Homepage
PR Newswire
26-04-2013, 12:43 PM
Note: Marc Andreesen may not fit the definition of a value investor but in investing, his VC track record is nothing to sneeze at. Begun with an initial capitalization of $300 million, within three years the firm grew to $2.7 billion under management across three funds. Andreessen Horowitzâs portfolio holdings include Facebook, Foursquare, GitHub, Pinterest and Twitter.
In Search of the Next Big Thing
An Interview with Marc Andreessen by Adi Ignatius
http://hbr.org/2013/05/in-search-of-the-...thing/ar/1
Marc Andreessen knows both sides of the start-up game. As freshly minted university graduates in the 1990s, he and his partners went hat in hand to venture capitalists in Silicon Valley to fund their new project, the breakthrough web browser Netscape Navigator. Within 18 months the enterprise had gone public and Andreessen had become a symbol of the internet generation. Now heâs a cofounder and partner of Andreessen Horowitz, a Menlo Park venture capital fund thatâs trying to make smart bets on tech start-ups in a climate much icier than the one during the dot-com boom. In this edited interview with HBRâs editor in chief, Adi Ignatius, Andreessen talks about the complex challenges entrepreneurs now face and an investment opportunity that slipped away.
HBR: How would you characterize the best entrepreneurs you work with?
Andreessen: We aim for a trifecta in the people we want to back. Weâre trying to find a product innovator who is entrepreneurial and wants to start a company, and who also has the bandwidth and discipline to become a CEO. When people like that actually deliver and work hard for 10 years, the results are miraculous. If they fall down on any of those three fronts, generally itâs a casualty.
Do all those skills really have to reside in one person?
Itâs hard to pair a product innovator with a business partnerâor to partner the founder with an outside CEOâand have them get anywhere. We work with our companies when they absolutely have to do this, but itâs very challenging.
Can entrepreneurs be taught? Or are the skills innate?
We think CEOs can be taught, so we specialize in training innovators to become CEOs. We donât spend a lot of time trying to teach CEOs to be innovators.
To what extent is the start-up business still hungover from the last boom and bust in tech stocks?
Itâs a really big deal, especially for anybody over age 35. Itâs similar to what happened after the Great Depression: Not until the 1950s did people really start focusing again on the stock market. Everybodyâs hypersensitive about another bubble. The minute anything starts to show even a little bit of life, they say, âOh, my God, itâs another bubble!â
Are you saying that the general view of the market is irrational?
Yeah, itâs irrational. The rational thing is to focus on the future, not the past. But current attitudes are very much based on what happened in the past.
Whatâs the view of Andreessen Horowitz?
Obviously, we see opportunity. We started our firm in 2009, after probably the worst 10 years ever in venture capital. But given the history of these things, this is probably a good time to get in.
Do you see the danger of a new bubble out there?
Itâs in the nature of venture capital and start-up investing that there are always stupid investments. The problem is that you never know which ones are which. I get these things as wrong as anybody else. But if youâre afraid to make any investments that might be stupid, youâll never get any big winnersâbecause the big outlier winners tend to look crazy at the start.
One symptom of the hangover is that fewer start-ups are doing IPOs. What does that mean for investors like you?
In a sense itâs good for me. As venture capitalists, we have a 13-year lockup on our money, so we take âlong termâ seriously. I tell our entrepreneurs, âIf you build a big successful independent company, at some point you almost certainly will go public.â
In the meantime, how do you prepare them for that moment?
I tell them they shouldnât even think about going public until theyâve built what I call a fortress. You build a company thatâs so big and powerful and well defended that it can withstand the pressures of being public. Our entrepreneurs are therefore almost completely focused on the substance of what theyâre doingâas opposed to what happened in 1999, when everyone tried to take companies public in two years on the basis of a lot of hype.
Ah, the good old days.
One of the local VCs had two mottoes in 1999. One was âGrow big or go home.â The other was âForget details, just do deals.â The second one got them into trouble because some of their companies had very little substance. They were largely just press releases on their way to an IPO.
So walk us through getting to an IPO today.
We take companies through what we call the parade of horrorsâall the stuff that happens to a public company. We take them through Sarbanes-Oxley, financial disclosure, patent laws, antitrust. We talk about what hedge funds do, and the intersection between hedge funds and fair disclosure.
What role do hedge funds play in all of this?
Hedge funds are much more powerful than they used to be. Market manipulation is never prosecuted, so they can lie about you all they want. On the short side, they target companies that arenât fully funded. If you have liquidity exposure on your balance sheet and you have to raise money at some point in the future, theyâll try to kill you. And they can make it into a self-fulfilling prophecy, where itâs impossible for you to raise money. So we talk a lot about what it means to have a strong balance sheet, to ensure you never get into that situation.
How much cash should a start-up have on hand?
Generally, you want to have at least two yearsâ worth of cash on the balance sheet in case your revenue goes to zero. This is the tech industryâsometimes that actually happens.
In this brutal environment, how important is it for start-ups to retain their founders?
We always want control to rest with the founders. Anything else can be intensely dangerous, because of the ease with which people can mount proxy fights and all this other stuff. Large tech companies will often move to take over start-ups with no intention of actually buying them, just to screw up their business for 18 months.
Man, Iâm glad Iâm on the East Coast.
Itâs like World War III out here. [Laughs.]
If IPOs are so hard to pull off, are most of todayâs start-ups looking to sell out to bigger fish?
If somebody comes in here and says his goal is to sell his company, we wonât invest. There are plenty of other venture capitalists who will fund him. For us, companies that are built to be independent are the most attractive. As for companies that are built to be sold, most acquirers are pretty smart and can smell that. Itâs ironic, but itâs very hard for such a company to actually find a buyer.
Back in 1995, you took Netscape public after just 18 months. Now youâre on the board of Facebook, which had its own noteworthy IPO. Can you talk about the difference in IPO expectations?
Netscape was a different era. There was no Sarbanes-Oxley, no reg FD [regulation fair disclosure]. Hedge funds were a tiny percentage of the market. Short sellers were small and unsophisticated. And there were more long investors who really understood what it was like to invest in a small company and see it develop. There was also the expectation that you took things public quickly. I canât really talk in detail about Facebook. But in my opinion, Facebook went public when it had become a fortress. The company had built itself into a position of strength in all the areas that make it safe to be public.
[Image: R1305G_A_LG.gif]
How has the lean start-up model changed the game?
Itâs a direct reaction to âForget details, just do deals.â Back in 1999, entrepreneurs were guided to do a fast start-up: Get the most basic, rudimentary product on the market as soon as you possibly can, and then hype the s--- out of it. Sell the s--- out of it. Try to generate as much noise as you can and as much hype as you can and get the big IPO first-day pop. And then hope that in the fullness of time youâll grow into all the promises youâve made to everybody. Or, the cynics would say, you can sell out quickly. A lot of these companies had terrible products.
And now?
The new start-up methodology is basically a complete 180 on that. It says the only thing that matters is getting the product rightâdeveloping a product that people want and use and love and will pay forâbefore you do all the other stuff. That is a tremendously healthy move, because it centers these companies on the substance of what theyâre building.
Is there any downside to that kind of focus?
It can be taken too far. A large number of founders are terrified of actually getting into a market. They use this approach as an excuse to never think about sales and marketing. In my view, theyâre in complete denial about what it takes to actually build a company and build a business.
So what do you do? A guy comes in with a great product and no interest in the rest of it...
We administer a beating. [Laughs.] We basically say, Look, we understand. A 28-year-old who has built a great product and comes in here is not going to have much experience in sales and marketing. We explain that a lot of products are being sold and marketed out there. If you donât take sales and marketing seriously, nobody is ever going to know about you. Nobody is ever going to buy the thing. Youâre going to end up losing. But if you want to take it seriously, here are the things we can do to help you.
What are you looking for when you invest in a tech start-up?
I define a tech start-up as a new company whose value is the innovation itâs bringing to the world. Itâs not the value of the product itâs currently building but the value of the products itâs going to build in the future. So itâs worth investing in a technology company only if itâs going to be an innovation factory for years to come.
Youâve written that âsoftware is eating the world,â that digital innovation is transforming virtually every industry. Where are we in that process?
Itâs a long-term thing. Only recently have we become a world in which everybody has a computer and weâre really there with the smartphone. Now is the time when a number of industries that historically have not been much affected by technology are all of a sudden in a position to be transformed by it.
What are some examples?
The book industry is an obvious one. First Amazon came for the book distribution business. It turned that into softwareâthe Amazon website. Now itâs turning the book itself into software. We look at industries like real estate, agriculture, education, financial services, health care, retail. And we think now is a good time to create the kind of state-of-the-art software companies that will really transform them. Ironically, a lot of these companies are actually replays of ideas that were tried and failed in the dot-com era.
Youâve talked about having launched some big ideas that didnât fly because they were ahead of their time.
We launched Loudcloud in 1999, and basically Amazon Web Services is what Loudcloud would have been if it had launched in 2006 instead of 1999. The technology wasnât ready. Reid Hoffman started a social networking company in 1997 called SocialNet.com, long before Facebook or LinkedIn [which Hoffman cofounded in 2003] existed. For 20 years people laughed at the Apple Newton and said it proved that nobody had any interest in a tablet. And then along came the iPad. A lot of ideas that failed in the dot-com era were actually winners. They were just too early.
Does access to the cloud and big data improve the odds of success for new companies, by allowing their business models to rely a bit more on science and a bit less on art?
Yeah, I think so. The best of the companies weâre seeing now are unbelievably good at analytics. They have this incredible closed loop where they analyze data and feed the numbers directly back into the process virtually in real time, running a continuous improvement loop. But none of this is a shortcut to success. That still involves a lot of art. For that matter, itâs still hard to get the science right.
What have you learned about developing the art part of the process?
The best founders are artists in their domain. They operate instinctively in their industry because they are in touch with every relevant data point. Theyâre able to synthesize in their gut a tremendous amount of dataâpulling together technology trends, their companiesâ capabilities, their competitorsâ activities, market psychology, every conceivable aspect of how you run a company. A large number of tech companies that failed did so when they brought in a new CEO and the company stopped innovating and sold out. Itâs very hard to transplant a founderâs skill set to someone coming from the outside.
Are VCs actually any good at finding great companies?
Research shows that there is a very high correlation between the top VC firms and persistent returns. These firms are good at what they do, but we believe that only a very small part of that is because theyâre smart. It also has to do with the persistence of the deal flow. Itâs a buyer-driven market for capital. And the best entrepreneurs want to raise money from the top firms, because they want the positive signaling effectâwhich is especially important for recruiting top talent. As a consequence, most second- or third-tier firms donât have the option of funding great companies. It doesnât matter how good the picker is. Heâll never get to see the deal.
Youâve made some good betsâon Twitter, Facebook, Skype, and others. Is there one bet you missed out on that you wish you hadnât?
Square [an electronic payment service] is our great white whale. Weâve passed on every single round and weâve regretted it pretty much every time. But weâre proud of our results so far. Our first fund has returned 2x already, with a lot more companies still to matureâwhich has allowed us to raise the other funds very quickly.
Youâve developed a strong philanthropic focus. Is the next generation of investors thinking about social investment?
No. [Laughs.]
So much for my hopes for the next generation.
Many younger entrepreneurs have a social mission or a philanthropic agenda. They start early. Investors, not so much.
In Search of the Next Big Thing
An Interview with Marc Andreessen by Adi Ignatius
http://hbr.org/2013/05/in-search-of-the-...thing/ar/1
Marc Andreessen knows both sides of the start-up game. As freshly minted university graduates in the 1990s, he and his partners went hat in hand to venture capitalists in Silicon Valley to fund their new project, the breakthrough web browser Netscape Navigator. Within 18 months the enterprise had gone public and Andreessen had become a symbol of the internet generation. Now heâs a cofounder and partner of Andreessen Horowitz, a Menlo Park venture capital fund thatâs trying to make smart bets on tech start-ups in a climate much icier than the one during the dot-com boom. In this edited interview with HBRâs editor in chief, Adi Ignatius, Andreessen talks about the complex challenges entrepreneurs now face and an investment opportunity that slipped away.
HBR: How would you characterize the best entrepreneurs you work with?
Andreessen: We aim for a trifecta in the people we want to back. Weâre trying to find a product innovator who is entrepreneurial and wants to start a company, and who also has the bandwidth and discipline to become a CEO. When people like that actually deliver and work hard for 10 years, the results are miraculous. If they fall down on any of those three fronts, generally itâs a casualty.
Do all those skills really have to reside in one person?
Itâs hard to pair a product innovator with a business partnerâor to partner the founder with an outside CEOâand have them get anywhere. We work with our companies when they absolutely have to do this, but itâs very challenging.
Can entrepreneurs be taught? Or are the skills innate?
We think CEOs can be taught, so we specialize in training innovators to become CEOs. We donât spend a lot of time trying to teach CEOs to be innovators.
To what extent is the start-up business still hungover from the last boom and bust in tech stocks?
Itâs a really big deal, especially for anybody over age 35. Itâs similar to what happened after the Great Depression: Not until the 1950s did people really start focusing again on the stock market. Everybodyâs hypersensitive about another bubble. The minute anything starts to show even a little bit of life, they say, âOh, my God, itâs another bubble!â
Are you saying that the general view of the market is irrational?
Yeah, itâs irrational. The rational thing is to focus on the future, not the past. But current attitudes are very much based on what happened in the past.
Whatâs the view of Andreessen Horowitz?
Obviously, we see opportunity. We started our firm in 2009, after probably the worst 10 years ever in venture capital. But given the history of these things, this is probably a good time to get in.
Do you see the danger of a new bubble out there?
Itâs in the nature of venture capital and start-up investing that there are always stupid investments. The problem is that you never know which ones are which. I get these things as wrong as anybody else. But if youâre afraid to make any investments that might be stupid, youâll never get any big winnersâbecause the big outlier winners tend to look crazy at the start.
One symptom of the hangover is that fewer start-ups are doing IPOs. What does that mean for investors like you?
In a sense itâs good for me. As venture capitalists, we have a 13-year lockup on our money, so we take âlong termâ seriously. I tell our entrepreneurs, âIf you build a big successful independent company, at some point you almost certainly will go public.â
In the meantime, how do you prepare them for that moment?
I tell them they shouldnât even think about going public until theyâve built what I call a fortress. You build a company thatâs so big and powerful and well defended that it can withstand the pressures of being public. Our entrepreneurs are therefore almost completely focused on the substance of what theyâre doingâas opposed to what happened in 1999, when everyone tried to take companies public in two years on the basis of a lot of hype.
Ah, the good old days.
One of the local VCs had two mottoes in 1999. One was âGrow big or go home.â The other was âForget details, just do deals.â The second one got them into trouble because some of their companies had very little substance. They were largely just press releases on their way to an IPO.
So walk us through getting to an IPO today.
We take companies through what we call the parade of horrorsâall the stuff that happens to a public company. We take them through Sarbanes-Oxley, financial disclosure, patent laws, antitrust. We talk about what hedge funds do, and the intersection between hedge funds and fair disclosure.
What role do hedge funds play in all of this?
Hedge funds are much more powerful than they used to be. Market manipulation is never prosecuted, so they can lie about you all they want. On the short side, they target companies that arenât fully funded. If you have liquidity exposure on your balance sheet and you have to raise money at some point in the future, theyâll try to kill you. And they can make it into a self-fulfilling prophecy, where itâs impossible for you to raise money. So we talk a lot about what it means to have a strong balance sheet, to ensure you never get into that situation.
How much cash should a start-up have on hand?
Generally, you want to have at least two yearsâ worth of cash on the balance sheet in case your revenue goes to zero. This is the tech industryâsometimes that actually happens.
In this brutal environment, how important is it for start-ups to retain their founders?
We always want control to rest with the founders. Anything else can be intensely dangerous, because of the ease with which people can mount proxy fights and all this other stuff. Large tech companies will often move to take over start-ups with no intention of actually buying them, just to screw up their business for 18 months.
Man, Iâm glad Iâm on the East Coast.
Itâs like World War III out here. [Laughs.]
If IPOs are so hard to pull off, are most of todayâs start-ups looking to sell out to bigger fish?
If somebody comes in here and says his goal is to sell his company, we wonât invest. There are plenty of other venture capitalists who will fund him. For us, companies that are built to be independent are the most attractive. As for companies that are built to be sold, most acquirers are pretty smart and can smell that. Itâs ironic, but itâs very hard for such a company to actually find a buyer.
Back in 1995, you took Netscape public after just 18 months. Now youâre on the board of Facebook, which had its own noteworthy IPO. Can you talk about the difference in IPO expectations?
Netscape was a different era. There was no Sarbanes-Oxley, no reg FD [regulation fair disclosure]. Hedge funds were a tiny percentage of the market. Short sellers were small and unsophisticated. And there were more long investors who really understood what it was like to invest in a small company and see it develop. There was also the expectation that you took things public quickly. I canât really talk in detail about Facebook. But in my opinion, Facebook went public when it had become a fortress. The company had built itself into a position of strength in all the areas that make it safe to be public.
[Image: R1305G_A_LG.gif]
How has the lean start-up model changed the game?
Itâs a direct reaction to âForget details, just do deals.â Back in 1999, entrepreneurs were guided to do a fast start-up: Get the most basic, rudimentary product on the market as soon as you possibly can, and then hype the s--- out of it. Sell the s--- out of it. Try to generate as much noise as you can and as much hype as you can and get the big IPO first-day pop. And then hope that in the fullness of time youâll grow into all the promises youâve made to everybody. Or, the cynics would say, you can sell out quickly. A lot of these companies had terrible products.
And now?
The new start-up methodology is basically a complete 180 on that. It says the only thing that matters is getting the product rightâdeveloping a product that people want and use and love and will pay forâbefore you do all the other stuff. That is a tremendously healthy move, because it centers these companies on the substance of what theyâre building.
Is there any downside to that kind of focus?
It can be taken too far. A large number of founders are terrified of actually getting into a market. They use this approach as an excuse to never think about sales and marketing. In my view, theyâre in complete denial about what it takes to actually build a company and build a business.
So what do you do? A guy comes in with a great product and no interest in the rest of it...
We administer a beating. [Laughs.] We basically say, Look, we understand. A 28-year-old who has built a great product and comes in here is not going to have much experience in sales and marketing. We explain that a lot of products are being sold and marketed out there. If you donât take sales and marketing seriously, nobody is ever going to know about you. Nobody is ever going to buy the thing. Youâre going to end up losing. But if you want to take it seriously, here are the things we can do to help you.
What are you looking for when you invest in a tech start-up?
I define a tech start-up as a new company whose value is the innovation itâs bringing to the world. Itâs not the value of the product itâs currently building but the value of the products itâs going to build in the future. So itâs worth investing in a technology company only if itâs going to be an innovation factory for years to come.
Youâve written that âsoftware is eating the world,â that digital innovation is transforming virtually every industry. Where are we in that process?
Itâs a long-term thing. Only recently have we become a world in which everybody has a computer and weâre really there with the smartphone. Now is the time when a number of industries that historically have not been much affected by technology are all of a sudden in a position to be transformed by it.
What are some examples?
The book industry is an obvious one. First Amazon came for the book distribution business. It turned that into softwareâthe Amazon website. Now itâs turning the book itself into software. We look at industries like real estate, agriculture, education, financial services, health care, retail. And we think now is a good time to create the kind of state-of-the-art software companies that will really transform them. Ironically, a lot of these companies are actually replays of ideas that were tried and failed in the dot-com era.
Youâve talked about having launched some big ideas that didnât fly because they were ahead of their time.
We launched Loudcloud in 1999, and basically Amazon Web Services is what Loudcloud would have been if it had launched in 2006 instead of 1999. The technology wasnât ready. Reid Hoffman started a social networking company in 1997 called SocialNet.com, long before Facebook or LinkedIn [which Hoffman cofounded in 2003] existed. For 20 years people laughed at the Apple Newton and said it proved that nobody had any interest in a tablet. And then along came the iPad. A lot of ideas that failed in the dot-com era were actually winners. They were just too early.
Does access to the cloud and big data improve the odds of success for new companies, by allowing their business models to rely a bit more on science and a bit less on art?
Yeah, I think so. The best of the companies weâre seeing now are unbelievably good at analytics. They have this incredible closed loop where they analyze data and feed the numbers directly back into the process virtually in real time, running a continuous improvement loop. But none of this is a shortcut to success. That still involves a lot of art. For that matter, itâs still hard to get the science right.
What have you learned about developing the art part of the process?
The best founders are artists in their domain. They operate instinctively in their industry because they are in touch with every relevant data point. Theyâre able to synthesize in their gut a tremendous amount of dataâpulling together technology trends, their companiesâ capabilities, their competitorsâ activities, market psychology, every conceivable aspect of how you run a company. A large number of tech companies that failed did so when they brought in a new CEO and the company stopped innovating and sold out. Itâs very hard to transplant a founderâs skill set to someone coming from the outside.
Are VCs actually any good at finding great companies?
Research shows that there is a very high correlation between the top VC firms and persistent returns. These firms are good at what they do, but we believe that only a very small part of that is because theyâre smart. It also has to do with the persistence of the deal flow. Itâs a buyer-driven market for capital. And the best entrepreneurs want to raise money from the top firms, because they want the positive signaling effectâwhich is especially important for recruiting top talent. As a consequence, most second- or third-tier firms donât have the option of funding great companies. It doesnât matter how good the picker is. Heâll never get to see the deal.
Youâve made some good betsâon Twitter, Facebook, Skype, and others. Is there one bet you missed out on that you wish you hadnât?
Square [an electronic payment service] is our great white whale. Weâve passed on every single round and weâve regretted it pretty much every time. But weâre proud of our results so far. Our first fund has returned 2x already, with a lot more companies still to matureâwhich has allowed us to raise the other funds very quickly.
Youâve developed a strong philanthropic focus. Is the next generation of investors thinking about social investment?
No. [Laughs.]
So much for my hopes for the next generation.
Many younger entrepreneurs have a social mission or a philanthropic agenda. They start early. Investors, not so much.
