So, scott cooper, what does a Venture Capitalist do . Basically what we do is we provide money to companies that are trying to grow and hopefully arbecome very Big Companies like facebook or google or apple someday and then if we are doing our jobs correctly we are also helping them grow the company so we dont work in the businesses but hopefully we can provide introductions to them and help them navigate new challenges as they go through the business so we like to think of ourselves as a money provider and hopefully a supporter as the business grows. Why cant a company such as a the one you describe go through a bank and do traditional avenues. Good question. The problem is most of the businesses we reinvest in our ricky businesses and lose money for a long period of time as they invest in banks are just not in the business of doing that or taking risk of losing their capitals so we are willing to take that risk and in fact half of what we invest in will lose our money and any bank who you proposed that idea to probably would not be too excited about being back in that center. Host where does the original money come from that you give to these companies . The business works that we raise money from and University Endowments are big if you look at Stanford University or at Yale University the alarms endowments and they earn a return that money goes to turn with subsidize the cost of supporting the university and large foundations and nonprofits and its another example and the companies are trying to use venture as a way to they are looking at looking at generate 30, return annual returns as a broad portfolio they will have Venture Capital andio mike of stock and this is a highrisk but hopefully the high reward portion of their portfolio. Host what is a normal pitch like . Guest its fun and its usually a few members of the Founding Team who come in and often they have a Powerpoint Presentation and they have often not build a product at this point in time and its an opportunity for them to tell us about their expansive vision for the companyns and how big and te Market Opportunity could be and kaat could this thing look like an scale if it gets there and ultimately why is this team the right team to go after that so its very fun, quite frequent, quite intellectually process by which we had to learn new interesting things and ultimately be able to make a decision about whether this is a team we should back for that particular opportunity. Host mr. Kupor, is this unique to this techworld . Guest you know, its definitely the case that not all Venture Backed Companies are Tech Companies but its also the case that many of this companies, say Venture Capital, our Tech Companies. Is not completely unique but it does require a type of financing like venture which is the willingness of somebody too, as i mentioned, take a chance on something where the odds of success are extremely low and hopefully if it works the payoffs are high so in our business one or two companies in our portfolio will drive probably the lions share of return and the rest of the portfolio does not contribute that meaningfully so you have to have that level of Risk Appetite to be interested in this business. Host your new book is called secrets of sandhill road. Where is sandhill road and why is it significant . Guest yes, sandhill road is in the middle of california which would otherwise not know except for the fact that about 1 mile or two east down sandhill road is this more payment neighborhood called Stanford University. You can think of sandhill road as if you are a music fan its a music row in nashville or wall street in new york and its a bit of a mythical place where it happens to be a lot of the Venture Capitalists congregates but its not anything that exciting to write home about but a bunch of drab, twostory buildings but happens to be a confluence of loss of capital an. Pportunity for entrepreneurs host why is it drab . Guest well, its a bit of an Old Industrial park. [laughter] its land thats been known since the beginning by Stanford University and its never there arent any fancy highrises there and a lot of twostory buildings and i think maybe partly there may have been zoning restrictions that cause it but also its upstaged by much more famous neighborhood which is Stanford University and maybe the university always a hd the intentions to make sure that sandhill road was left glamorous than the University Campus itself. Host you are the managing partner of [inaudible] which was Andreesen Horwitz guest yes, were a Venture Capital firm so we do the things were talking aboutut in the interview so we invest in very Early Stage Target Companies and hope that over time can help them grow in a large business. We are about a 10 billiondollar business which means we have raised about 10 billion over our ten year history from the limited partners that we talked about and again our job is to be on top of all the most interesting things happening in tech and entrepreneurship and particularly those businesses that have software as a foundational component to them. Host what is the technical or legal explanation of what a limited partner is . Guest sure, a limited partner is someone whose investor in a fund like ours and the Legal Definition means they are truly limited in the sense that they dont have control over the investment and control over when or if we sell those investments so they are essentially think of them as a path investor they give us monea and we have an obligation to be a fiduciary and hopefully earn a good return for them but the decisions about what companies we invest in, when we choose to sell them, those types of things are 100 in our purview. Guest what. Day for was a typical you . Guest so, usually we will be seen a couple different pitches on a day and that means we might have a couple hour long meetings with entrepreneurs and if we are working on deals then we will do diligence so someone we met earlier and now getting closer to thinking about a deal so we dig into their business in greater detail to understand the product in more detail in the financials in more detail and then we spent time building relationshipsim so huge part of this business is being wellconnected into the entrepreneurial ecosystem, understanding what professors are doing at different universities that might be relevant for some companies so we spent a lot of time on what we have called outbound relations. Host what is your expertise that you bring to this position . Guest yeah, ive been in tech for about 25 years and was a banker in my early days and i was at a Startup Committee for about nine years that ultimately got sold to hewlettpackard and now i been in the business for ten years so i think what i i bring is really an appreciation for both the Capital Markets and financing side of businesses but also a real appreciation fort what it means to be in a start up and go through the start up companies process and i hope what that means is not only does it provide empathy and incredible amount of respect for the entrepreneurial process but i think it allows us to be better investors and more patient investors and understand and organize that these things just dont go up into the right all the time in starting a company is ais serious ups and downs and i think we bring a discipline and patience to that investing process. Host mr. Scott kupor, often there isnt a product necessarily associated with the pitch and is that correct . Guest rightparenthesis is a product idea usually i but ofn the case that in the early stages there is no product that you have been billed. What we are trying to understand from the entrepreneur is not necessarily what is the final product but tell us about what we call the idea of maize. How did you think of the idea offor this product and how do yu believe its responsive to what the market needs are but we recognize that companies prevent witches they will change over time as they get products into market and thats the Company Building products. The discerning data points and being responsive to what the needs are. Host what is your one lost record . Guest we dont think of it that way and the honest answer is its [inaudible] which is we generally on about 40, 50 of the things we invest in and o theres a polite way of calling them in. Capital which means we lose our money and then typically at about 20, 30 of Companies Make money in the real difference between success or failure in this business is what happens with that remaining ten, 20 of companies and to the become a facebook or google where you might make 25, 50, 100 times your money and that is the way this business works. The way we measure success is based upon total returns for those returns will be driven by a very small number of compani companies. Host mr. Kupor, if youre a 10 milliondollar company and you had some successes what is one that you can tell us about. Guest weve had some nice successes and i will give you great example that we have a company today called oct a, enterprise space and we invested in the company for the first time back in 2009 and was one of the very First Investments when we started the business and it was what we call a seed investment. We put a halfmillion dollar and in to give the two founders an opportunity to build out their idea and their product and over the years we invested more money but it went public about a year and half ago and its a ten, toppling down markets cap so thats a great example of a success case where you have something that weve been working with them from inception and the Founding Team there just has done an incredible job in building up what is now sustainable freestanding business. Host i apologize if i missed this but what is it that oct a does . Or makes . Guest octet is a softwaree company and the way to think about what they do is if you are a business you may have cloud based applications which means applications that you are not running on your premises but are running in the cloud so you might have gmail for example for email or use salesforce. Com to manager salesforce and he might have a software called marquette which manages your marketing and all of those software because they run the cloud, every user has to log into those and have security controls around their ability to access those applications for what octa does it essentially provide a single signon into those applications so instead of having to know your passwords for those applications you log into octa and they directly manages your access into those so its a tool that the it debarment will use to manage security in their shop and manage user access and administration of this when we hire somebody what applications do we give them access to and if someone needs of the firm how do we make sure they remove access and its a tool to manage security and User Administration for a variety of applications v. Host for those of us of a certain age names like General Electric and ibm, ford, those are names that we are familiar with and where did the name octa come from . Guest is a very good question but i dont know the origin story of octa. Ive looked that up for you and drop you a note on it but i wish i had a better answer and r,unfortunately you stumped me speak. Host is Silicon Valley successful because of venturecapital . Guest no, Silicon Valley is successful because of entrepreneurs who built these businesses and are willing to take the kinds of risks that itt entails and building something that as we talked about might have a ten, 20 chance of success. Venturecapital is an enabler of thatat entrepreneurial activityo we are a financing source and hopefully we can add value to these comedies but we should not get ourselves at the end of the day and the innovation and develop meant of these companies calms 99 from the hard work and efforts that they put in. What are the things, mr. Kupor, he talked about in secrets of sandhill road is that products or ideas are off rightdoublequote, ten years ahead of their time and what do you mean by that . Spirit yeah, its funny. We see this recurring theme is that businesses that do not work at some point in time later it will work so let me give you a ivmple example. You may recall the Company Called wed web fans where we had the tech bubble in 98 and they were trying to do grocery delivery and the way they were doing it at that time was they were building massive warehouses ck order to stock all the produce and materials they needed and then they would use vans as the name implies to deliver that to people and provide delivery. It was a Wonderful Service for people but it was a small Market Opportunity because the number of people who thought about the idea of Home Delivery for groceries or who were willing to use their computers at the time because cell phones did not exist to be able to do that ordering was not that big and the company ultimately was not successful. If you fastforward to today we are in an investor in a comedy called insta cart which is basically doing the same idea but executing it in a different way. Executing it with a workforce that is in many cases part of what we called the gig economy, people who are independent contractors on their own doing this and they are not staffing and supermarkets themselves but partnering with supermarkets to get access to the produce of the things they need and again they have the benefit of the iphone revolution which now means that a lot of things that people would not have otherwise would do it on their mobile phone and those examples where t the new technology can create a market and expand the market in a way that cannot exist in a prior timeframe. Host when it comes to an insta cart or in octa number n one, do they go to other Venture Capitalists as well w besides yourselves . Guest yeah, they do. The weight this business works is people raise money in different rounds and rounds typically correspond to the scale and development of the company some often people will raise a first round of financing and that will last them 18, 24 months on average and then they will go raise another round of financing and if they are doing well the evaluation will be higher on that second round of financing. In general for each round of financing at the early stage there tends to be one major investor and if we are lucky enough too have that opportunity we will be the major investor but when they go out and raise subsequent rounds of financing is often the case that additional Venture Investors will now join and be a part of the company so we got an interesting relationship with our other Venture Capital firms in the industry and partly competitors in that there are deals and rounds that we will directly compete against but many times we are partnering with our other Venture Capitalist firms because weep ae investing alongside either in earlier rounds or later rounds in the same company. Do you have a say so in how the business operates during that first round of financing . Spirit yes, the way our business works is we have a set of governance rights that typically ree attached to the financial interest we invest in the company. So often we will sit on the board of a company and we will have obviously a right and duties that a board member may have to make decisions about whether the ceo is appropriate or strategy the companys and then we also tend to have stock that allows us to vote for things like will the company raise more money or try to sell elthemselves so those types of things we have a say in. We dont govern them completely and the founders of the company and other shareholders but there is a balance of power that comes from that type of structure. Host do you have a say so in a company like octa or insta cart to date now that they are freestanding companies . Or had they pay back their money so youre gone . Ass. Guest they dont pay back their money so the way they work is we own equity and stock in the companies so in a case of an octa when they go public we have wthe option if we so choose to sell that stock and that is how we would make a return on our investments. In octas case we have one member of the board and our founder is on the board and our typical memo is that we will stay on the board for someri period of time after the companies go public but over time look to exit the boards as these companies become more mature. Today are only saying the company is as one of many Board Members and of course we have stock so like any other stock we can vote through a proxy for other Corporate Activities that would require a type of vote. Host mr. Kupor, ben horwitz and our relative legends who are they . Guest yeah, he originally made his fame in netscape back in 1993 which is the First Company to commercialize the web browser and netscape famously went public in august 1995 and it heralded what many people believe as the first real techeo revolution for the modern internet era that started in the early 90s and theyve gone on to other companies and he was on the board of ebay and hewlettpackard and its very important adventure and now we have him [inaudible] a they became Close Friends and colleagues to that in the ultimately started a company together in 1999 called loud cloud which was many people probably have not heard of but we were trying to build something that is akin to what amazon, web services does today and think of it as a compute onm demand and as we talk about it earlier with the insta cart example its a good example of a company that was probably a few years too early but now as we see the Amazon Web Services are successful idea. Then was a cofounder and ceo which is a very successful business and he and 2009 decided to take their Entrepreneurial Skill set and turned themselves into Venture Capitalists and hopefully help grow the opportunity for other untrue doers who are seeking to build new businesses. Host does netscape exist today . Guest netscape does not. Netscape was sold to aol in 1998. The netscape browser was their main product does not exist mday. Its the main browser that most people are using today is Google Chrome or the apple Safari Browser but most of those browsers own their progeny to the early netscape days. Host scott kupor, one of the realities and one of the criticisms of Silicon Valley, entrepreneurship today, is that inventors and entrepreneurs will ctme in with a product that they are hoping will be sold to a Larger Company or a Larger Company will buy that product so there is less competition. Guest yeah, i will tell you our experience and how we think about investing is actually not interested in backing founders and comedies where their goal is to try to sell the company. The reality is that does happen many times and in fact, 80 of the exits and our business when a company is exiting happens through acquisition but when these Companies Start we want to believe at least that they will go after an opportunity big enough and that the product is expensive enough that can promote a Standalone Company and go public. You are right which is acquisitions do in fact happen and i dont think about those generally as anticompetitive in the sense that weve never or continue to see just new innovation constantly happening in thisn business so its certainly the case that yes, sometimes Larger Companies will acquire some of these younger businesses but often there is another company right behind them who will go after another segment of the market so none of aat and the fact that acquisitions exist has had any impact on the rates of new Company Formation and we continue to be privileged to see all kinds of new opportunities still happening. Host is the culture of Silicon Valley the work culture there something you have to get used to . Guest i think so. Its a, look, its a hardworking culture. People have high dreams and aspirations for what they are trying to build and you know, it does mean certainly the people probably spend more hours in the office and maybe people would otherwise like to. Its also a very Competitive Labor market and i mean that in a positive way which is low, there are all kinds of opportunities and job mobility m is extremely high in Silicon Valley so it puts a real premium on culture within a company which is if the ceos in the Management Team doesnt do a good job of staying in the right culture and of helping people who want to achieve a normal worklife balance due so there are so many opportunities for mobility that it does keep the market in check. Host can you pitch an idea to a Venture Capitalist on a sand hill road . If you live in fort wayne, indiana or louisville, kentucky . Guest great question. One of the things weve seen in the u. S. Is the Venture Business is still very geographically concentrated. New york, california and boston make up i think, like 70 of the total Venture Capital dollars that are invested every year. The answer certainly is you can sed we are very interested in talking to those entrepreneurs. Often what happens is in those local markets the very early Stage Capital will be called seed capital, typically it will come from local markets and then if they dont have larger firms beyond that you will often see those comedies come out to either new york, boston, la or other places where there is a more concentration of larger funds that can do the next financing rounds for those businesses. Host in your book you talk about the fact that both microsoft and facebook were dc funded companies and the difference in return for those two companies. Guest yeah, this is a real interesting phenomenon that happened in our business which is the average time it takes from a company from bounding to going public has basically doubled over the last 15 years. It used to be the case the comedies would go public about six and a half years after founding but now those numbers are roughly ten, 12 years and lots of reasons for that which are probably beyond the scope of our conversation today. The example given the book is micro soft. Make a soft went public at a 350 million evaluation today mike is off is over a trillion dollar evaluation and all of that growth from 350 million to a trillion dollars happened in the Public Markets so approved for the Public Market investors. The mental exercise i talk about in the book is if facebook were to grow at that same level of appreciation and admittedly over a 20, 30 year time. It would be worth more than the entire global gdp today so its probably the case that we will not see 3000 times growth in facebook over the life of its history. Its obviously those are extreme examples but i think they point out a very important thing whiching in the industry is a lot of money that used to and growth happening in the Public Markets are now shifting to the private markets. Personally as a policy matter i think its a problem and i think it means that less growth in the Public Markets means that normal investors who invest the Retail Account or therefor a 1k accounts are missing out on great appreciate opportunities and i would personally like to see us have more of that growth happen evenly between public and private markets. Host why are they staying private longer . Guest i think there are a lot of things break the most significant is the fcc, many years ago, if you look at the data from about 20 years ago started to introduce a lot of efficiency mechanisms into the Public Markets to again do exactly that, make the markets more efficient and they did a great job. This was not at all a problem obth the sec. If you look at, for example, the amount of money it cost to traded stocks today in the amount of expenses that Retail Investors pay and all of those have been going in exactly the right direction over the last 20 years soo its a wonderful thing prayed the challenges that works well with large cap and highly liquid stocks but when you have a smaller cap stocks that arent as liquid that market has become much more challenging. If you are a sub billiondollar market Capitalization Company today in the Public Markets you probably dont have Research Analysts who are covering their pmpany and you probably dont have sales and trading desks at banks who are talking to the Institutional Community about buying your stock and as a result therefore the stock does not trade very well and its not very liquid. At the thats a pretty unattractive placee for peopleo be and therefore companies are staying private longer in order to get to a larger scale and a larger market cap and what has happened over the last 15 years is the money is following that so the Public Market investors have recognized that and that is why you see sometimes mutual funds like a fidelity or [inaudible] price investing in private companies because they ecrecognize capping their growth they now go into the private markets because of thisel elongation of the cycle that is getting into the Public Markets. Host mr. Kupor, inner world are you still the wild west in the sense thatth youre outside the revelations the banks et cetera have to face . Guest it depends on the type of Venture Capital firm. We are what is called a registered investment advisor. We are regulated in the same way that a hedge fund would be regulated or another private equity firm and so that means we are subject to the sec coming and visiting us and subject to a variety of compliance rules. A number of Venture Capital firms havee lesser regulatory scrutiny and as a function in our case of the types of investments we are doing. We need to describe ourselves to the higher regulatory standards but it is true for many Venture Capital firms that ultimately they are a responsible to the sec if they are doing things like fraud or other bad behavior bbut you are right and they hae much less a revelatory scrutinies than a bank or other Financial Services institutions. Host what products are catching your eye today and what are you looking for. Guest we have lots of ideas about where we think the most exciting things will be over the next five, ten, 15 years. One great area where we are spinning time is at the tetersection of Computer Science and life sciences. There is a whole new companies trying to generate new drugs or create new diagnostic tests for disease where they are using components of Computer Science to help improve that process. Particularly things like Machine Learning that can improve the learning ability of computers to detect cancerous cells and the blood sample for example. That is onein of the most interesting areas. R the other part of our business is we need to be, quite frank, open to meeting with all kinds of different entrepreneurs and understand the idea that they have because we certainly do believe wee are smart enough to know all the greatest trends and will be important over the next ten, 20 years. A lot of our business is getting ourselves in front of smart individuals who are doing cuttingedge work and software and then for us to do diligence to determine if we think that business has a chance to ultimately grow into a very large and selfsustaining company. Host what are the Lessons Learned from both the 1990s and [inaudible] . Guest those are both good things to talk about for the lessons of the 19 90s i think are mostly a lesson of, i would call, market size and the businesses to sustain themselves profitably. The staff that i like to uses we talk about netscape earlier but when netscape sold itself to aol in 98 the entire size of the internet population globally was less than 150 million people. If you may recall people reusing these horrible screeching to get modems in order internet access. If you think about that a company like a pet. Com which has been in news a light because we a recent ipo of another pets Company Called iie. Com successfully and no matter how great of an idea pipe. Com was to have food online can never be big enough to acquire enough customers and ultimately sustain the individual economics for the business and of course, that business failed. I think the big lesson of the 90s is the size of the market really matters because it drives how costly it is to acquire customers, how many of them you can get to and ultimately how much profit you can drive from those companies. [inaudible] is a different orample which is we often live in a world where sometimes you will fully disbelief in order to go along for some dreams that entrepreneurs have about what to do. There is as difference in my md between what [inaudible] appeari to be and we will see if the sec does the work that theres a difference between broad and misleading people versus having big dreams and ultimately failing to accomplish those dreams. The lesson there is to make sure that we bet those dreams appropriately and understand the difference between an ambitious plan that might be feasible and one that might have bad behavior associated with it. Host scott kupor is a managing partner of Andreesen Horwitz and author of this book, secrets of the sand hill road, Venture Capital and how to get it. Thank you for being our guest on the communicators. All communicators areca availabe as podcast. Tonight on the tv getting at 8 00 p. M. Eastern highlights from our monthly indepth seri series. That is followed by former Consumer Financial Protection Bureau director richard cordray, details the creation of the bureau. Then journalist Michelle Malkin offers her thoughts on u. S. Immigration policy. Watch the tv tonight and over the weekend on cspan2. The president s from public affairs. Available now in paperback and ebook. Presents biographies of every president organized by their ranking by noted historians from best to worst. And features perspectives into the lives of our nations chief executives and leadership styles. Visit our website, cspan. Org the president s to learn more about each president and historian features. Order your copy today wherever books and ebooks are sold. Next, on the tv. Programs from our archives the focus on technology. You can watch them in their entirety by visiting our website booktv. Org and use the search function at the top of the page. First, from march 20 march 2819 Nyu Stern School of business professor amy webb argues that Artificial Intelligence is giving too much power to big corporations. My job is to model risk for living. I have primarily focused on technology and over and over i kept coming back to the same nine companies. These same companies that control the lions share of patents that have an extraordinary nt
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