen's firm had taken so many growth positions, its average ownership stake was roughly 7.5%. It's actually 8%, which meant that to get 5 to 10x across its four funds, you would need your aggregate portfolio to be worth $240 to $480 billion. How could that possibly be? I started to check the math with Andreessen. He made a jerking off motion and said, blah,

• 1:49:22David Rosenthal?

  blah, blah. We have all the models. We're elephant hunting, going after big game.

• 1:49:28Ben Gilbert?

  Oh, my God.

• 1:49:30David Rosenthal?

  A, that a rival VC would take the time to type out a long email.

• 1:49:35Ben Gilbert?

  And would take the time to have themselves or an analyst go model out a different firm's average ownership? Are you kidding me?

• 1:49:42David Rosenthal?

  So great. So great. And model out, close enough to be within half a percent of the actual.

• 1:49:48Ben Gilbert?

  Totally. And wait a minute. So it's actually an interesting question. So they would need, what were the numbers of how much market cap in aggregate would need to be created?

• 1:49:57David Rosenthal?

  240 to $480 billion of market cap.

• 1:50:01Ben Gilbert?

  So you got Coinbase at, what is it, 100?

• 1:50:05David Rosenthal?

  Right around a cool 100.

• 1:50:07Ben Gilbert?

  You got Roblox at 45. So that's 145. You got Okta at 33. So that's around 170.

• 1:50:17David Rosenthal?

  Yep.

• 1:50:18Ben Gilbert?

  You got Slack at 24. No.

• 1:50:21David Rosenthal?

  Something like that. Let's take it to 200.

• 1:50:23Ben Gilbert?

  Okay.

• 1:50:23David Rosenthal?

  Around to 200. You got Airbnb. That's another Hyundai right there.

• 1:50:26Ben Gilbert?

  Yep. You got Pinterest, which is another 45, 50.

• 1:50:30David Rosenthal?

  Yep. All right. So we're at 350.

• 1:50:32Ben Gilbert?

  So like you can see sending that email being like, uh, good effing luck. And like you do look at the companies they invested in. You're like, yep, they far surpassed that. And like, we haven't talked about Instacart or Databricks or Robinhood or, and of course, these are smaller positions, but yeah.

• 1:50:49David Rosenthal?

  Yep. Uh, it's so, so good. And then Mark's response makes a jerking off motion with his hand. It says we're elephant hunting. We're going after big game.

• 1:50:59Ben Gilbert?

  That has to be the first time that was printed in the New Yorker.

• 1:51:03David Rosenthal?

  The New Yorker.

• 1:51:04Ben Gilbert?

  It must be.

• 1:51:05David Rosenthal?

  Uh, so great.

• 1:51:07Ben Gilbert?

  Yeah. I mean, well, the interesting thing is the whole industry seems to massively give whiplash from some new disruptive entrant, often who's writing bigger checks and has a bigger fund. And the first reaction is, oh my God, complain about them.

• 1:51:21David Rosenthal?

  See Tiger today.

• 1:51:23Ben Gilbert?

  Exactly. It was Andreessen Horowitz, and then it was SoftBank, and then it was Tiger. And like, at least with Andreessen Horowitz, and it seems like, I don't have any information that's not public, but like, it seems like with SoftBank, Vision Fund One, like, strategy worked a heck of a lot better than people thought it was, and at least a lot better than the media was reporting. So I don't know. I suppose the next time my knee jerk reaction is to be like, oh, these new guys are, they don't know what they're doing and they're like, being irresponsible and they're blowing us out of the water. Like, maybe think twice about just complaining and figure out, okay, how do I actually need to adjust my strategy? Because maybe this is going to work.

• 1:51:59David Rosenthal?

  You couldn't have teed me up any better here. Back to the New Yorker article. His quote, "A16Z's services model made a strong impression on Sand Hill Road." Quote, "Andreessen caused us to up our game on the marketing side," said Sequoia Capital's Doug Leoni. "Younger founders pay attention to media and we don't want to be de-positioned." Sequoia hired an in-house publicist and two new marketing specialists to complement the four it had, and most top firms made similar moves, even if they primarily believed that A16Z's services were simply a marketing tool. Oh, so Doug, so Sequoia. Like, we're not going to be de-positioned. Like, yes, this is a good innovation. We're going to adopt it.

• 1:52:44Ben Gilbert?

  Yeah, it's Bill Gatesian in that way.

• 1:52:48David Rosenthal?

  Yep, totally.

• 1:52:49Ben Gilbert?

  I can't wait until Power to talk about this one. It's so interesting to me that this caused effectively margin compression in the venture capital industry.

• 1:52:59David Rosenthal?

  Ownership compression?

• 1:53:01Ben Gilbert?

  No, I literally mean margin compression and how profitable it is to be a general partner.

• 1:53:05David Rosenthal?

  Oh, you mean the management fee side of the thing?

• 1:53:07Ben Gilbert?

  Yeah, like, it's hard to run lean as a big firm because you kind of need all this stuff to be competitive and that stuff is really expensive. It's a big team. You can't just take home $10 million in fees every year.

• 1:53:21David Rosenthal?

  Even if you're Sequoia, you need a big team.

• 1:53:23Ben Gilbert?

  Yeah, totally. And so you end up with this fascinating dichotomy. It's the same thing that's happening in the media ecosystem where like, there is no more middle. If you are going to be one of the few who succeed and you're big, you've got to have a big ass cost structure.

• 1:53:38David Rosenthal?

  Yep.

• 1:53:38Ben Gilbert?

  Andreessen Horowitz is the New York Times of venture capital. And simultaneously, it will be true that there's this long tail of people that are like, "F that big cost structure. I'm going to start Kindergarten Ventures and take my small amount of capital and like, no team, and I'm going to play a completely different, super niche game." And there is some room in the middle, but there's not the room that there used to be in the middle.

• 1:54:03David Rosenthal?

  Yep. And, you know, I think the industry is... Found that out painfully over the last 10 years.

• 1:54:11Ben Gilbert?

  Yeah, but this really interesting thing of like, it took a long time. It took 30 years or 40 years of venture capital as a profession for the arbitrage of profits to go away from general partners.

• 1:54:25David Rosenthal?

  Yep. So flip side of this coin, both on the staffing and the services side of things, but also on the deals and the valuations front and just like the support. Yeah, it just like beats me over the head. And you know, maybe this will sound biased towards Andreessen Horowitz, but I'm not trying to be really just like doing this research, thinking about the last 10 years, there is no bigger winner in all of this than entrepreneurs.

• 1:54:51Ben Gilbert?

  Oh, for sure.

• 1:54:52David Rosenthal?

  Oh, my God, like you used to be giving up 25, 30 plus percent of your company at Series A and getting like $2 million for that. And like somebody sitting on your board doing something, maybe.

• 1:55:06Ben Gilbert?

  You're absolutely right. I was talking about the margin compression and fees. Now let's talk about the margin compression in returns.

• 1:55:11David Rosenthal?

  Yep.

• 1:55:11Ben Gilbert?

  Everyone's cost basis is higher because there's way more capital competing to go in. So therefore your ownership percentages are going to be less for the same amount of capital that you wanted to put to work.

• 1:55:21David Rosenthal?

  Well, and even on the fees side, vis a vis entrepreneurs, they're just getting a lot more. You can argue all you want, and people do about how valuable these various services are and whatnot. But like, I think it's pretty valuable that somebody, Andreessen Horowitz in the lead, but now the whole industry is out there just like banging the drum about how great startups are and like how great their portfolios are. And like, if you're an entrepreneur, why would you not want somebody championing you? And in a way that's going to be so hard for you as a founder of a small company to do, you're not going to go get a profile in the New Yorker, but Andreessen is, and they're going to talk about how awesome you are.

• 1:56:00Ben Gilbert?

  Yeah, it makes the most sense for these things where it doesn't yet make sense for a startup to have that competency in-house. So having access to a fractional resource of that competency, who's a specialist and one of the best in the world at it, and really highly paid, who you couldn't afford for how sort of tiny and pathetic your company is, which all startups are, it is an unbelievable boon to get that. So not only are you facing less dilution and getting more capital than you ever used to before, but you are also actually getting a far superior product to what you used to get.

• 1:56:31David Rosenthal?

  It sounds like our cap chase ad read from, from last season.

• 1:56:37David Rosenthal?

  I love it. I love it. One playbook theme I want to highlight here and we'll talk about this again at the end, but anytime your name is on your competitors lips, you're winning. Like you're winning. Like it doesn't matter what they're saying. Yeah. If they are talking about you, good, bad, ugly, indifferent, you're winning. You should just keep doing what you're doing. Particularly when they're the most successful incumbent of all time with Sequoia. So, okay, after that, later in 2015, they raise a $200 million bio fund. June of 2016, they raise another one and a half billion dollar core fund. 2017, they raise a $450 million second bio fund. 2018, first $300 million crypto fund led by Chris Dixon and new GP Katie Hawn,

• 1:57:23David Rosenthal?

  who interestingly, I didn't know this about Katie till doing the research. Do you know what her background was before she joined Andreessen? She was a federal prosecutor at the DOJ and she led the Mt. Gox case. Whoa. And then after that Coinbase recruited her to join the board of Coinbase. After the Mt. Gox debacle, they're like, look, we're Coinbase. We're like doing this above board. We're the right way to do this. And so that's how Chris met Katie and then she came into Andreessen. Super and man, crypto is so different than the rest of the startup ecosystem. Totally. Let's see, 2018, also in 2018, they launched the cultural leadership fund,

• 1:58:03David Rosenthal?

  which got a lot of like blowback at the time and I, I think was pretty misunderstood. I think it's actually a pretty good idea. 2019, they split the main fund finally into separate funds for early and growth. 750 million for early, $2 billion for growth.

• 1:58:23David Rosenthal?

  And then 2020, just one year later, they are back in the game with $1.3 billion main early fund seven, $3.2 billion growth fund two, $750 million bio fund three, $515 million crypto fund two. So that is $6 billion in total across a suite of funds raised in 2020. Strength follows strength. Dang. And then this year, of course, in 2021, they added another $2.2 billion crypto fund three, bringing total capital under management to just a hair under $19 billion.

• 1:59:04Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:59:17David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:59:33Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:59:49David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:00:12Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:00:31David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:01:02Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. All right. Other things that I pulled from PitchBook about the firm today. So they made us this great tear sheet that we'll have to see if we can share this in the slacks. It's a great set of data on the firm. They did a little under 1,000 investments in a little over 500 portfolio companies total.

• 2:01:44Ben Gilbert?

  They've produced 160 exits, 20 of which were companies going public. There's now 22 GPs with the addition of a new New York-based GP. The first time there's been someone outside of the Bay Area added as a GP.

• 2:01:59David Rosenthal?

  Another friend of the show.

• 2:02:01Ben Gilbert?

  David Haber. And David, as you mentioned, 19 billion hair under in assets under management. Eight network teams, 220 people now work at the firm. So to give you a sense of like, they've got 22 GPs, but that means that 90% of the people who work at the firm are not GPs. So they've got a big investment team, but obviously these, these network teams have grown meaningfully. And I also was talking to some folks, they did a lot of hiring outside of the Bay Area during COVID. So as much as they were sort of one of the champions of Bay Area for life. And if you're serious, you invest here and the best companies are created here, blah, blah, blah. The last year has like really changed that. And not only are they investing in more places, but they actually have staff in more places

• 2:02:44Ben Gilbert?

  and have adapted the culture and the processes internally to be hybrid.

• 2:02:49David Rosenthal?

  Then also, we debated, including all this in the history and facts. I think for length, if nothing else, but also to do it right. We're going to do a different venue to talk all about this, but they've also built a media company.

• 2:03:03Ben Gilbert?

  Yeah.

• 2:03:05David Rosenthal?

  Alongside all of this.

• 2:03:06Ben Gilbert?

  Yeah, absolutely. Yeah, there's a whole sort of forward looking view of.

• 2:03:12David Rosenthal?

  A future looking view, one might say?

• 2:03:13Ben Gilbert?

  Yes, I was trying to avoid, let's call it lowercase future looking view. Not only of the media company, but like other things that they're doing that transcend being a venture firm with value-added services. And I think as Mark recently coined it, and he had a great invest like the best episode on this HP 2.0. And there's definitely a lot more that we'll talk about there, probably in a future episode at some point.

• 2:03:36David Rosenthal?

  Yeah, I think that's a great way to do it.

• 2:03:40David Rosenthal?

  So yeah, that's Andreessen Horowitz. Oh yeah. Wait, there is one more piece to talk about. So there's this great saying in venture that is also a Mike Moritz phrase. He's just so, he's so good, uh, which is that the apples take longer to ripen than the lemons. And of course, apples being a double entendre, meaning like good companies, but also, you know, apple. Again, Sequoia's case, so good. They start having some success. So April 2017, success on the like distribution front. Okta IPO, March 2019, Lyft IPO, April 2019, PagerDuty Pinterest, June 2019

• 2:04:21David Rosenthal?

  is the Slack DPO, December 2020 Airbnb, January 2021, Affirm, March 2021, Roblox, which within a year, they turn around like a 15x on that.

• 2:04:33Ben Gilbert?

  Yeah, here, I actually calculated that. So their initial investment into Roblox, which I think is out of their, their late stage fund, the growth fund, somewhere between 100 and 150 million. It was a $150 million round at a $4 billion valuation.

• 2:04:48David Rosenthal?

  Oh, so great. Uh, big shout out to Ho and our friends at Altos.

• 2:04:53Ben Gilbert?

  Totally. Means they own probably about 2.5% of the company at IPO, which of course is a $45 billion market cap today. So pretty quick turnaround for that 100 to 150 million into $1.2 billion.

• 2:05:08David Rosenthal?

  Yep. And then the big one, April 2021, what's that? Seven years after the initial investment?

• 2:05:16Ben Gilbert?

  In Coinbase.

• 2:05:17David Rosenthal?

  Coinbase. Damn. $11 billion stake that Andreessen Horowitz has in Coinbase.

• 2:05:26Ben Gilbert?

  Which I think is an even better outcome, or it's about on par with what Sequoia had with Airbnb, if I'm remembering right from our episode there.

• 2:05:35David Rosenthal?

  Yeah, it sounds about right. Maybe a little less. I want to see Sequoia had like a 15 ish percent stake in Airbnb, 13, 15, something like that.

• 2:05:45Ben Gilbert?

  But I seem to remember this like 10 to 12 billion dollar absolute dollar return.

• 2:05:51David Rosenthal?

  That could be, but Airbnb traded up to around 100 billion. I think it might be back down a little bit now. Anyway, we're splitting hairs here. These are pretty good.

• 2:06:00Ben Gilbert?

  In any case, one of the single greatest venture capital returns of all time.

• 2:06:05David Rosenthal?

  Yeah. Hard to argue.

• 2:06:07Ben Gilbert?

  Well, we're definitely going to get to grading a little bit of math. It's napkin math, but I think it's interesting to sort of review this. But let's do some analysis first. Let's take our narrative section. What's the bull case and what's the bear case on Andreessen Horowitz moving forward? Let's start with the bull.

• 2:06:24David Rosenthal?

  I think we just painted the bull case, right? Well, okay, okay. Bull case, I got two bull cases. One crypto. I mean, if you believe crypto is the next.

• 2:06:35Ben Gilbert?

  I wrote two and you just got the first one.

• 2:06:37David Rosenthal?

  Okay. Next bull case I would have, I'm curious if you'd have this as well. A16Z has been pretty adamant, like you said, about like Bay Area and in particular about Western technology companies that they invest in. They haven't touched China, India, et cetera, rest of the world. No reason to think that their brand couldn't extend. So that feels like a green shoot for them. Those are the two off the top of my head.

• 2:07:05Ben Gilbert?

  I like that. I didn't have that. The second one I had is this sort of HP 2.0 notion of, you know, in the old days before there existed a startup ecosystem where you could get funded by venture capitalists to go and pursue your idea. You would try and rise up the ranks of an HP or one of these companies as an executive to go and invent the future. And HP was the 100% owner of every division. GE was the 100% owner of every division of their company. Obviously, taking minority positions is different, but can you sort of be more of the Hewlett Packard in their heyday? If you aren't the majority shareholder of these businesses, can you still find a way? And now we're drifting into Kleiner Perkins territory a little bit, but can you find

• 2:07:50Ben Gilbert?

  a way to both provide the services, find synergies between portfolio companies and really like find leverage from your own scale such that you can find economies of scale across the different companies? And by that, I mean, does everyone really need their own totally separate finance team? Like at some scale, probably not. The same kind of thing that you see in industry consolidation when one company buys another. I'll be very curious if they sort of transcend the we help you out with part-time resources thing in their networks to see if there's some way where like actually some part of the fundamental operations of the company are happening at the venture level.

• 2:08:31David Rosenthal?

  Interesting. It's kind of like an. Maybe sort of like an actual fulfillment of the, you know, the CIA dream execution machine thing.

• 2:08:41Ben Gilbert?

  Hmm.

• 2:08:42David Rosenthal?

  Cause the CIA package, like Jurassic Park, you know, the, the packages that they were putting together, the talent, you know, they weren't doing any like, part of the reason CIA had to exist was like, they're not going to pull together like, I don't know, I don't know what goes into making a movie, but all, I'm assuming there's a lot of stuff that the studios used to do and that CIA was able to bring together into a package and then be like, nope, studios, you are just financiers now.

• 2:09:08Ben Gilbert?

  Totally.

• 2:09:09David Rosenthal?

  I wonder if this is part of what's informing this HP 2.0 strategy.

• 2:09:13Ben Gilbert?

  Yeah. I mean, the thing that I wrote down is that the biggest case is that the firm is actually unrecognizable in 10 years, that they're sort of the startup platform, like an idea platform. And I'm not being specific about what that means because I don't really know, but maybe the right term is that they're like the startup dream machine, which actually lends itself more toward a studio. It would seem like, I mean, just based on all the work we've done at PSL, starting 27 companies, like I do wonder if they'll shift earlier and start being more of like a, you literally are a person with an idea and we have an ability to sort of take that and plug it in. And the cool thing about the studio is

• 2:09:53Ben Gilbert?

  we have that machinery built for like the first 18 months. And I'd be curious, a lot of people talk about seed to IPO as an investor. It'll be interesting to see if Andreessen Horowitz can sort of become the startup dream machine all the way from idea to IPO.

• 2:10:11David Rosenthal?

  Yeah, yeah, yeah. Well, or you could just go raise a whole lot of money and you could be the next, you know, disruptor in the industry.

• 2:10:23Ben Gilbert?

  That's a great point. It's really like that Mark and Ben kind of have no sacred cows and like whatever, you know, they're very experimental. They're very willing to change things and like, it wouldn't surprise me if some point in the near future, they stop talking about it as a venture capital firm because they feel that it's a sort of broader set of activities.

• 2:10:40David Rosenthal?

  Well, clearly they're already sort of going this direction with the media company and all that.

• 2:10:46Ben Gilbert?

  Yep.

• 2:10:47David Rosenthal?

  Yeah.

• 2:10:47Ben Gilbert?

  We also totally skipped over crypto, which I think is okay, but can you give like one or two sentences on how they're different than other firms with a lens toward crypto?

• 2:10:57David Rosenthal?

  Well, in one respect, it was just simply that they were there first and early. And so they've been part of like these big ones. Other firms have too, you know, USB being primary among them. And then native crypto firms like Paradigm and MultiCoin and all those great folks. But, you know, to the extent that success breeds success is going to apply in crypto, early-stage crypto investing, as it always has in venture. Andreessen has been there, right? Like Coinbase, dang, Solana, yep. Bitcoin, like everything interesting, they're there. So I think that's a big part of it. You know, the other piece of it is like, it's different doing that.

• 2:11:39David Rosenthal?

  And they've built the machinery to do it in a way that other traditional venture firms have not. I think, if I understand the history right, I think part of the reason why they created a separate fund for crypto versus doing it out of the main fund was because of this, the same things that trigger needing with secondaries needing to be in RIA. I think if you do too much token investing in a core fund, you would need to register and be, you would lose your venture capital exemption. So while other firms were registering as RIAs to do secondaries, which of course Andreessen also does, they were like, oh, well, we'll go do this first with crypto funds and then now for the whole firm to be able to buy tokens instead of equity.

• 2:12:22David Rosenthal?

  So I think it's just going to take a lot of firms a long time to catch up to that.

• 2:12:25Ben Gilbert?

  And the operations of things of staying abreast of the things you can do in the US versus international like takes overhead and they've invested in that overhead and they've figured out what the necessary infrastructure is from a regulatory perspective to do crypto investing with LP dollars.

• 2:12:42David Rosenthal?

  Yep. So we talk about the bear case?

• 2:12:45Ben Gilbert?

  Yeah. Okay. So here's my biggest one. We have been on an unprecedented, unbelievable bull run in tech that started the same year that Andreessen Horowitz was founded. They've never operated in a down market. I'm not saying that it's not going to go well, but like their strategy has aligned perfectly with the economic landscape while they've been operating in it. So it is untested, unlike all these other firms that have needed to, if you believe the A16Z haters who say they have no price discipline, will that come back to haunt them during the, you know, one or two funds from the vintage years of whatever downturn comes at some point in

• 2:13:29Ben Gilbert?

  the future? It could hit them a lot harder than it hits other folks.

• 2:13:35David Rosenthal?

  Yep.

• 2:13:35Ben Gilbert?

  You don't have to debate that. I'm just saying.

• 2:13:37David Rosenthal?

  Yeah, yeah, yeah. Totally. Question mark.

• 2:13:40Ben Gilbert?

  That would be the knock. The other bear case I was thinking of is like, they basically overextend themselves in trying to get too creative and imagining what this HP 2.0 could look like. And they have like a great, very profitable business on their hands where they have really dominated an industry and like them trying to turn that into something entirely new and different may actually not work.

• 2:14:03David Rosenthal?

  I gotta also say for a firm and people that are so good on branding and marketing and whatnot, calling this strategy HP 2.0, you might want to rethink that one. It's like, I don't know that HP is something you really want to associate with these days.

• 2:14:18Ben Gilbert?

  Well, and nobody, I mean, there's just not that many people alive and operating in the business world right now or leading companies in an aspirational way who are aware of the HP that Mark talks about.

• 2:14:30David Rosenthal?

  Yep, exactly.

• 2:14:31Ben Gilbert?

  They're only aware of the defunct PC manufacturer.

• 2:14:34David Rosenthal?

  You want to say Amazon 2.0? Great.

• 2:14:36Ben Gilbert?

  Yeah.

• 2:14:37David Rosenthal?

  But anyway, I think a big one that I have no view one way or the other way this, whether this is happening or not, or at risk of happening, would just be that as you turn this into a big firm, it's already a big firm, politics are going to start to creep in, right? Like it happens. This happens in organizations. And frankly, probably politics have been the downfall of every venture firm that has risen and fallen to varying relative degrees. You know, there are all sorts of reasons, right? But you break it down. At the end of the day, it's people, it's politics. That's the problem. And the bigger you get, the more opportunities there are, the bigger you get, and the more time that goes by, the more opportunities there are for that.

• 2:15:22David Rosenthal?

  And so maybe some seams will start to get exposed and other firms can now come along. And yeah, do die a hero or live long enough to be the villain. Like, I guess they've been the villain their whole lives to a certain extent, but at some point, they're going to be the villain entrepreneurs.

• 2:15:36Ben Gilbert?

  In some way, they've been the underdog, too. Like, they've had this tailwind of feeling like, you know, fight the man. And you're right, like, they're the man. So.

• 2:15:46David Rosenthal?

  They're the man. Yeah.

• 2:15:47Ben Gilbert?

  Yeah. I guess one other thing I was thinking about is, speaking of Tiger Global and what's going on in hedge funds coming into late-stage financing and now even early-stage financing, those folks are beating the drum of, we're a financial investor and we're going to give you the cheapest available capital and you can use that capital to go and build your own relationships and hire people and do all the things you need to do that, like, VC is kind of a bundle of both advice and relationships and capital and we're just selling you pure capital. There's some set of entrepreneurs who are going to do that because they're very experienced, they have their own relationships, they don't need the services that a firm like A16Z brings to bear. The question is, will

• 2:16:31Ben Gilbert?

  that belief spread where more and more people, even if they're inexperienced and could benefit from the, the set of services that A16Z offers, if they're like, actually, the most capital at the cheapest price sounds great to me and I actually just want all these companies, competencies in-house.

• 2:16:48David Rosenthal?

  Which, as hopefully we've painted along the way here, was a key component of the Andreessen Horowitz strategy. Like, there's all the stuff, there's all the services, there's everything about it. But also, they were offering the best terms at the highest prices for a very long time. And if they're no longer doing that, you know, I think there's a very valid argument that price is what matters.

• 2:17:08Ben Gilbert?

  It's sort of like Andreessen Horowitz had a different underwriting model on the future than the rest of the VCs did. And so far, because we've been in this bull run this whole time, it has proven to be right. So everyone else who is being too conservative in their sort of valuation models and basically underwriting of what future markets could look like was wrong. And that's why Andreessen Horowitz could both be the best product at the best price. But it may prove to be the case at some point in the future that the gas in the tank runs out on software is eating the world, or that we go through a little extended hiccup where people stop believing

• 2:17:49Ben Gilbert?

  that for five years and the money coming after you dries up and LPs are difficult to raise from. Like, I'm just imagining a little bit more capital crunched environment where like, you can't be both higher valuations with more money and a really expensive broad set of services.

• 2:18:07David Rosenthal?

  Yep. No, I mean, in the long run, like, obviously, I think we all know what side we fall on.

• 2:18:12Ben Gilbert?

  Like, everything, it depends on your time horizon. And if your time horizon is infinite, then yes, you and I, being the optimists that we are, we're like, looking at this bear case, being like, yeah, but as long as you can tough it out, you'll be fine.

• 2:18:22David Rosenthal?

  The internet, never bet against the internet.

• 2:18:24Ben Gilbert?

  Never bet against the internet.

• 2:18:28David Rosenthal?

  But you're so spot on about the underwriting thing, that they were just underwriting differently than everyone else, and more correctly. You know, the vignette from the New Yorker article with the competing VC.

• 2:18:38Ben Gilbert?

  Right. The point of that competing VC was like, this is crazy. The math doesn't work.

• 2:18:42David Rosenthal?

  Their underwriting is wrong. Yeah.

• 2:18:44Ben Gilbert?

  And A16Z is like, oh, that thing that you said was crazy, where you're like, the math doesn't work because the numbers are too big. We think we can hit those numbers. And they did.

• 2:18:51David Rosenthal?

  Yep, and they did.

• 2:18:53Ben Gilbert?

  And by we, like, tech companies broadly that we invest in.

• 2:18:56David Rosenthal?

  Yep. Well, I think that's the, this isn't exactly a narrative, one way or the other. Maybe it's a narrative about the industry, this whole, we made this point on the first episode, but I want to double, triple underline, underscore here. We're telling this whole thing. And there's so much drama, and it's so fun. It's like, you know, Andreessen's, you know, the underdog and the disruptor, and there's all this, you know, feuding and whatnot. This is all just great for everybody. It's just frickin' fantastic for everybody. Like, the fact that the New Yorker is writing about tech, it's great for other VCs, it's great for startups, it's great for entrepreneurs, it's great for podcasts like you and me, it's great for Andreessen, it's great for benchmarks, it's great for Sequoia. Full stop.

• 2:19:35Ben Gilbert?

  Yep. Which is a great lead into power. So I think this is interesting. I think that they had a source of power that worked really well for their first, call it eight-ish years, and now they have a different power. And remember, for folks that are new to the show, power is the thing that enables a business to achieve persistent differential returns. Like, how can they be sustainably more profitable than their nearest competitor? The first one was clearly counter positioning. We've used it several times in this show to describe the way that they positioned themselves in the press versus other folks versus incumbents.

• 2:20:20Ben Gilbert?

  And I'm going to use it a little bit more specifically in this case, which is they literally did things that other people could not do because their business models did not allow for it. If you were to go to GPs at big firms and say, "In order to bet on the future correctly, the way these other guys are, and we need to staff up like this, overnight, we all need to stop taking salaries for the next three years. Oh, and we all make over a million dollars a year in salary and have personal lives and burn rates that have accommodated that. And, you know, that's even before we start getting our carry." The chances of that happening immediately, rather than over the next five to eight years, being, you know, forced to, was like zero. And so there was that moment in time, much

• 2:21:05Ben Gilbert?

  like how CAA was able to do it in the agency world, where they literally took a different business model and did a thing that the incumbents couldn't copy, which was genius. Yep, totally. Totally genius. The other one was brand. Totally. And that's the one that will last for the future. All this highfalutin stuff is great, and all the value-added services are great, and all the networks are great, and the executive briefing center is great. Let's not forget the business that we're in here, which is deploying capital and getting a return on that capital. Now, that is a commodity. Capital is a commodity. And the way that commodity industries look

• 2:21:46Ben Gilbert?

  is that they're pretty much undifferentiated, because the vast majority of the value is available from a near-exact provider substitute. And so what differentiates a commodity from another commodity? Brand. Coke and Pepsi, baby.

• 2:22:06David Rosenthal?

  There was actually a great quote, I forget where, I almost put it in the script and I didn't, of an entrepreneur talking about the Andreessen Benchmark thing. And they're just like, oh, it's so great. It's like watching Coke and Pepsi, you know, do a price war.

• 2:22:19Ben Gilbert?

  Truly.

• 2:22:20David Rosenthal?

  I'm just sitting here sipping.

• 2:22:21Ben Gilbert?

  Truly. It's like watching a game of chess play out too, because it is simultaneously true that having a great board member, it can be game changing for your company. Having this set of services can be game changing for your company. Like, I just watch, not to toot our own horn, but like, some of the folks that were able to bring into portfolio companies through us at PSL recruiting them, trajectory changing for companies. And I'm sure, like, I've never worked at Andreessen Horowitz, I'm sure that works in spades there. And so like, even forget all of the other services. Like, if you have a great recruiting mechanism, game changing for companies. And also, it is true that the primary value that comes from raising capital is the capital.

• 2:23:07David Rosenthal?

  The brand piece is also interesting too. And you said about like, you know, and just riffing a little more on the Coke and Pepsi thing. Back to the Benchmark versus Andreessen. Benchmark's brand, we are the craft venture capital firm.

• 2:23:19Ben Gilbert?

  Yeah.

• 2:23:19David Rosenthal?

  Andreessen's brand, we are the franchise. It's just like Coke and Pepsi, right? It's like, you know, Coke is, you know, whatever, you know, Coca-Cola classic with the polar bears and whatnot. And Pepsi is like the taste of a new generation, you know, like, it works. Like, there's just different segments that they address. Like, it works.

• 2:23:37Ben Gilbert?

  Yeah. It's funny, while we're talking about power, we should also talk about like, when you talk about profits, you know, like persistent differential returns, you should literally talk about like pricing power. In Forbes, it was reported that Andreessen Horowitz takes 30% carry. And so it's interesting to see that like, their returns and their market perception has literally

• 2:23:59Ben Gilbert?

  Turned into them being able to price higher than their competitors. This is LP facing, you know, when, when it's them versus other venture firms and they can say, yeah, yeah, you're going to get a worse deal with us than you're going to get with other people, but it's worth it. So you'll take it and they do.

• 2:24:15David Rosenthal?

  This is the Hamilton Hallmary definition of brand power, right? It's like you can charge a higher price for the same product.

• 2:24:20Ben Gilbert?

  Yep.

• 2:24:21David Rosenthal?

  It's why people pay more for a Tiffany's diamond than a no name diamond.

• 2:24:25Ben Gilbert?

  Yep. So the brand thing is multi-sided. It's your brand entrepreneurs and it's your brand LPs.

• 2:24:30David Rosenthal?

  Yep. And the entrepreneur version of this is you get into the round. You get into the round and you get a, a large ownership allocation in the round.

• 2:24:39Ben Gilbert?

  Yep. All right. Playbook. I know we've done a lot of this already, but there's a few, few that I want to hit.

• 2:24:44David Rosenthal?

  Go for it.

• 2:24:46Ben Gilbert?

  All right. So just to review all the things that were like unheard of or uncommon before A16Z started doing them. GPs as former founders rather than investors, huge team of experts, which is now known as VC platform, calling everyone at the firm a partner, blogging, which other than like Brad Feld and Fred Wilson, doing transparency versus opacity and content marketing more broadly, like that didn't really exist in venture. Paying huge prices to blow your competitors out of the water and just offer much higher valuations and bigger checks.

• 2:25:19David Rosenthal?

  It's crazy. Yeah. Literally nobody did that.

• 2:25:22Ben Gilbert?

  Yeah, it existed at some extent in isolated ways, but like, no one just said like, F it. We're doing it over and over and over again because we're underwriting the future differently than you are.

• 2:25:30David Rosenthal?

  Yeah. And not, not really like people would be like, oh, I can't believe, I mean, cause I entered the industry in 2010. So Andreessen was there, but it was still early days. It would be like, oh, I can't believe the price that X firm paid for this, you know? We offered a six pre and they did an eight pre, you know, like nobody was just step change.

• 2:25:47Ben Gilbert?

  Nobody said like, what if you raised eight?

• 2:25:49David Rosenthal?

  Yeah.

• 2:25:49Ben Gilbert?

  And then we'll figure out how to value that. And then lastly, venture firms investing in crypto. I think USV probably gets a little bit of credit for, I think they were earlier in some ways, but not nearly investing as many dollars and for sort of as long a period and building a brand with the crypto community, the way that Andreessen has gone on to. So you look at those, what is that, six things?

• 2:26:13David Rosenthal?

  I would add seven too of like PR.

• 2:26:16Ben Gilbert?

  Yeah.

• 2:26:16David Rosenthal?

  As well.

• 2:26:17Ben Gilbert?

  Yeah, I guess I'd put that into like the content marketing, brand building. But you're right, it's a different function of marketing. So those seven things that like, you kind of take it face value, like that's part of the job. That's what it is to be a venture capital firm, which like, just weren't things a decade and a half ago before Andreessen Horowitz made that a part of what it takes to do this job.

• 2:26:40David Rosenthal?

  Yeah. I can't argue with that.

• 2:26:43Ben Gilbert?

  Is literally their playbook was to change the requirements of the job to be done for everyone else in the industry. It was wild. On that note, there's this interesting thing that I've been thinking about, which is like everyone, the common knock was that they were overpaying to buy name brand for themselves to sort of like buy their way into winners, which first of all, even if they did that, it actually is accretive to their LPs since their LPs would benefit from being investors within this name brand fund in the future, assuming that they were going to continue investing in subsequent funds. Like it actually was a good use of the capital, even if their prices were irrational because great, now in the first year when that fund was deployed, uh, yeah, we might've overpaid

• 2:27:28Ben Gilbert?

  for some deals, but now we're in a top three franchise. So awesome.

• 2:27:33David Rosenthal?

  And the first funds ended up being good.

• 2:27:36Ben Gilbert?

  Right. Would anybody argue today that they actually paid too high of a valuation for anything they did from 2009 to 2015? Absolutely not.

• 2:27:44David Rosenthal?

  Yep. One other corollary on this playbook theme I wanted to make, we made this point on the last episode, but I don't think we've talked about it yet here. This is just so silly. And I didn't quite get this perspective until being outside of the institutional venture industry. And now it's just obvious to me. It's so silly. Why would you ever argue, publicly argue as a venture firm that valuations are too high? Like, who's your customer? Your customer is entrepreneurs. That'd be like saying like a politician running and being like, taxes are too low. We need higher taxes. That is my platform. And not only that, but this specific other competitor of mine, who you know, from the other party

• 2:28:26David Rosenthal?

  who's running, the problem with their platform is they want lower taxes. If you're an entrepreneur listening to this, you're like, I like lower taxes. I like higher valuations.

• 2:28:36Ben Gilbert?

  Right. Yeah, that's a great point. Yeah. Pick a different thing to argue about.

• 2:28:41David Rosenthal?

  Totally.

• 2:28:41Ben Gilbert?

  If that's your, your side.

• 2:28:42David Rosenthal?

  You can feel that way all you want, but like, don't argue about it.

• 2:28:46Ben Gilbert?

  Right. Hmm. Yeah. Speaking of like, things that are specific to institutional VC, like we discuss on our VC fundamentals episodes in the, the LP show, there is an investment process that has to happen because there's a lot of partners. So you need to figure out, like, we raised this fund, like, we got these 22 people. Isn't that crazy? It's 22 now. But even imagine a smaller partnership earlier on, five, six, seven people, like, how do we make decisions to invest this fund? Well, an interesting thing that they do is they do not have a consensus based approach. So I think, and this is according to the information, which is LinkedIn sources, any GP can pull the trigger on any deal on their own. So they can say like, I'm going to bat for this. The way Mark describes it in some

• 2:29:31Ben Gilbert?

  podcasts is that they assemble a red team to basically be there. The way we've talked about this at PSL, and I think I've talked about on LP episodes in the past is like to have a foil. If you're advocating to turn a project into a spin out, someone should kind of be the, the bear case on it or your foil. Mark calls it a red team. And he's like, we basically staff someone with the responsibility of going and trying to figure out why this is a bad investment. Because if you don't have the consensus of the Partnership and you're putting your name on the line. Sure, we can, we should do that investment. Maybe like it's a good non-consensus bet, but also you should have to go argue with someone who's going to present the other side of the case. And he's like, we figured this out because Ben is, is my red team. Like I can come in and be super optimistic about something and Ben is naturally

• 2:30:14Ben Gilbert?

  good at, because you know, they fight like dogs. Like he's naturally good at presenting the other side of my arguments and we decided to institutionalize that in the firm, which I think is really an interesting approach that both forces you to be diligent, but also allows for non-consensus bets.

• 2:30:32David Rosenthal?

  Interesting. Yeah, I like that in theory. I wonder in practice how much it actually goes. Cause like you and I know, like these deals happen in like days, if not hours, like you're not,

• 2:30:43Ben Gilbert?

  Lightning speed.

• 2:30:44David Rosenthal?

  It's just, it's a interesting.

• 2:30:45Ben Gilbert?

  At least in theory and like great to talk about on podcasts.

• 2:30:48David Rosenthal?

  Yeah. Great to talk about on podcasts. It makes total sense though, that they can't be a consensus driven firm with that many people. Like you're never going to agree on it. Anything.

• 2:30:56Ben Gilbert?

  Yep. Especially at the pace that they're doing deals now because of the pace that the whole thing is working now.

• 2:31:02David Rosenthal?

  Yep.

• 2:31:03Ben Gilbert?

  Last one that I had that I just thought was interesting that we didn't talk about at any of this, but Mark talks about a lot, which is he doesn't really believe in pivots or the notion of like failing fast or the lean startup. I'm amenable to this argument, even though I do a ton of testing of ideas that like the big innovations throughout history are made by true believers who just kept trying. Like there's something like the filament of a light bulb was like Edison's 200th attempt at creating filament. And it's like, it may not be the right decision for you as an individual to keep ramming your head against a wall, but it's good for all of

• 2:31:45Ben Gilbert?

  us as a society that there are a lot of people who are willing to keep running at something almost illogically so in a way that is potentially not in their best interest because that is where the true breakthroughs come from. And if everybody's always like looking at data from the first sort of test and they're like, eh, it's not really working. Let's try something else. Then like you don't get the breakthrough innovations.

• 2:32:08David Rosenthal?

  Yep. That makes sense. I mean, I think like both of these things are true, but certainly like we didn't like test acquired. And if we had tested acquired in the early years, we probably would have been like, well, that's not working very well.

• 2:32:21Ben Gilbert?

  Totally, but passion projects, passion leads you to do things that aren't necessarily economic. And then at some point, you sort of look around and you're like, whoa, value creation has happened.

• 2:32:35David Rosenthal?

  I love that image.

• 2:32:38Ben Gilbert?

  Hopefully not said in that sterile of language, but yeah.

• 2:32:41David Rosenthal?

  I like that. I'm gonna use that with startups going forward. Just feel like, guys, value creation has happened.

• 2:32:50Ben Gilbert?

  Well, I was talking actually with a portfolio CEO the other day about how I really believe from doing acquired now that, and we talked with Patrick O'Shaughnessy about this, that like, brands just take time. People don't love stuff quickly. They're always skeptical of new stuff. And so, a brand is like, it's time, times absolute number of people who are familiar with the brand, times the magnitude of how much they care about the brand. Sure, you can get the coefficient on those second two factors to be very high, but it sure helps to have a lot of time, because it multiplies through. So, just looking back at acquired, and A16Z now has this going for it too. It is remarkable, even if the product doesn't get any better, and certainly the product for us and for what they offer has gotten

• 2:33:34Ben Gilbert?

  dramatically better, that time existing in market, continuing to bang your head against the wall and keep doing your thing and being true to it, even if it's an irrational decision because it may not pay off, the passion can allow you to stick it out long enough such that a brand can be built.

• 2:33:53David Rosenthal?

  Well, there's also like, once you get a brand like that, I mean, I guess this is the point of seven powers, like, any of the powers, once you achieve them, you're just like a whole lot more robust than you used to be. Like, think about the first Andreessen Fund and the Skype deal. If they had lost money on that.

• 2:34:12David Rosenthal?

  Man, history would have been different.

• 2:34:13Ben Gilbert?

  Totally.

• 2:34:14David Rosenthal?

  That could have torpedoed everything.

• 2:34:16Ben Gilbert?

  Yep.

• 2:34:16David Rosenthal?

  Now, they write a couple hundred million dollar check into something and it blows up in their face. Like, like, let's take Clubhouse. Like, jury's still out on Clubhouse. Like, will it work? Well, don't worry, you know, who knows. But let's assume for a minute that, just play out a scenario where it goes to zero and they lose a whole bunch of money on it. Won't matter at all. Literally no impact, right?

• 2:34:37Ben Gilbert?

  That's such a good point.

• 2:34:38David Rosenthal?

  Or similarly, like, early days of acquired, right? Like, first couple of episodes, like, if we had just, like, if something really bad had happened, we probably would have quit. But not that I want to do this at all, but like, if we have a bad episode or something like that, like, we're probably gonna be fine.

• 2:34:49Ben Gilbert?

  Yeah. I don't know. Man, this is like my constant paranoia, because it's such a big risk to dedicate.

• 2:34:54David Rosenthal?

  It does feel a little tightrope-y.

• 2:34:56Ben Gilbert?

  Listening to a podcast is a risk, because we're like, totally off topic here, but this is something I'm like, super fired up about. If an article's boring, it's fine, because you skim it real quick and then, under a minute, you're gone. If an episode sucks, you're like, wow, I just dedicated an hour, two hours, three hours of my life to this thing. I'm not gonna trust these people to produce things that are high quality anymore. I'm gone. And so I, I don't know about you, I constantly live in fear and like, have gotten

• 2:35:21David Rosenthal?

  I do.

• 2:35:22Ben Gilbert?

  aggressive on if this thing is not of the quality bar in which we set. Every single episode we release is a risk.

• 2:35:33David Rosenthal?

  It's funny, like, I think my level of, I'm curious what you think, my level of nerves going into every episode has remained constant and steadily increasing for the six years we've been doing this.

• 2:35:49Ben Gilbert?

  Totally. There's more on the line every time.

• 2:35:50David Rosenthal?

  Every time. Yep.

• 2:35:52Ben Gilbert?

  Huh.

• 2:35:53David Rosenthal?

  Well, that was a digression.

• 2:35:55Ben Gilbert?

  Totally.

• 2:35:56David Rosenthal?

  So great. There's so many stories. That was, you know, continuing to riff on the tangent of the podcast. We were worried we were gonna run out of stories after like, 10 episodes.

• 2:36:06Ben Gilbert?

  Well, we did run out of good acquisitions.

• 2:36:08David Rosenthal?

  That's true. That's true. But my God, there's stories everywhere. And in our community now, like, it's just, it's the best.

• 2:36:16Ben Gilbert?

  Fire wheel spinning. All right, grading.

• 2:36:19David Rosenthal?

  Dun, dun, dun.

• 2:36:20Ben Gilbert?

  So, listeners, you know, we are not LPs in Andreessen Horowitz, and if we were, we wouldn't be able to disclose their returns. That said, thanks to our great relationship with the folks at PitchBook Data, we are able to pull a ton of stats on when they invested, at what rounds, at what valuations. We're able to scan S1s of all these companies to see if they owned more than 5% at IPO, what they own. We do know how much money they've raised. And so we're able to do some napkin math. And here's the napkin math that we've done. So we looked at the proceeds from their top 10 liquid outcomes. And that may not mean that they've actually liquidated their position, but that they could have.

• 2:37:03Ben Gilbert?

  So that is, and I'll just run through them real quick, because I think we said some of the numbers earlier, but it's worth highlighting again. Okta was a billion and a half to 2 billion, back to Andreessen Horowitz. Coinbase, 11 billion, the granddaddy of them all. Airbnb, we estimated around 3.5 billion. Based on an $85 billion market cap, they have IPO'd in the last six months. So it's reasonable to think that they would start liquidating that position now. We think that they own about 4%. They're a sub 5% shareholder, but are of course on the board.

• 2:37:35David Rosenthal?

  They led the Series B. And I think they put 60-plus million into the Series B, so.

• 2:37:41Ben Gilbert?

  Yeah, a lot of, lot of capital there. So probably 3%, 4%, somewhere in there. Lyft, they generated about $1 billion out of. PagerDuty, half a billion. Slack, we think about 3 billion, assuming they held all the way to the Salesforce deal 18 months later. Pinterest, a billion and a half. They own 10% at IPO, which was, I think, like a $15 billion market cap, but has 3X since then. So it depends how much they held.

• 2:38:06David Rosenthal?

  Depends when they distributed, yeah.

• 2:38:08Ben Gilbert?

  Right, it could have been higher. Roblox, a quick 1.2 billion. GitHub, a billion. And Affirm, somewhere between half a billion and a billion. Again, all these things are estimated, but if you just look at those companies. And think about distributing pretty early, like assuming that they didn't hold Okta all the way until it is worth $33 billion that it is today. These companies probably generated about $25 billion in returns. So an interesting thing to do is to then look at that divided by the AUM of the funds that they come from, just to say, what's like the worst case scenario for their multiple?

• 2:38:46David Rosenthal?

  So that's assuming no more value from anything else.

• 2:38:49Ben Gilbert?

  Which is simply not true. And we'll revisit some of the things that still could bear fruit after we just do some quick math. So that you look at their total assets under management, 18.8 billion. But like, a lot of that doesn't contribute to any of those companies we've talked about. So subtract out the early-stage funds from 2019 onward, because none of those companies were from, you know, those haven't matured yet. So that's 2.2 billion off the 19. Then you got to take out their most recent late-stage fund from six months ago, which is 3.2 billion. Then you take out at least crypto funds two and three, and maybe you even take out crypto fund one, which is only another 350 million. But then you're pulling out from all of that, another 2.7 to 3 billion.

• 2:39:34Ben Gilbert?

  Then you take out all the biotech funds, which is 1.4 billion. You have like, close to $10 billion to subtract out.

• 2:39:40David Rosenthal?

  And you could maybe even argue that one or two of the more recent early-stage funds to take out as well.

• 2:39:48Ben Gilbert?

  But to make this like, again, all napkin math, really easy, because we're just trying to figure out, like, did it work? Is it going to work? Is it showing signs of working? Let's just say their first $8 billion, we have some data on. And then the more recent $8 billion, jury's still out, we don't know yet, time will tell. And so if you look at that sort of first eight, well, that created at least 25 billion, which is a cool 3X. And you're not even counting And this could be a monster, Databricks, which that company's worth 28 billion and it wouldn't surprise me if A16Z owned like 25%. They invested very early and they've been investing every round. They could own like 7 billion of that company at the current valuation.

• 2:40:33Ben Gilbert?

  Again, I don't know, but this would be a reasonable estimate. Instacart, it would seem reasonable to think they own like 2 billion in that. Robinhood, a small percentage because it was only a seed investor and then something more recent in the growth round. But like, you also have like Robinhood, Oculus, Flatiron Health, Stack Overflow, Instagram, which is so funny, they generated 78 million out of Instagram, which was a nice return at the time, but sort of doesn't matter in this overall analysis today. So that 25 billion number, that gross 3X is even before all these other companies that definitely contributed and before all the other ones that, you know, may have returned capital, may have done well, but not Coinbase well.

• 2:41:15David Rosenthal?

  Well, and there's one more dark horse too, which is, I believe in the crypto funds and maybe some of in the early core funds, they're buying Bitcoin and Ether.

• 2:41:26Ben Gilbert?

  Oh, interesting.

• 2:41:28David Rosenthal?

  I'm almost 100% sure at least Bitcoin, if not Bitcoin and Ether, they were buying in a bunch of these funds.

• 2:41:36Ben Gilbert?

  Wow. Depending on when they were buying, that's game changing for this whole, depending how much capital they put to work for this whole analysis.

• 2:41:41David Rosenthal?

  Yep.

• 2:41:42Ben Gilbert?

  The reason that I wanted to sort of do this napkin math is to basically say, okay, we know with the first half of the capital that they raised in their life, at the very worst case, they had as good a returns as anyone else in the top quartile of the industry. So at the very worst case, it didn't not work.

• 2:42:02David Rosenthal?

  Right. Yeah, there's no, uh, this is not enough.

• 2:42:06Ben Gilbert?

  Yeah, they were able to do a hard thing, which is burst onto the scene and break into something where there is really persistent returns, year over year, decade over decade, and compete with the very best of the best. And do we actually have the data to tell you if they're, you know, the best in the industry or to compare them to Sequoia? It's too hard to do.

• 2:42:26David Rosenthal?

  But it also doesn't really matter, right?

• 2:42:28Ben Gilbert?

  Right.

• 2:42:28David Rosenthal?

  It would be fascinating to know if they're better than Sequoia or better than Benchmark or not. But like they're in the ballgame, you know?

• 2:42:35Ben Gilbert?

  Yeah. And this also, I think we can finally put to bed that leaked data in 2016. It's not that the data was wrong at all, but like the conclusion of all people's analysis is, you know, for the brand that they have, Andreessen Horowitz is way underperforming. Gosh, they're only at a 2X or a 2 point something. And you're like, okay, we don't know yet. Coinbase, if you had analyzed Coinbase in 2016, would you have been able to determine that it's going to whatever gigantic multiple it was on that fund just from that one company? No, there's no way you would have been able to.

• 2:43:09David Rosenthal?

  The apples take longer than lemons to ripen. That was, I skipped over that in this curve for a time, but it was a Wall Street Journal article that was so clearly a hit piece planted by rival venture firms, where they had a bunch of quotes from like LPs and stuff that like they're, you know, the entries and returns were. I think the headline of the article was something like, despite Bluster or whatever, entries and returns are average.

• 2:43:34Ben Gilbert?

  Yeah. Well, I don't have much more to add. And frankly, I guess I would throw an A on it, with the plus sort of being if we ever got cleaner data. But for what a challenge it was to break in and challenge the incumbents in such a short timeframe, it's remarkable how well they've done.

• 2:43:56David Rosenthal?

  That's spot on. It's an A. Only reason it's not an A plus is like, A plus is Facebook buying Instagram and getting $500 billion of value for one. We just don't know enough yet that maybe it could end up being that in the future, but it's not that today. But no way this is less than an A. Who else did this? Nobody's done this.

• 2:44:16Ben Gilbert?

  And just to put some numbers, like I'm going to guess that the first 8 billion of capital in these funds that we're sort of calling inbounds for this analysis returned somewhere between 25 and probably 40-ish billion.

• 2:44:31David Rosenthal?

  It's so good. You know, and it's funny, like the other. Naval gazing aspect to venture and investment returns that people talk about all the time is like the multiple and like the IRR is an efficiency of capital and like only having the best companies and blah, blah, blah, blah, blah. Just the magnitude is like, at the end of the day, what really matters is the magnitude here.

• 2:44:53Ben Gilbert?

  Yeah, the absolute dollars.

• 2:44:55David Rosenthal?

  The absolute dollars. Like they generated what, let's make it easy. Let's say 30 billion that they've returned on eight billion invested. That's $22 billion that they've generated. Name me other firms who have done that. There are a few, but there are a very, very few who have done that.

• 2:45:13Ben Gilbert?

  Yeah, it's interesting. Like a good multiple means you are right, but a great amount of absolute cash returned means you were three things. You were right with conviction. You had access. You had winning access to be a meaningful participant on that cap table. And you effectively did the work to obtain the capital in the first place to be able to deploy a large enough amount of it to generate a large dollar return. You gotta be good at a lot of things and you gotta be convicted and right in them.

• 2:45:44David Rosenthal?

  Yep. And I think large institutional LPs, I think that's how they think about it, right? It's like, you're like, yeah, great. Yeah. 10x fund, fine. If it's a $50 million fund and you 10x and you return 500 million, like clap, I'm proud for you, you know, but like, I'm not jumping out of my seat, but you know, you returned me 22 billion. Like now I'm jumping out of my seat. I don't care what the multiple is.

• 2:46:09Ben Gilbert?

  All right. Well, um, gosh, it feels good to come to the end of this two parter. You want to do carve outs?

• 2:46:15David Rosenthal?

  Yeah, let's do some carve outs. I got two. First, they're both sort of quasi carve outs. The first one is a quasi carve out because I've already had this author as a recent previous carve out, Arthur C. Clark. So good. Was it on the Ethereum episode? Maybe I had him as my carve out. OG, super OG, science fiction author. I have since continued to read his stuff and I read Childhood's End. Have you read Childhood's End?

• 2:46:45Ben Gilbert?

  No.

• 2:46:46David Rosenthal?

  Oh my gosh, this is so good. You gotta go read this book. You know, the movie Independence Day?

• 2:46:51Ben Gilbert?

  Yeah.

• 2:46:51David Rosenthal?

  The Will Smith movie?

• 2:46:53Ben Gilbert?

  Absolutely.

• 2:46:53David Rosenthal?

  Oh, so great. So Independence Day is based on Childhood's End, but it's only based on the very beginning, like the beginning of Childhood's End is. What Independence Day was based on, but then the rest of the book takes a very, very different turn and it's super mind bending and really cool. Can't recommend it enough. That's number one. Number two is specifically for you, Ben. I have a carve out for you. We are both huge MKBHD Marquez Brownlee fans.

• 2:47:25Ben Gilbert?

  Yeah.

• 2:47:26David Rosenthal?

  And I think with the most recent video, he just launched a new channel on YouTube called The Studio Channel with the video. You're gonna love this because you're such a gear geek. Studio tour, MKBHD studio tour and like, oh my God, it's so cool.

• 2:47:41Ben Gilbert?

  And he's got great gear. I gotta go check that out.

• 2:47:44David Rosenthal?

  I was watching and I was both like jaw on the floor and I was like, wow, we are such amateurs at acquired like.

• 2:47:50Ben Gilbert?

  He has a litany of red cameras.

• 2:47:52David Rosenthal?

  Litany and like, wow, video is, I have so much more respect for what YouTubers do. Like audio is easy. We're playing on easy mode here.

• 2:48:01Ben Gilbert?

  Oh, it's so much harder for sure. Okay, cool. Like I'm legitimately adding that to my to do list right now to go watch that after. All right, mine is continuing my recommendation of The Sopranos and Goodfellas, The Godfather. Somehow I have never seen The Godfather trilogy, like it just escaped me. I know I'm like going back and like actually watching all these.

• 2:48:26David Rosenthal?

  Wait, so you started with The Sopranos and Goodfellas without having seen?

• 2:48:29Ben Gilbert?

  Correct.

• 2:48:30David Rosenthal?

  The Godfather.

• 2:48:30Ben Gilbert?

  Correct.

• 2:48:31David Rosenthal?

  You know, whatever path leads you to greatness, the point is you get to greatness.

• 2:48:35Ben Gilbert?

  Yes, and greatness it is. God, it is so good. And like, one is so like good and raw and two is so artistic and well thought through and the method of storytelling flashing back and forth between the two stories. I think some people complain about it. I loved it. I think it's De Niro's best performance ever. It's definitely Al Pacino's best performance ever.

• 2:49:00David Rosenthal?

  And three, three exists.

• 2:49:03Ben Gilbert?

  Three, I turned off. Actually, I didn't watch three. I watched Coda. People think it's better than three. It's like a reshot. There's some stuff that's reshot and re-edited. And like, maybe if I had 14 years between two and three, then it'd be okay. But because I tried to watch them back to back, I was like allergic to the 90s-isms of Coda that where I was just like, this is unwatchable. I mean, the haircuts alone. I think Michael Corleone says more words in the first 10 minutes of that movie than in the entirety of two.

• 2:49:35David Rosenthal?

  I believe it. I believe it.

• 2:49:37Ben Gilbert?

  Just no subtlety. So that's an anti-

• 2:49:39David Rosenthal?

  I don't know that I've ever watched three. I was just, this is what I hear from everybody.

• 2:49:43Ben Gilbert?

  One and two are so good.

• 2:49:44David Rosenthal?

  Oh, they're so good. They're so, the horse head.

• 2:49:48Ben Gilbert?

  Oh, it's beautiful.

• 2:49:49David Rosenthal?

  Just great. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:49:57Ben Gilbert?

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:50:08David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:50:28Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:50:41David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:50:52Ben Gilbert?

  All right. Well, with that, listeners, come join us in the Slack, become an LP. All those links are in the show notes. If you liked this episode, Share it with a friend. You could share it on social media. That'd be nice, but I actually like the one-to-one stuff better. We're all about the slow, methodical, high-touch growth here at Acquired. And so if you can put your personal, someone that you think would really appreciate it, then that's who you should share it with.

• 2:51:17David Rosenthal?

  We love social media shares, of course, but it's kind of hard to like, just post on social media and be like, "You should listen to this three-and-a-half-hour podcast."

• 2:51:25Ben Gilbert?

  Right.

• 2:51:25David Rosenthal?

  That is part two of Andreessen Horowitz. Like, you kind of got to like, really convince someone. So if you love this, tell your friends.

• 2:51:33Ben Gilbert?

  It's like when I get an Eventbrite invitation to go to something versus when a friend texts me and like, "Hey, you should come over for this," you know?

• 2:51:40David Rosenthal?

  Yep, exactly.

• 2:51:41Ben Gilbert?

  It's a totally different thing. All right, listeners, we'll see you next time.

• 2:51:46David Rosenthal?

  We'll see you next time. And wait, we got one more piece of news. Who Got the Truth? Live on Spotify.

• 2:51:54Ben Gilbert?

  Go check it out. You can listen to it here for the next two minutes and then go listen on Spotify.

• 2:52:01David Rosenthal?

  Yeah, Spielberg.

• 2:52:02Ben Gilbert?

  Mike Taylor, take us out.

• 2:52:59Speaker 03

  Through all this smoke, I need to know Who got the truth?

• 2:53:05Speaker 03

  Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight Another story on the way Who got the truth now? Who got the truth? Not here for the cheetah They flip-flop like a seesaw Not free under these laws Now the world see what we saw People wonder what to do now It took a body cam to get the truth out Hit the streets, time to move out Got so much to lose now Everybody's break, break, breaking up the dinner Break, break, breaking up the dinner Break, break, breaking up the dinner Through all this smoke, I need to know

• 2:53:50Speaker 03

  Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight Another story on the way Who got the truth now? Who got the truth?