Netscape co-founder Marc Andreessen met with the editors of Venture Capital Journal to discuss Andreessen Horowitz, a new venture firm he founded with longtime investment partner Ben Horowitz. This is a transcript of the discussion. It has been edited for clarity.
Q: Why start a venture firm? You can do pretty much anything you want to, including retire.
A: I love this industry. I love this business. I love what these companies do. I’ve started three of them. That’s probably enough. It’s a high-stress endeavor to actually start one. What founders do is just incredibly stressful.
And what my partner and I have discovered over the past four or five years is that we just love doing the angel investing, we love working with companies, we love working with the great founders. And we have essentially been doing it for free. If you find yourself doing something for free and you seem to be pretty good at it and you seem to really enjoy it, then at a certain point going pro seems like the appropriate thing to do.
The other reason is we see an opportunity to create a new firm, so there is entrepreneurial aspect to it that we take very seriously. There’s a reason we’re not joining an existing firm. We see an opportunity to create a new firm. We think that the model for how these companies are getting built has changed. We think our experience is relevant. We think there are huge advantages to showing up with a big checkbook. We definitely wanted to raise outside capital because we wanted to be able to walk in the door with these companies and be able to put a lot of money into them when it comes to it, and you just can’t do that as an individual—unless you’re completely out of your mind.
Q: Has the fund officially closed, and is the size $300 million?
A: It is closed and the number is $300 million.
Q: What’s the sector focus?
A: Anything based on computers. Let me give you the ‘not list’ first. Not cleantech, not energy, not biotech, not life sciences not nanotech, not rocket ships, not electric cars and not space elevators. [Smiles] What we will do is basically anything computer-related. So that could be, on the front end, consumer Internet or what we call business Internet: software as a service and related things [and] cloud computing. We would also do back -end, both hardware and software. So, networking, storage, servers, databases and all sorts of related things around that.
Q: What about chips?
A: Almost certainly not. That’s probably too capital intensive for us. We’re much more likely to do new ventures that take advantage of the fact that chips have become super powerful and super commoditized. We see a whole wave of companies being formed. [Points at a Flip digital video recorder] Those guys are an example.
It would have to be something very capital light. Building a fab scares us, and fabless also scares us for different reasons.
We think Flip is indicative of a wave of new companies that’s being formed in the valley that are basically new consumer electronics companies that are taking advantage of commoditized hardware and contract manufacturing.
The fact that you can buy off-the-shelf, super fast DSPs or multicore CPUs, or communications chips—Broadcom is a vendor, for example—then you can build new gizmos ranging from—anything, right? Cell phones, cameras, set top boxes, basically all kinds of new gizmos. So, in other words, like the Palm, Tivo, that whole trajectory of companies. We think there could be a lot more of those. An example of a company like that that we’ve invested in as angels is Aliph, the company that makes the Jawbone Bluetooth headset. That’s a great example of what we would do.
So, basically what we decided to do is restrict the domain to that, because we think … it’s necessary to understand the product. And we’re engineers by background, specifically we’re computer science people by background. Everything in the domain I described we can really get our heads around the product in detail. And we don’t know anything about the energy sector.
The other thing that we believe is that there is still a lot of primary innovation happening in all those areas that I covered—and I think that’s becoming a controversial observation these days. There are some very smart people who will give you the other side of that. At the ground level, we actually see a lot of exciting changes going on.
We’re excluding cleantech. We wouldn’t do that. We don’t understand it. We don’t have a Ph.D. …
Q: Will this be a U.S. only fund?
A: We have the flexibility to invest outside the U.S. It will be primarily a U.S. fund. Most of the investments will be in the U.S. and most of those will be in Silicon Valley. We are pretty focused on the Valley. We think the Valley continues to be the best place to make these kinds of investments in general, with some exceptions.
Q: What’s the time frame for the fund?
A: It’s a 10-year fund with an option to extend. In general you have to assume that a venture stage investment takes seven years to harvest, just looking at data over the long run. [Interrupted by remark that it now takes eight years on average for a VC-backed company to go public] Yeah, exactly, it could be longer. And that’s one of the things that we talked a lot about with our investors. Times have changed. We think that we can build major franchises, but companies may or may not go public and, for that matter, they may or may not get sold. We definitely want to have the runway to be able to fund these things out over time.
It’s entirely possible that we may be in an area here for a while where these companies go—it’s more like 12 to 15 years. No. 1, it actually takes time for companies to develop. No. 2, if they’re not going public, then … [interrupted by new question]
Q: If things go as you hope, how many GPs could you see in the firm five years from now?
A: Enough GPs to invest in the 15 companies that matter and no more. We are pretty hardcore on having the number of GPs in the firm always be small. If it goes from two to four, we would view that as a gigantic expansion. We’re pretty convinced that it would never go to six or eight or 10 or 12. I don’t think that makes sense, and the reason is because you’re hard pressed to find even really successful firms that have—even in the really successful firms, you’ve got a power-law curve of who’s doing the great deals and who’s got the great returns. When you get a great firm that actually has two partners who are both doing world-class deals, that’s a really unusual and profound thing. …
Q: What is the fee and carry structure for the fund?
A: We’re not discussing that. Part of the virtue of not being a public company is we don’t have to talk about things like that. … Let’s put it this way, we are not unconventional. We look normal to an LP and the investments we’re going to make will look normal to an entrepreneur. We thought about a whole bunch of alternative structures.
I’ve looked over the years at every incubator and all these other new ideas. Like, should it be a holding company? What we finally concluded was that while you can imagine improvements to the conventional way things are done on the LP side and the entrepreneur side, it’s VERY important to be competitive, because it’s a market for capital on both sides.
Once you start to get too unique in your structure of either how you make your investments or how you take the money, then it starts to be a serious drag. At a moment in time, in 1999, you could do things, but over time LPs are comfortable with a certain structure and we fit into it.
Q: How much did you and Horowitz invest in the fund?
A: We have significant skin in the game. We are significant-size investors relative to the LPs.
Q: What’s your optimal deal size?
A: First of all, you’ll notice that there are two GPs. That’s a large ratio of dollars to GP, probably three or four times what you’ll find in a lot of funds. The deal-size range—this is an area where we’ve relaxed the focus—the deal size range is $50,000 to $50 million.
Here’s why. First of all, we think that it’s not a stage-specific exercise, at least the way that we do it. It’s a company-specific enterprise. We’re on the hunt for new franchise companies in the category I described. Our view is when you find one of those franchises—or a company that you think can be one of those franchises—you want to invest as much as you can both in time and effort across as many rounds as you can.
Q: What is a franchise company?
A: Andy Rachleff, who is a VC [formerly at Benchmark Capital] who now teaches venture capital at Stanford, did an analysis. Basically between roughly the mid-80s and the mid-2000s—a good cross section of time across a couple of different cycles—what he found is that basically there are about 15 companies a year that are founded in the tech industry that will eventually get to $100 million in annual revenue. Those companies in total represent a very large percentage of the returns to venture capital. His data show that they were 97% of all public returns, which is a good proxy for all returns. So those are the companies that matter. Those are the companies that have a big impact on the world. Those are the companies building foundational technology. Those are the companies that generate all the venture returns.
A company that gets to $100 million in revenue a year is what I would call a franchise company. That’s an opportunity to build something big and enduring and permanent and important. And there are many other tech companies founded each year, some of which are very interesting and some of which end up getting sold for lots of money or whatever. But generally speaking it’s those 15 that really, really matter.
So, our view is that venture capital is a feast-or-famine business. If you’re investing in those [franchise] companies, you do well. And if you’re not able to either pick or get into those companies, you fail. And that is the story of the sort of two-tier system that has existed now for years.
So, we’re going after those 15 companies and we’ll enter them at any point where we find them. Ideally, we’ll find them at the seed stage and we will help develop them and put in more and more capital as they grow. Failing that, if we screw that up, we will then, as we say, ‘correct our mistakes,’ and we would go into a later round.
Q: How sensitive will you be to valuations? For example, would you invest in Facebook or Twitter now at their current valuations?
A. Facebook I should probably not comment on because I’m actually on the board. Twitter, if I could, I would invest at the last round valuation, which was two-something. The Benchmark round. And certainly we would even consider higher than that.
It is an interesting question. No. 1, valuation matters a lot, but the franchise companies tend to look overvalued at multiple stops along the way. And I’ve just seen a lot of emphasis over time of people who passed on things—whether it was people who wouldn’t invest in Google because it was $75 million pre [money]. There were a whole wave of VCs who passed on Facebook, that basically dropped out at $40 million pre [money]. There were VCs that passed on Twitter over valuation in earlier rounds. And I’ve just seen it over and over and over again. AOL is another example. Cisco is another example.
Now, the real question is how big are the things going to get? Because valuation DOES matter and you don’t want to go crazy. But you want to focus on company quality more than negotiation. And I frankly think there are VCs with a finance background who get confused about that. The minute you start looking for deals, in my view, you’re in trouble. You’re in the wrong … Like, maybe if you’re a commodities trader that makes sense, but in this business [shakes his head no].
Q: So you want to keep your eye on the prize and not get distracted by a particular point in time or particular valuation?
A: Yeah, I would say that and I would define the prize as the market size. The actual most important thing is the market size. If the market size is going to be gigantic, then a number of things follow from that. No. 1, if a company executes well, it’s going to be worth a ton of money. No. 2, a large market is wind at your back as a startup. It’s not that uncommon to see two startups, one of which actually has a better management team than the other but a worse market, and it underperforms the company with the worse management team and the better market.
This is an area where entrepreneurs tend to get confused, because market is not under your control. You can control your product, you can control who you hire, you can control how you run the company. But you can go out there and sell and sell and sell, but if the market is not there it just doesn’t matter. Other companies just kind of wander around, get into a gigantic market and end up becoming huge.
So, we’re very focused on market size and very focused on the nature of the product going after that market—and we think products REALLY matter. If you intersect the product and market topics, we have a concept called product/market fit, which is that a company changes, almost like changing from a liquid into a solid. It does sort of a state change when it achieves product/market fit, which is to say: It has successfully discovered and built a product that people want to buy. Startups almost always start out without product/market fit and at a certain point in time they either achieve it or they don’t. When they achieve it, then the investment thesis changes entirely. Up until then you’re speculating on product/market fit. Once you’ve achieved it, you then start speculating on total market size.
Q: What happens when two companies get a product/market fit?
A: [Laughs] Well, it’s actually interesting. One tends to get it sooner. The first mover is actually a really good advantage. Now, the details matter a lot, right? Google achieved product/market fit in a new and original way in a business that probably had 35 other entrants over the preceding six years. But they really nailed it in a way that the previous companies hadn’t. I would even call them a first mover in how they do in the true market that actually exists.
So, we focus a lot on product, a lot on market and a lot on that point of product/market fit. The purpose of the seed-stage investing is to get into companies before they achieve product/market fit, to watch them through that process. And if they achieve it, or as they achieve it, is when we put more money in.
Q: How will that affect the number of investments you make?
A: The majority of the investments will be in seed stage. We may do as many as 60 to 80 seed stage investments in the first fund. Typically, in the seed stage, we wouldn’t go on the board. In fact, at the seed stage, we often advocate that the companies not even have boards. At the seed stage these days you’re talking about a company with like four or five people, so if you try to put a board together the board can end up with more people than the company. And a seed stage company’s mission in life, in our view, is to find product/market fit. Until it does that, all the rest of the company-building stuff doesn’t make any sense. That’s one side of things.
From our standpoint, a majority of our dollars will go into a much smaller number of deals at the venture stage than at the late stage. And so, hypothetically, 10 to 15 venture deals and two to three late stage deals or something like that.
Q: Can you give some example of companies you’ve backed that have achieved product/market fit?
A: You can clearly point to companies that have achieved it. I think LinkedIn has achieved it, I think Twitter has achieved it, I think Digg has achieved it, I think Aliph has achieved it.
Q: How close are you to making a deal?
A: We’re working on two right now, one of which we’re close on and one that’s further away. But these may not even get announced, so I wouldn’t set that up to be anything other than that we’re working on deals.
Q: Venture fund performance has been terrible since the bubble. Why do you think that is and what are you going to do differently to ensure that you produce great returns?
A: What I would say is there’s no such thing as venture capital. It’s not an asset class. It’s feast or famine. There are 10 or 20 firms that produce great returns over time and then there’s everyone else. And as you know, everyone else is about 780 firms or something like that. … That just doesn’t make sense. The story of the last 15 or 20 years—part of it was the story of the bubble, of course, and part of it also was the story of the emergence of this idea that venture capital was an investable asset class, and if you’re a large institution you could put X percent into venture capital.
So, basically what’s happened is that there has been a spillover effect, where institutional money that has wanted to get into venture capital couldn’t get into the top 10 or 20 funds and so invested in lots of others. And they now know they never should have done that. The awareness in the LP community is now rising rapidly that that is a problem and a mistake. The limitations of venture capital as an asset class are put as much money as you can into the top firms and then don’t put any more money in. And if that’s only .2% of your portfolio, or whatever, then that’s all there is. By the way, it’s the same lesson for buyouts and the same lesson for hedge funds, which people are also learning. Managers in these asset classes really matter. … Money is draining out and firms are shutting down—and they should. [Interrupted] Maybe half of those firms won’t be able to raise new funds in the next 10 years. It depends on when they’re going to come up to raise money. Put it this way: Every time you guys report on or read that a venture capital firm has shut down and they say, ‘Well, we decided not to raise another fund,’ the reason is because they couldn’t. [Laughs] It’s like CEOs never quit voluntarily. They always get fired. It’s always involuntary.
So that’s now starting to happen, and, as you well know, the liquidity problem is intense. So we were definitely counter-programming the trend by even going out and trying to raise a fund in the first place.
That’s what should happen [there should be fewer VC funds]. It’s not just that there are 400 extra venture funds. It’s that they then fund, I don’t know, 4,000 extra companies, none of which ever amount to anything. The model doesn’t work. So what you get is second-tier venture funds funding second-tier startups started by second-tier entrepreneurs building second-tier products. It doesn’t make any sense, so the swamp should get drained.
Q: It sounds like you’re not going to do anything dramatically different. The fundamentals of venture investing work if it’s done by someone with access to the top entrepreneurs and …
A: That’s right. So, the basic generic qualities: Insight into which deals are the ones in practice, especially, that will be the 15 [franchise companies started each year], and then ability to get into those, which is to say, the ability to mount a competitive argument to the best entrepreneurs that your money is not just money. Those are the things that really matter. There are whole bunch of ways to screw that up, in my view. Like one is to, as I said, try to shop for deals. Another is to be operating for the most part outside of Silicon Valley. [Laughs] Another is to operate for the most part outside of the U.S. Now, there are a couple of exceptions of people who operate outside of Silicon Valley who do great, and there are a couple of exceptions of people who operate outside of the U.S. who do great, but, again, they are exceptions to prove the rule.
That’s the fundamental thesis. I would say that we are then applying a few twists to it based on who we are and what we’re trying to do. Ben [Horowitz] and I are both company builders who have both started and scaled companies to significant size.
One twist is that we’re broadening the early to late side. We’re more multistage than most. Another twist is we’re narrowing the domain, which we discussed, pretty tightly.
Many of the super successful venture firms, as you know, have been multisector for a very long period of time. That has worked very well for them over 20, 30 or 40 years. We’re just not in a position to do that, so we’re not going to try to do that. We’re going to stay focused on what we know how to do.
Q: What kind of returns did you tell LPs you could get for them?
A: I don’t want to really go on the record on any of that. … I don’t want to put out some sort of public performance target.
Q: The reason I’m asking is because you talked about the last 10 years. I’m trying to compare what you think you’re going to do compared to the last 10 years.
A: OK. Well, it really matters if you’re talking about the top 10 or everybody else, because there have been a number of funds over the past 10 years that have done fairly well. …
What we said [to potential LPs] was that we’ve analyzed where success and failure comes from … and we’re going to shoot for the success cases. And that is going to mean that on a relative basis, we’re going to be out there—we’re going to be making aggressive investments.
We’re going to be investing in things that other people might think are a little crazy or at prices that people may think are too high, because that is part of the success formula for getting into those 15 companies that matter. And I said we hoped we would do as well as the top 10 or 20 firms over the next time period—over the next 10 years. Now we had spreadsheets and all the rest of it that go around that, but I’m not going to tell you about that.
But this also depends on, you know: If there’s a gigantic Nasdaq bubble in seven years, then we’re going to do great. We’re just going to do fantastic. If there isn’t, then I think we’ll still do well. The actual magnitude of like 2X vs. 3X vs. 10X vs. 100X has a lot to do with the external market, so you’re not trying to engineer for that, per se. You’re trying to engineer for these 15 companies.
What I was careful to say was I don’t want to call a bottom, because bottoms are impossible to call—until people are physically jumping off the roof of the building, which is a good sign of a bottom. But I will observe, historically, that going back to the ‘60s, that there’s basically been a cycle [in the venture business] and we’ve now been through it four or five times. There have been booms and busts and booms and busts. … The late ‘60s were great, the early to mid-‘70s were awful, the late ‘70s and early ‘80s were great, the mid- to late ‘80s were awful, the early ‘90s were still awful, ‘93 to 2000 was fantastic, except ever since. The normal cycle is seven up and seven down. So it’s been 10. Well, the bubble was kind of extreme on the upside as well, so maybe the down cycle is 12 [years] or maybe it’s even 14 or 15 or 16. But it’s cyclical, so at some point it’s going to come back. Even until it comes back, there is still money to be made in the top companies. There’s still work being done and there’s still good returns being made in the top companies.
Q: How do you think your performance with your angel investments compares so far to the top 10 venture funds? [Andreessen and Horowitz have collectively invested in 39 startups since 2004.]
A: We’ve only been doing it part-time, so it’s been amateur hour. We’ve both had day jobs throughout that time period. In that portfolio, for the companies that have had events happen—such as a bankruptcy, an exit or another round—for those companies, it’s way up. But most of those are not yet liquid. So we gave investors the data on that, but we fully pointed out that we don’t think this is the best we can do, nor do we think you can draw any real conclusions from the fact that it’s way up, so just take it for what it’s worth. … I would hope we’re going do better… Let’s put it this way: If we can’t do better doing it full time, then that will be an interesting learning experience. That will be a very valuable data point.
Q. Is there a particular VC you admire most and why?
A: Yes. I have had the good fortune to work with two of them—John Doerr [of Kleiner Perkins Caufield & Byers] and Andy Rachleff [formerly of Benchmark Capital] are the two I’ve worked with directly on my own companies. They have very different skill sets and very different areas of contribution, but both are just tremendously helpful. It’s just hugely valuable to have them involved in a company. And then, obviously, Jim Breyer is just outstanding, just fantastic. [Breyer is a general partner at Accel Partners and sits on the board of Facebook with Andreesen. Andreessen describes Accel as a “close ally” to Andreessen Horowitz.] Mike Moritz of Sequoia is also fantastic. And Aneel Bhusri [of Greylock Partners] would be a fifth. And then Danny Rimer [of Index Ventures]. If I had to pick six, it would probably be those six. I don’t think I could narrow it down.
Q: What kind of advice did they give you for your new fund?
A: Actually, it’s funny. We wanted our friends and potential allies in VC to know what we were doing, so we went out and briefed them first and we had a very interesting range of reactions. Actually, there were two interesting things. The newer people were to the industry, the less willing they were to consider that there were things you could do differently. Interestingly, the people who have been in the industry for a long period of time have very open minds about structure and approach.
So, as we talked about some of these ways we were going to be a little bit different, the older guys were usually pretty amenable to at least thinking that those things might work. The younger guys were like, ‘Oh, that won’t work! You can’t do that!’ … You would think that if you’re in the business of funding innovation, you would be innovative, but not always.
Q: Do you think that they really thought that it wouldn’t work? Or were they actually thinking, ‘Damn, I wish I had thought of that?’
A: It’s hard to say. We wondered that, because they had made the decision to join an old-line firm, by definition of the people we were talking to. The more experienced they were, the more open-minded they were. The guys who have been successful over a long period of time are really smart and very creative themselves.
One fund [starts laughing]. One fund told us: ‘Oh, you guys will never be able to raise $300 million. You won’t even raise $200 million. What you should do is raise $100 million. You should raise $10 million each from 10 other venture firms and you should give each of them one-tenth of the carry or 1% of the total …’ [Interrupted by cross talk] It was basically, like, ‘Why don’t you become our butt-boy?’ [Laughs]
Q: Who was that?
A: [Laughs] I can’t say, I can’t say. He’s actually a friend of mine. I thought it was a very aggressive move to try to get us to stand down.
Q: Having founded three VC-backed companies, what’s the worst experience you’ve had with a VC?
A: I don’t know that I’ve had a terrible experience. I’ve seen a lot of terrible experiences. … Let me answer a slightly different question. There are things that we do see a lot that we’re highly sensitive to and we’re going to try to offset a little bit.
One is, there are some VCs who are very experienced and skilled operators whose wisdom is very valuable in your company. There are some newer VCs who have a very high ratio of opinions to experience. [Laughs] …
The CEO, who in a lot of these cases is the founder—for whatever other deficiencies they have, they are living and breathing the product, and the market they are dealing with, and their company, and their competition. They’re just saturated with it 16 hours a day. As a board member or advisor or investor, you come in once a month or once every two months for three or four hours. Or you have a weekly phone call, or whatever. Your information is just—it’s almost insignificant compared to what the founder has in their head. So, in our view, you have to be really careful about the kind of advice you try to provide and the basis from which you’re providing it. …
General advice is not helpful or relevant. It’s got to be very specific. Our focus to offset that is we’re going to try a concentrated approach, where we’re basically saying our role is to provide tactical help or tactical advice as opposed to strategic advice. We’re looking for the entrepreneurs who don’t need our strategic advice. …
Q: What do you mean by tactical vs. strategic?
A: What you’re doing as opposed to how you do it. What product you’re building, what market you’re going into, which competitors you’re worried about. Strategy. Why is this company here on earth and what is it fundamentally doing? That’s stuff that generally the founder is going to know better than any of the investors, including us. And that’s something where generally advice from the outside is going to be a value-drain rather than a value-add. … Our views on product strategy are not that relevant to anyone we deal with because we just don’t know as much about [their product] as they do. And, by the way, if we’re wrong on that and we know more than the founder, then we’ve made a serious mistake in who we’ve backed.
Conversely, the how do it—how do you build the company, how do you hire the team, how do you manage the team, how do you run a more complicated product development process, how do you build a sales force, how do you finance the company?—those are all teachable from experience.
Q: Isn’t that how the consultants like Bain make their money?
A. No! [Laughs] As a matter of fact, it’s not! [Laughs] Those guys make their money with much, much larger companies than the ones we’re dealing with. They would never make it through the door of the companies we deal with, because none of our companies could afford the bill. They have to settle for us. [Laughs]
So, I would say that’s one area we’re very sensitive to. The other one is really, really striking, which is: Mike Moritz says the biggest mistakes they’ve made [at Sequoia Capital] usually, in his view, are when companies have sold out too quickly. We agree a lot with that. This goes back to market size. If you’ve achieved product/market fit and the market is going to be large, then almost any time you sell the company at any point in the next five to 10 years is a mistake, even for what at the time looked like just gigantic prices. …
Q: How do you feel about people at Facebook being stuck and not being able to enjoy the fruits of their labors because the company hasn’t gone public or been sold?
A. Oh, I feel just terrible for them. [Smiling with his hand over his heart] They’re 26. They’ve spent four years of their life. It’s an awful thing. It’s just a terrible thing. I’m obviously teasing. … In general, the people at Facebook today are having the best experience they’re ever going to have for the rest of their lives. The people at Facebook today, when they leave, they will spend the rest of their careers looking to replicate that experience and most of them will fail. They are absolutely having the time of their life.
No. 2, there is gigantic financial upside that they’ve seen so far and there is gigantic financial upside, I believe, to come. I don’t think Facebook’s valuation is anywhere near maxing out. The last preferred valuation was $10 billion. … The thing [Facebook] is already doing over $500 million in revenue this year. This calendar year they will do over $500 million in revenue. If they pushed the throttle forward on monetization, they would be doing more than $1 billion this year.
There’s every reason to expect, in my view, that the thing could be doing billions in revenue five years from now. Whatever number of billions you want. So the ultimate value on the thing is potentially gigantic. So, generally speaking, the people who are selling their stock in Facebook right now are making a mistake.
Q: Have the terms been set for Facebook employees who want to sell shares to DST? (Digital Sky Technologies of Russia paid $200 million for a 1.96% stake in Facebook in May and has said it plans to spend up to $100 million more to buy Facebook shares from current and former employees.)
A: I shouldn’t be the company rep on that.
Q: What do you think about the idea conceptually?
A: The fact is that there are former employees of Facebook who were selling their shares privately and there were actually buyers lining up to try to buy them. In some cases they were buyers the company would be delighted to have as investors. In other cases they were people you never heard of. They were being negotiated at various prices, which gets a little bit funny for an illiquid security, because there are issues … like taxes and so forth. So seeing the market clearing price is actually a fairly hard thing to do. So, the company’s viewpoint is organizing a program is better than just random, ad hoc individual sales. So they are wrapping that all in a bow and then giving that as an opportunity to people as they view as appropriate.… I think if these transactions weren’t happening privately, then this wouldn’t be happening. [This program would give Facebook employees a] known buyer, known price, known terms, consistency, equal access. Another challenge was super financially sophisticated former employees had an edge vs. normal employees, which is not really fair.
Q: Does Facebook CEO Mark Zuckerberg remind you of your younger self and how is he different?
A: [Laughs.] The big difference is he REALLY wants to be the CEO and has tremendously applied himself to doing that. I actually think he’s not that similar to me from that standpoint. He’s doing a really good job of running company and really wants to. That’s a big difference. Similarities? I don’t know. Young? [Laughs]. Young and hard working. He’s the real deal. He wants to buckle down. He wants to build a great company. He doesn’t want to sell it.
Q: And he’s product focused?
A: Yep. Super, super product focused. I mean, he’s an engineer by background. He’s extremely product focused, as he should be, as those companies need to be. He also marries a long-term version with flexibility along the way of how to get there as he learns from the market.
Q: What are your thoughts on Facebook’s new CFO, David Ebersman, who was formerly CFO at Genentech? (As a Facebook board member, Andreessen interviewed Ebersman and participated in the hiring process.)
A: … He’s a super-talented CFO, but he’s also a super talented athlete.
Q: What’s his sport?
A: Building companies. [Laughs] Athlete in the sense that he’s multi-skilled. He’s not your stay-in-the-accounting-department CFO who doesn’t know how to deal with product development or doesn’t know how to deal with marketing. If you look at his resume, his breadth of achievement at that company [Genentech] is outstanding. His references are off the charts. The people he worked for and who worked with him at Genentech think he’s just the best thing ever. … He’s got all the skills you need, but he’s still at a point in his career where he’s very hungry, very energetic, very curious. Obviously he’s coming out of a different industry, but it’s an industry known for being pretty complex and he’s super fired up to learn about this one. …
Q: Were you an angel investor in Facebook?
A: No, I wasn’t.
Q: Did you have an opportunity invest in Facebook?
A: Uhhh. Damn, she asked the question. [Looks up at the ceiling and laughs]
Q: You’re one of those guys you talked about who passes things up.
A: [Laughs]. Yeah, but I correct my mistakes. Uhhh.
Q: You’re actually turning red.
A: Hey, I turn red when the temperature changes. I turn red for all kinds of reasons. I turn red when I put on a red shirt. Uhhh. Let’s put it this way, I’ve known them from the beginning. I probably could have if I had tried hard, but I didn’t.
A: Because I didn’t. [Smiles]
Q: Because of your investment in LinkedIn?
A: No. It’s always an affirmative decision. You have to actually step forward and actually go after it. And things just really happen fast, and Facebook was happening at a super high rate of speed and things just didn’t click.
Q: But you have shares now?
A: Yes, as a director.
Q: I’m assuming you wish you had been an early investor in Facebook?
A: Oh, I wish had invested in every successful company. [Laughs]
Q: Is there any other company you think, ‘Damn it, I wish I had invested in that?’
A: The one that I tried to invest in but couldn’t get into was Friend Feed. They’re too rich. They’re former Google guys. They basically did it themselves. They have too much money.
Q: Did you come back for another round of Twitter? I don’t know how many rounds there have been, with only $15 million.
A: Well, they’ve only spent $15 million. They raised about $40 million. They have a bunch in the bank.
Q: Did you come back for a second bite?
A: No. As individuals we just kept the investment size small and basically only ever did one round. [Andreessen said he would “conceivably” invest in a future round for Twitter if he were allowed to.]
Q: Did you invest in the idea of Twitter or did you invest in Odeo?
A: Twitter, not Odeo. I knew of Odeo, but I didn’t actually know Evan back then. [Evan Williams is co-founder and CEO of Twitter.] When Twitter first got started, I emailed him and that’s how we first met. I saw Twitter when the product first launched, back when they were in the middle of the transition, so they hadn’t yet shut down Odeo and they hadn’t yet raised money for Twitter.
Q: So, about when Charles River Ventures was taking its money back, which I’m sure they’re kicking themselves for now?
A: Was that Mayfield? Was it CRV, too? That’s one of the great stories, because Evan made up the difference. My understanding is he made up the difference out of his own pocket and gave it back to them whole. That’s a great guy. That’s a classic story and I think that’s representative of a pattern you’re seeing these days. Another one was Facebook was seeded with $500,000 of seed money from Peter Thiel.
We were talking about product/market fit. It’s the process of getting to product/market fit that takes much less money. Once you get to product/market fit, then you actually do tend to raise a great deal of money. In fact, if anything you’re probably going to be raising more money than you did 10 or 15 years ago because the market size is larger.
This whole thing where people say startups are cheaper is both true and not true. It’s true before product/market fit, but not true after. And we think in the mechanics of how you run these companies, the really smart entrepreneurs tend to keep the investment size really small and the team size really small until they reach product/market fit, and then they turn on the gas.
Hence the $50,000 to $50 million [range of what Andreessen Horowitz will invest in a round]. So, $50,000 to $500,000 is the range before product/market fit and $5 million to $50 million is the range for market expansion. And, in particular, it’s market expansion where Ben [Horowitz] and I become incredibly helpful, because when you’re expanding to get into the market that’s when you’re starting to hire dozens or hundreds of employees, that’s when you’re starting to do major financial transactions, that’s when you have to start worrying about management and culture and all these things. And that’s where we really dig in. That’s the stage at which we go on the board and get very involved.
Q: You seem to be a firm believer in the if-we-can-scale-this-thing, the money will come model. You’ve said as much about Facebook and Ning and Qik. But that doesn’t always work. It costs Pandora a lot of money every time it attracts a new user for example, but those users still prefer not to be fed ads. As an investor, how do you know when that’s a viable approach?
A: No. 1, the details really, really matter. The cost structure really matters. I don’t know enough about Pandora. When people get in trouble with this sort of thing, it’s usually for one of two reasons. Either the market wasn’t going to be that large—in which case deferring revenue to get to the market wasn’t worthwhile—or the costs are just too high. So, I don’t want to talk about Pandora specifically.
But, in contrast, here’s how I think about the economics of Twitter, for example. The economics of Twitter are that they’ve spent about $15 million. They have created already a global brand name. Ben likes to point out that the Bing ad campaign [by Microsoft] is $300 million of advertising. Would you rather own the Bing brand or the Twitter brand? So, what’s that worth? Two, they have a user base of about 30 million users now, growing very fast. And, three, they have that growth rate, so they have all the future acquisition.
But even just looking at the current user base, they’ve spent maybe 50 cents per acquired user. Total. For everything. All development, all marketing, everything. And so on the revenue side, you say: ‘Suppose they want to monetize that? Can they get 50 cents per user per year in terms of ads?’ Yeah, probably they could do that. So to go get that $15 million back seems really easy, and it seems like there’s a lot more upside beyond that.
That’s a case where you say, ‘OK, having done that, what do we now know?’ It seems to be mainstreaming. It seems like the total addressable market is somewhere between 100 million users and a billion users, or maybe more. It seems like the right thing to do, with those economics, to raise some more money, which they’ve done, and go get the rest of those users. Once they have the users, then monetization obviously becomes very easy. If you have any monetization mechanism, then it’s just a large scale, so you just turn it on.
Facebook is basically an example of that. The significance of Facebook’s revenue is that they’re already doing more than $500 million in revenue without really putting a whole lot of effort into it. They have a sales team and they have some ad products, but it’s not a major focus or priority and yet they’re over $500 million. This year’s revenue will be over $500 million. The economics of Facebook are that they have 225 million active users. Maybe they’ve spent maybe $300 million or $400 million. It’s just not that much money. You do that every single time. And if the market is going to be gigantic, you’ll get the whole market. …
Q: You said on Charlie Rose that if you can get 50 to 100 or 150 million users, then everyone is going to end up using it. How did you decide that was the tipping point? Was that based on your experience at Netscape?
A: I made it up. [laughs] I pulled it out of my butt. However, there’s a point at which it’s not just nerds, speaking as a nerd. Whatever it is. It’s not just Silicon Valley people, it’s not just people in urban areas, it’s not just people in California. There comes a point where you can go to Topeka [Kansas] or Poughkeepsie [New York] or Lubbock [Texas] and you can run into people—and they’re normal people—and they use something. And when that happens, that’s a really big deal. That’s something that has clearly traveled culturally and societally very broadly. And it’s clearly something important. You get the occasional fad, but actual products that propagate like that don’t happen very often, so when they do, it’s a sign that you’re really onto something and if you keeping pushing it you can probably make it much larger. Because the world is a huge place. There are a huge number of people in the world. If you can really go mainstream, then you should.
Q: I’m sure this is the least of any investor’s concerns, but is there point of over-saturation and a way to mitigate that danger? Like, MySpace seems to be tipping in the other direction.
A: MySpace has a different issue in my view. Their issue is that they fell behind on product innovation, specifically vs. Facebook. They had their network effect. It was growing. It was getting very large. Facebook has, I think, out-executed them on product. Facebook is increasingly taking the network effect away from them. I think they’re aware of this, which is one of the reasons why they hired Owen [Van Natta as CEO]. They’re going to try to come back at it and counter it. You look at the two companies. MySpace does a lot of things really well. But, that said, they’re owned by a major media company, they have focused tremendously on monetization for the past two years, and they just don’t have the product innovation engine that Facebook does. Facebook is completely focused on product innovation. I think it’s a case study of how that happens. You could argue that MySpace focused too quickly on monetization. You could argue that you just saw the consequence of switching focus like that before you’ve taken the whole market.
Q: Do you think that was because they were purchased by News Corp.?
A: I think that had a lot to do with it. Once they were purchased by News Corp., then obviously the bottom line considerations became very important. And News Corp. is not a VC. They don’t like to punt things out for years without profits. And News Corp. has also been under pressure in their core business, so they need their online stuff to actually contribute profits in the near term. They’ve done a lot of things really well. A lot of their monetization work I think has actually been quite impressive, but core product innovation has not been on par with Facebook’s so far.