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See Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions clients of O'Shaughnessy Asset Management, May maintain positions in the Securities discussed in this podcast. My guest today is Silicon Valley icon Marc Andreessen before. Co-founding the Venture Capital. Firm Andreessen, Horowitz Mark was an early Pioneer of the internet at age 22. He built Mosaic the first widely adopted web browser and the technology that underpins Netscape Communications,
Ins Mark was an early proponent of cloud computing, social networks. And the software business model, in each case, Mark seem to be well ahead of the crowd. During our conversation, we explore how software is making the world better. How slow sectors, like education Healthcare and housing are eating the economy and marks vision for the future of a 16z. Please enjoy my conversation with Marc Andreessen before we transition to the episode. I also wanted to highlight our newest series business breakdowns. Each week, we do a deep dive into an individual business, to understand what makes
Great find more information on joint Colossus.com or search for and sign up to the business breakdowns feed on your preferred podcast player. So Mark, we're going to cover a ton of territory today. I'm going to start with some of your iconic ideas and we'll start with maybe your most famous, which is this concept of software eating the world. I want to focus on the middle word eating. I think everyone understands software, people understand the world. Could you describe exactly what you mean by eating? Like what is literally Happening
Here? Part of that is just
trying to colorful to make it interesting. But the thing that's happening is quite literally. It's actually a concept from Buckminster Fuller, believe it or not, a hundred years ago. And he called it, I think his term for it was ephemeralization and I realize, I'm getting confused is, because economists have a separate term, they call dematerialization, think of those two terms and so, but Mr. Fuller, had this thing that here, it's amazing that he saw this. He saw this in, like I forget what it was like making tens or 1920s or something, you know, way before the computer was invented, but he looked at sort of the progress of sort of Industrial Development at a time.
People generally had a very different point of view. He said, basically with science and technology were getting better and better at doing more and more with less and less until ultimately one day, we'll be able to do everything with nothing and the literal like meaning of what he meant. And this is why economists have this idea dematerialization the literal ideas like you know, in the beginning of Industrial Development, you're using raw materials in this, just grossly an effective way. Like, you're just mining for huge amounts of Natural Resources. You've got this just incredibly inefficient processor.
Making steel. So you're just using huge amounts of, or use incredibly inefficient engine serious, huge amounts of oil, you know, to generate very small amounts of power. And then what basically happens is you get more and more advanced, you get much more efficient, use less natural resources, use less energy and you're getting better and better results. It's funny that he observed that was actually happening, you know, it's just simply the art of Science and Technology even before computers. And then software is that alchemy, that finishes, that and ultimately, I think, in the far future delivers, ultimately, his vision of doing everything with nothing, which is quite, literally taking,
Activities productive processes and entire categories of products, and services that have a real-world foot, print, a footprint made of atoms today, and ultimately determine the debts. We've all been through this in the last 18 months, the degree to, which travel driving to the office, and the actual physical office, building, quite literally got dematerialized into video conferencing. It's sort of one of these just like classic incredible examples of that phenomenon. That's the long-term Market. That's ultimately where it's headed.
I've seen just grabbing elsewhere as just the ultimate lever on the physical world.
And I think of a club smeels work on energy, where you've got sources of energy and that you've got the efficiency, like, how much of the energy can you eke out of the fossil fuel or the nuclear Rod or whatever seems like software is the best possible way not just to make bits or atoms, rather more efficient, but also remove them from the equation. I think that's what you're saying. Do I have that roughly right?
The way I put it is basically it's like look if they physical product can be replaced by software. The example, I always use for people who can think about this scratches to get up in the morning. Most of
You have an alarm clock, a little plastic box that sat on her bedside table. It plugged into the wall. You yell at us to get up in the morning, there was this entire company, right? RadioShack, that was in the business of selling us all these little plastic boxes of it. All these things. Now that little plastic box that Bart pocket, snapping your phone and so is the answering machine CD player. And so is the DVD player and so is literally dozens or hundreds of little things and so for anything that can be quite literally transformed or replaced and transition from atoms to bits like that happens that cause kind of a form of reaction.
That original essay in that argument which basically is okay. Smart guy like that makes sense for alarm clocks for whatever newspapers. But what about cars are? What about, you know, houses you can't drive bits like if you do need to go from one place to another you at some point need metal and glass rubber at the front of the car. There are certainly things that will always have some real-world footprint of these for a very long time, but here use of this term lever. Basically, the way to think about it, that is software is a lever to be able to have those physical systems, and products become much more efficient, and much more powerful. We way in advance of them.
Gradually being eliminated. If this was co-products, that's happening with the car in real time, which is, first of all, like the car is being transformed into basically rolling supercomputer but still bent metal and glass and rubber but more and more. The value of what the car is annual. Quite literally the functional value. But literally, the economic value, the car is being basically turned into software. These things are super computers on Wheels there. Now, you know, starting to drive themselves, the entire basis for competition, the Auto industry has additional software the entire basis of how people are going to evaluate what car versus others may be on the basis of its software, which is very
rent than how people used to think about these things. The other way to think about it is, how is the activity of all those cars coordinated? This is where you get this kind of magical phenomenon in form of these systems like Lyft. And Uber, we're just think conceptually for a second. Like how did Lyft or Uber come into being the thing that literally happened was a programmer, sat down typed, in a bunch of computer code on a computer and press enter and the program, the code started to run. And then the next day, cars and their drivers started to drive to different places and pick up passengers who they normally never would have even known about.
And those passengers all of a sudden, had a completely new way to get a ride. You can figure it an entirely new revolutionary, real world transportation system, not by building a new kind of car, not even by buying a lot of cars not by building a train tracks, or monorail, or suborbital rocket or any of these things. But just having software, Greek word, name, existing because of a resources into a far more efficient form. Airbnb is the same thing for housing and so forth and so on and so software is a liberal the world somebody types in code that code runs the real world changes, and the real world changes, not just arbitrarily, but in a way this more,
Fission is it's more organized. It's more productive that provides more opportunity to people. There's just this enormous future Runway. As software is becoming pervasive, in our world is like every physical item. It's going to get ship as every Chip is going to connect to the network as this technology kind of saturates. Every kind of physical product around us, which is, what's happening. The software, increasingly is the coordination layer. You have this long Arc of improvement in the physical world that actually doesn't require complete your place for the bits. But just, let's use the much better.
Do you think there are credible
Kids or potential, downsides to this trend. You might call this like the Luddite question or South Park. They took our jobs like the automation problems that people. Talk about. What if any do you think are credible concerns about this inexorable
Trend? It is economic change. It is change course. This is a process has been running for a very long time. Once upon a time, all of mankind was doing some systems farming. The good news is that since Romney jobs went away, those Court had very good jobs, all the jobs that everybody has who's listening to this podcast. These are all jobs, got really created as a consequence of Technology at some point.
Last 300 years, it is a process of change. It is a process that results in creating more and better jobs. We're all relieved that we don't live in the world pre automation for that reason. Because we really seriously quite quite dramatically would not want the jobs that preceded technology. We are all the beneficiaries of this trend, but it is changed. Kind of in the moment. There are entire fields of professions that do get eliminated through this process. A classic external historical example is there was once a thriving, professional world of blacksmiths. The job of the blacksmith was to put shoes on horses. Horses were the dominant resident presentations,
Alter the time and there when the car came out like the blacksmith, not happy and they were blacksmiths. That went out of work and there were blacksmiths that had to retool into different career path await their lives. In a way they never would have wanted to and there are blacksmiths that never had the same standard of living on the other side of that. It is change. It is a disruption of the status quo, there's a few things that you just have to kind of put balanced against that. I think one is kind of the point I already made which is that the result of this process is more and better jobs than you have before. That is good for many people in their own lifetimes that get to have a better life is of consequence.
And by the way, it's doubly true, their kids. And I think this is a big difference between people who think about this process, that's directly at people who kind of think about the real world, which is, if you ask any responsible parent, that's irresponsible parent, would you like your kid to have the same job you do? Or would you like them to have a better? The different job of different. Ask a parent who works in a blue collar professionals to ask a parent who works on an assembly line or works in the front line that are sort of manual labor but harder work. You what you're going to be doing that? Or would you rather your kids suffer developer or artist or job in which the you're in a very comfortable physical environment? You're not
The risk of like workplace accidents and so forth higher-paid able to provide better for that kids family and for ultimately your grandchildren and virtually all parents will say they're in favor of that. This is progress, this is how it happens. So I think that's important, the other really important thing, I think people just miss and this is sort of this massive disconnect between the narrative and then the facts or the statistics is basically, like there's this perception and narrative that we live in this time of unprecedented technological disruption. Do you have these both very Triumph list. Kind of analysis of like software is eating the world.
Or you've got these very negative blasts, the New Yorker did that big piece of while ago about how awful disruption is and how technology is destroying everything and making everything awful. There's this narrative that this is this time of unprecedented, disruption technology-driven disruption and then you actually look at the numbers. The number that you look at to try to get a handle on what's actually happening is productivity growth productivity growth is the economic statistic that captures captures a bunch of things would primarily a captures the impact of technological change on the economy, you can quite literally just get a gauge on like how much is technology. Transforming the economy.
Given your by what the productivity growth number is for that year and productivity growth. You'll notice productivity growth was much higher from call it, the 1920s to the 1970s, then it was from the 1970s that today. Generally speaking the rate of technological change in the economy has been decelerating for the last four years. Not accelerating and everybody thinks it's been accelerating. It's actually been decelerating by the way. Productivity growth has been decelerating, several other important related metrics have been accelerating the rate of new business formation has been accelerating. And again, this is one of
these Contra narrative things where you think entrepreneurialism is everywhere. It's like, the know actually across the whole economy. Entrepreneurialism is in Decline company. Turnover is in Decline, job. Turnover is in Decline. You know, there's this narrative that like your kids are going to have like a lot more jobs in their lifetime. And you do, if that was true at one point, it's not true anymore. And then there's these two other really interesting metric size. Look at what he gets the jobs questions, which is if you look under the net employment numbers, which are them headline numbers, you'll read the headline numbers every month, or whatever, effects hundred thousand. Jobs are created this quarter. That's a net number, but that's
That of job growth creation and net job. Growth destruction is literally crazy - destruction. And it turns out the creation of discretion, numbers are much higher than the net numbers but they're also falling. And so the rate of new job creation in the economy has been calling for 40 years that the rate of do job destruction. It's Diwali the last 40 years by the way, another interesting thing that aggregate level I think I have this right for memory that aggregate job creation and destruction rates in the US are something like Forex per capita. There were
Effective rates in Europe, Europe has like a far more rigorous Draconian you know, regulatory system aimed at basically, sawing economic change. They have succeeded in that mission. And the way that we know that is they've succeeded by basically dramatically. Reducing both the rates, they've done what they wanted to do. They reduce the rate of Destruction. There's a lot less job turnover. They have also correspondingly really sharply reduced by an equivalent amount the rate of new job creation. And of course, the result of that is unemployment rates in Europe are higher, wage growth is slower. Do job creation rate is lower. Generally speaking, this has been, I would argue
Bad trade for Europeans. In general, you can make an argument either way but it's like you also have the counter example of society that has decided that they want you to bless change, and I don't know that, it works out that well you want to parameterize that which is like we're not actually in this era of like just enormous technological change the way people think, and then we can discuss why video is very interesting question to me, just to the conclusion. That actually, the criticisms are actually hundred percent up base their butley wrong. If you want more job creation, if you want higher wages, and if you want more of a sense of opportunity and potential,
Shal in the ability to be fulfilled and the ability for people to provide for their family and for the kids to have great jobs in the future, you actually want more technology in the economy. You want more productivity growth, you have more economic change, which again, is very contrary. The current narrative. I think this
productivity growth thing is like the most fascinating thing in the world because how audit is to put the numbers against what feels especially in 2021 and maybe something's changing or has changed post covid. But what feels just like, explosive experimentation in lots of sectors Beyond software that we're sort of.
Stagnated for a while. So it begs the question you kind of alluded to it. Like if we agree that productivity growth is good and want it to go a lot faster. What are the major category impediments to that potentially happening over the next 10 to 20 years
to your point? Let's talk about this in two phases. Let's talk about it up until 2019. And then let's talk about what might happen from here because I think the world maybe did just change in this respect and a pretty interesting way. So basically from call it 1971, if you look at the charts from like 1971. So basically
18. Is this era of stagnation is the wrong word? Because like there was a lot of change but like the sort of decelerating rate of change. So my analysis is basically the thing that's confusing on that is economy is not homogeneous all sectors of the economy aren't the same and what's happened over the over that 40 year period is this really sharp Divergence between different parts of the economy? There's a chart we don't have it in front of us right now but there's a chart that maybe you could link to probably seen before which is this chart. They come as mercury, post updates for a regular basis, he calls the chart of the century and it's the
Part of price curves by sector. And the economy, it's like average prices across these huge economic sectors and basically what you see is, It's A Tale of Two Cities. Basically, there are a whole bunch of sectors. Let's call them. The Superfast change sectors, if you will, or is going to super fast growth sectors or Superfast their sectors. Getting disrupted on a regular basis. These are sectors like, computers, and media. And Retail, by the way, cars, and clothes and food, most of the stuff you buy.
Those suckers basically over a 20, 30, 40 year, period with experience basically, is this really rapid rate of price, declines, price declines, and then also and or like dramatic improvements to the product. The canonical example might be, just the television set. If you spent like thousand dollars on a television set, 40 years ago you got no 13 inch or whatever 21 inch maybe CR key thing. If you spend $1000 on television today, you get a hundred inch super skinny wall-mounted just like most amazing and home cinematic experience. You can possibly imagine but in fact, they're having trouble in the TV industry.
Holding the prices at like a thousand dollars, like by the type of white TVs that were like 300 $400. They're just spectacular. They're just amazing. That's representative this great example, that's representative of the sector that has just had a ferocious rate of technological change over the last 40 years. So, very rapid price declines, very rapid product, quality improvements by the way, very rapid volume growth. Way more people have TVs today than had 40 years ago, and have with other activities, we 40 years ago, people didn't even necessarily color TVs. Another got these like cinematic things. That's
Native of maybe call these fast economic sectors. And by the way, in a lot of those sectors there spend just like an enormous amount of job growth. So the amount of job growth is taking place and like making entertainment for those TVs or video capture that huge job growth. Can those factors? Then you take the other sectors, we might call those the slow sectors. There's a bunch of those. But three really big ones, housing, Healthcare and education. And those sectors exhibit, the opposite behavior, that was the behavior of your TV set. So the hundred inch TV set that covers your walls going to cost a hundred bucks. The four-year college degree is going to cost a million dollars.
And it's like, the four-year college degree is basically just think about technologically. It's an unchanged experience. 400 years ago, getting a degree from a college University today. It's the same set of activities, the same format. It's teachers in the classroom. It's written exams, but there's been no technological change whatsoever. And prices, that exploded is a great example of you got a sector where you would think, the luddites would be happy because it's like The Logical change is not happening, but then you'd see these explosive prices and then you kind of look at the nature of these categories. So say, housing Education Health Care. It's like, well, those sound familiar one of those sensitive.
Familiar. It's like, oh yeah, that's what we call the American dream. That's what we call being like middle class. What's the definition of the American dream of sort of being middle class? Upper middle class gets like, I've got a nice house in a nice neighborhood. I've got my 10, my kids to really good schools and I've got really good health care in those three sectors. Prices are exploding through the roof. You have either very little time. Logical change happen in those sectors. It's actually possible. You're actually going backwards. It's possible. You're actually losing productivity in those sectors as time passes because the administrative bloat is driving this huge increase in cost. Now, here's the thing, there's a bunch of things that are
Some sort of interesting about those sectors. So one is very little technological, innovation happening in the sector's. The houses don't really get built differently, hospitals, don't really get run differently at schools are exactly the same to is the sectors are huge. These are like, giant slices of GDP. These are like, far bigger Industries than like televisions, her books food. These are huge Health. Care is a six, the American economy on his way to being half. And then, of course, housing education is also super expensive. This is the answer of the question you asked, which is the reason why the economy as a whole
Hole is not going where you would think it's going, is because these suckers are most of the economy. And then think mathematically, what's happening mechanically what's happening? Which is if the prices of the fast sectors are falling in the prices of the slow, suckers arising, the slow sectors, are eating the economy mechanically, they're becoming a bigger percentage. The economy, the non productivity growth non-price. Declining non technologically Innovative. Sectors are becoming a comic. This is the ephemeralization point like all this stuff that has a lot of technological change that coming ephemeral and cheap, leaving everything else to become where all the money goes.
And then you get to this kicker on it which is housing, Education Health Care. The other thing they have in common is this very specific form of government intervention in those markets and that government intervention comes in two parts. One is restricted Supply. Then all three of those sectors. There are very sharp government-driven. Restrictions on the provisioning to supply in the economy we can talk about that but course the prom with restricted Supply as you drive up prices because you drive it prices voters, get very unhappy and so then the government subsidizes demand, this is the phenomena. You just take colleges as an example, you have a literal cow.
College cartel in the u.s. you have an accreditation agency that accredits colleges universities, run by thinking company, colleges and universities. The accreditation is necessary to get access to federal student loans without federal student loans. You can't make these business models work and infrastructure but the consequence of that bottle, lack of Supply which is supported by the government which is enabled by the government because otherwise they would just break it up on it under antitrust. Grouse, they let the federal student loan program be kind of leash by it because there's friction Supply prices rise because prices rise voters, get upset because of that.
Positions put more money into federal student violence, but if you put more demand, if you put more money into an economic sector with restricted Supply, the result is prices go up even more. And so, then prices go up even more and then voters get even more upset and then politicians subsidized, even more, and then prices go up even more. And so in all three of those sectors there in this Doom Loop, that's going in the opposite direction of what everybody thinks, they're worried about their not in a doom Loop of technological innovation and automation there in a doom Loop of whack of technical Innovation steadily escalating.
Prices steadily escalating government subsidies it right with this incredibly restrictions. Apply in in that formulation, there's no limit to how much these things can. Cause there's no limit to how much a house in San Francisco can cause there's no limit to how much heart surgery and a hospital can cause there's no limit to what a four-year college degree can cost. It can potentially cost infinite because the government will just keep subsidizing. Again, I look at that and I'm like, well, it's obvious what we need to do. We need to technologically disrupt those sectors. We need to do to the slow sectors, what we've done to the fast sectors, we need more time.
Going to mention if we don't do that, this story evolves into the exact opposite direction. Everybody's worried about which is what's actually happening right now.
If that brings us through to 2020 one, you mentioned that maybe something has happened. That might cause a shake-up in this inertia. I almost want to go example by example here because they're so big. They're so important, it could give us a couple different lenses to view what the future might look like. So I guess the first as an umbrella concept, what has happened as a result of covid or in 2021 that you think is different and then maybe we'll start with education.
And to dig in a little bit on how we might attack this problem. Because to me, it seems like the most obviously ridiculous. One, there's a network, there's accreditation. There's actually, the stuff you learn. We can attack those things with technology, but before we get to the example of Education, I'd love just to hear your thoughts on what really has changed versus what to change. Mirage, as a result of
covid, I think the big thing is just System Shock start by saying, look, we're going to talk about some positive things that are going to come out of covid. So, you know, important to kind of note up front like covid in general was very bad, it was very
For a lot of people is very bad for a lot of families have severe Health consequences for a lot of people. A lot of people died. It was also like very economically disruptive. A lot of people have got very badly damaged by it. A lot of small businesses have gotten destroyed so overall it's like a big negative and we wish that we hadn't gone through it. That said it is going to have consequences. I think some of those consequences are actually potentially quite positive so the big one is just like it's a System Shock, you know how life works is most days weeks and months are a lot like the ones that came before life just kind of rolls along every once in a while you kind of tweak things a little bit, but
Generally tomorrow is actually a lot like today. And then you may either as a worker, or as a manager, or a CEO, or as investor or whatever, you're an entrepreneur, you may have some idea on how to do something radically different. She maybe I want to like, go live somewhere different from where I work and telling me, that's okay. That's kind of weird different, or maybe I want to start a new kind of online. Retail business. That doesn't even physical storefront, or maybe I'm a CEO and I realized I actually have 10,000, too many people, maybe have 10,000 people answering the phones, and I really am ready to replace that all the software. But I'm worried about the effect of my
If I cut 10,000 people because from support function, or maybe I'm a restaurant chain, maybe I'm the CEO of McDonalds or whatever a restaurant chain. And maybe I think it's time to actually build a big delivery component to my business, but I think my shareholders will get mad at me because it's a large amount of cost to get a delivery business up and running. So people have had all these ideas. I think, for a long time of things that they might like you differently, they just haven't had Catalyst. There's been too kind of environmental setting for which, I think a lot of people could pursue the more radical ideas that they had. And so, I think covid, as a System, Shock is an opportunity, all of a sudden for a lot of those
Has ideas first, for a lot of experiments to get run during covid right along those lines, which have been really interesting for a lot of people both personally and businesses, but the other is like, okay, now it's like everybody has a cover story. If I ever wanted to reorganize my company now is the time if I ever wanted to fundamentally eliminate job, departments over here, and create new lines of business over there in a way that would have freaked people out. Now, basically, it's just like hope because of covid-19 this if I always wondered like it, why is the CEO do? I have all these offices and everybody can use to the office and they had a dress up and he's got like
They said their their desks and I just like to share their screen and to email all day, maybe they could have done that at home. Now, I have an excuse to say, hey, we're back. I have an office anymore. And all of a sudden instead of being like, a weird thing that freaks everybody out, it's like, oh, of course, you know covid. We ran the experiment, it turns out, maybe we don't need these offices. It's this really unusual opportunity to take stock from first principles of how we think things should work and how we want to live and possibly drive very different conclusions. So that's the kind of macro backdrop in that things get really interesting. So there's implications kind of all throughout the economy, but the really big ones.
Is just for the last whatever 3,000 years fewer in ambitious capable young person. You grew up in a village or real some remote location or whatever. And even a midsize City, if you wanted access to Top Flight Economic Opportunity, you move to the big city you can find and this has been a long-running this way previous technology. That's true of London, and Venice, and many other big cities for a long time, for thousands of years before technology, economic opportunities always been in the city. And then, of course, that also means, there's always been this lifestyle trade-off, which is like, okay, I can make more money.
The city I'm going to live worse for the same amount of money. And of course, that problem has gotten particularly acute in the last 20 years because of all these crazy housing policies where the cities where everybody wants to live, don't want to build more housing and then, of course, now you have just like this General go f civil order and this incredible spike in crime, decided to turn our Superstar cities into Gotham for some reason, except apparently with no Batman, I have all these friends, it's like a running joke. After I have all these friends are like live in San Francisco and I've been teasing them for years. It's just like, okay, I've been accusing my friend,
Who live in San Francisco, specifically the specific city of San Francisco. And the tell my friends for years, you only live in San Francisco for the stories. You want the like crazy stories. I came home. Last night, there were like almost people having sex in my front yard, usually get people to kind of admit that they kind of like that up to a point. But then it's like, my took my three-year-old out yesterday with David Parker. We got somebody a junkie tried to, like stab, my three-year-old with a syringe if he used to rent the jump, start to get less funny over time. You just have this generalized collapse of these requirements. That was a problem. It was already developing, a course, that's really been exacerbated.
Over the last six months. So it's like okay, what's that trade-off? What is it worth to hellscape in order to have this spectacular job? If you have to make that trade-off, it's a difficult choice, but all of a sudden lo and behold, you don't have to make that trade-off and maybe in a few turns out the remote work. And this is what every CEO founder in the pandemic is actually remote work throughout works not perfect. There's gonna be a lot of changes that companies are going to make because the remote work there's some experiments that we could talk a lot about that but generally speaking it worked really well. And it worked much, much better than anybody thought it would work. There's no company of any size.
As that I'm aware of where any of the knowledge work? There's a production plant that might have got shut down for a while or something but every company I know of that has knowledge working knowledge workers. They all had good experiences of remote work across the board. If you think about just economy, no bank went down the stock exchange went down. No, internet company went down, nothing. No insurance company. In this might fundamentally change. What we thought we knew from 3,000 years of economic history, which is this idea that where you work, where you would have to be connected and maybe fundamentally they really don't. And then at that point,
Now, you're in a whole new world. Housing is example ready? Completely changes this housing question because it's like, okay now maybe people are going to maybe separately, optimize their work lives in their home lives. Maybe they're going to live in Athens are a different kind of built environment. My favorite example is if I were in the real estate business, what I'd be doing right now, which, I'm not. But if I was, I'd be trying to figure out find really nice midsize cities or larger towns that are like really nice, physical environments, really safe and like good schools and just generally really nice places to live and then build like basically new kinds of multi-generational housing
Basically, you know, compounds neighborhoods where you could have 12 or 15 or 20, homes interlinked for you. Could have this lie, all the members of extended family, every member of the family of God have three, four, five thousand square foot house. And you could all be closer together and collectively, you would be paying less than you be paying. If you were all living in one bedroom apartments in San Francisco, kids growing up in that environment, might have a fundamentally kind of more pleasant upbringing specially surrounded by extended family, but then they might still have access to all the tops economic opportunities in the years ahead because they can just video in and they can get the internship at Google or whatever and have the same career that they would have if they were
Francisco. That's the kind of thing that I think becomes possible. Now that might be a really fundamental break for how these work. Until now
you mentioned this idea of knowledge work and how swimmingly any company based on knowledge work went through this period shockingly. So it brings me to education which of the three categories to me is by far the most confusing because on the one hand you can learn anything you want online in much more depth and speed and fun than you ever could in history. Yet the cost is going up. How should we think about this? We think about it as that bundle.
Love aggregation Network and actual education. Should that be unbundled? How could we attack this such that? Because on the other side you have those stats around. If you go to college everything's better and I don't know which way the causality runs your incomes are way higher and your health is better and like all these other things. So how should we Square this circle? Like it just seems so confounding to me that we could have the internet and yet this cost keeps going up.
Yeah, that's right. So a couple of specific things happen over the last 18 months. So one is my wife teaches the Stanford Business School and I saw her actually go through this pain. Like,
One week Sanford was like everybody's going home. Passers they basically said which professors are willing to teach online and it was like. Whatever happened Professor is were like that. No way, I'm not doing that. The other half of the professor's were like, okay, I'll give it a shot for the professors that were willing to teach online. They literally had to construct their own methods consistent for doing it all of a sudden on the Fly. Create a new way to teach courses online and then their courses actually got one more popular because a lot of the other courses that canceled, they all got just thrown in the deep end of the pool for online learning. And again, it's one of those things like, it went better than anybody had a
It's expect it was by no means perfect because having a week to retool a classroom person that so that's not exactly optimal. It's a pedagogical methodology. You might want to have a chance to think more systematically than that, but again, it worked fairly well. We worked a lot better than people thought the education system. Kind of ran this experiment, a bunch of things happened. I think one is, I think a lot of parents of K through 12 students, I think it's the first time parents saw what their kids are getting in the classroom at the K. Through 12 level in many, many years, most parents, if you're in your
Never 30s or 40s in your kids are in like whatever. Sixth-grader. It's great. You were taught in the classroom, you know, whatever 30 years ago. It turns out some things have changed to. The current Ripple is quite a bit different at a lot of schools. I know a lot of parents were just shocked, absolutely shocked, that the stuff that was coming across their these great viral videos that have done, basically, like teachers getting caught on video basically saying. Yeah, this is a big problem. The parents are saying what we're teaching? I've been to figure out some way to get back in the classroom, so they can't see it anymore, because we don't have parents are appearing with whatever's happening from the
He many Bentley parents were just like, oh my God, this is so much different than I thought it was, by the way, maybe you like that, maybe you don't. It certainly feels like we're on the front end of a pretty dramatic homeschooling. Boom. We have some set of parents are like I'm not sending my kids back to that, that's one set of things at the college level. It's actually funny at the phenomenon, you describe like it really stresses. This question of what is college. You just mentioned, like, sort of advanced you and colleges colleges. Not one thing. It's the bundle of things as quote, unquote education. But it's also a day care for young adults. And then it's also like I, you know, social dating environments and then
So, I testing Gateway kind of thing on the way in and then there's a, you know, certification branding thing on the way out. So it's a bundle of these things. And so I think that the streaming experience there was this mean that went out that was like popular internet streaming services. Hulu $60, a year, Netflix $100 a year, harbored $54,000 a year. I think it really like kind of stress the people. It's like just sitting at home and getting a bunch of video lectures and doing a bunch of exams is nice. And I'm sure that's useful for some of those questions are useful. That obviously it's not most of the value to your point because
Because otherwise, you would just be like watching courses on YouTube. You'd be getting basically the same thing at this point, so it's basically it not bad. So, what do we know about? What college? And the universities, actually are what we know and Brian kaplan's probably written the best on this. What we know is it's mostly the stamp of approval. We actually know it's mostly the stamp of approval because of this thing that Bryan Caplan talks about called the sheepskin effect, which is basically this interesting question, which is like, suppose you go to Harvard for seven semesters out of the eight. But you drop out right before that last semesters you have 7/8 of the
Do you then go out in the workforce and make seven? It's of the salary. The answer is no, you make half the salary but somebody who completed that last semester and so there's two possibilities in the chief staff Fact. One is all the actual skills are taught in Wisconsin which is probably not the case. And at least if your college experience is like mine, that's not the semester where you're setting the
hardest.
So that's not the case. And so what's the case, which is, it's the stamp of approval. It's the brand that you get when you successfully complete the degree and then you kind of dig underneath that it's like, okay, what exactly does that brand me?
Me and actually turns out it means a couple things very specifically in my analysis. At least it means that you passed an IQ test on the way in which is basically and it's quite literally, it's a pacp admissions process, you made it through the front door and basically crazy. What happened was employers used to do IQ testing directly, 40 years ago. And then it became very politically unacceptable to do that. And so employers for the last 40 years have been wandering, the IQ testing through the universities, they've been letting the universities do that on the front of the University Mission process with use of scores.
SAT and ACT, but that signal, persists, which is if I'm hiring somebody, who's 22, who got a degree at a top school. I know, they made it through that admissions process, that means they're smart because they had sat or ACT scores high enough to hear that. So it's literally a laundry IQ test and that's significant because universities are currently the process of dumping the tests and they're dumping the SAT and ACT, and this is amazing to me. The universities are voluntarily dumping
half of the value in certification, right for their own political reason.
So that's going to have consequences. We can talk about that. And then the other thing, the Sheep's can affect the reason why the sheets.
Effect is real the deeper reason that that happens. The psychologist thinking people study this stuff is it's basically it's a test for the personality trait of conscientiousness. Quite literally the personality trait of I finish. What I start, I'm a responsible adult, and I'm capable of finishing how much projects and this is why graduates out of top schools are so attractive to employers, is because get somebody who's very smart who has a demonstrated track record of high Consciousness, those are the ideal employees, like, that's what you want for the highest end jobs. Like those are the two qualities that you want and so, basically, like I think there's an argument that
Huge amount of the sort of activity. At the University level is a kabuki dance around fundamentally. These two tests, the test for IQ and the test for conscientiousness. And then, I think if you put your employer at on your like, okay, that works pretty well up to a point but like maybe that's not working as well anymore. Because first of all, these universities are dumping the tests they IQ test. And so like that, I'm not going to get that signal anymore and then the other is, is a four-year college degree. The only way to perpetuate Justice and maybe there are other ways to do that. And by the way, maybe finishing online coursework is
Lee the same signal and it's not the same signal today because people aren't used to it yet. People are still getting used to this new world but sitting here five years or 10 years or 20 years. Do we really believe that the only way to kind of check that box and says, I'm a conscientious of all is that I went and set a password for four years. And it's hard to believe that that persists, especially with all of the other consequences in the educational system that are kind of getting soaked up logical and that's the long run opportunity and I were excited about that. As he sees, we're excited about that, you're trying to back online, education companies, they're kind of behind that Trend. And again, it's like covid doesn't change all of that overnight, but Club is enough.
The System Shock where I think it's going to cause people to be asking questions.
The job being done here in large part is reduced search costs for employers and it's kind of a work around like you said a laundered testing, Why not start universities like why doesn't Google have a captive University and just own the stack, make it more efficient, make it more tailored for the actual jobs, they need to fill. Do you think that might start happening that big companies will actually create replacements for this system?
So it's starting to happen. I mean, and there are companies that have done this for a long time. She
Eee for many years. I think they still do. They have their, actually, their own management School literally its own off-site facility. McDonald's actually has had this for a long time. They have this thing called Hamburger University. In theory, you can enter, McDonald's is a light worker. And that, at some point, you go to McDonald's University or Hamburger University and you get literally the training. And at some point, you become a franchisee or a manager and executive at the company GM. Had it, what do they call it? Kettering University in Michigan, and Detroit. I had a different name for a long time, and it was for GM. Basically trade up their own people. There is a history of this.
Ghibli. This is part of this General transition towards, you know, I don't know complacency or something over the last 40 or 50 years where I think a lot of big employers side of that they could Outsource all this. Here would be one interpretation, right? Which is basically the US government decided post-world War II to just flood the university system with money. It's like okay if that's going to happen then we might as well just stick it back on top of that that did work for a long time and maybe it's this working Must Fall now. So yeah, no look, I think a lot of companies men do that Google forget the latest but Google has a program. They've at least announced I think they have been fine.
Leave out in recall correctly. I think Google has now formally removed college degrees from their recruiting process and it's actually funny which is they've actually done that from the left. They've actually done. That is part of their quote, unquote Equity thing, which is basically, it's quote-unquote unfair to discriminate against people who didn't have the opposite go to college. But it results in the same thing that we're talking about, which is, I think they have our way of testing and evaluation now for their incoming funnel. That doesn't require you to have a college degree and you get evaluated. At least, they claim you get evaluated fairly as compared to people who do it cause your race, they seem like they're pushing on that pretty hard. Look, I think
The Dumping of the SAT or act. I think that alone, I think any employer with their head screwed on straight is going to be like, wait a minute. Now, what is this signal? It's literally half the signal is big, dude. So I guess the good news is I was a great Soul, Consciousness fast with the IQ test has been tossed, out that stresses, this is incredibly politically charged topic and so there aren't a lot of employers who can, like, stand up in public and say, you know, we need to start IQ testing again or take the SAT as part of your application process to working company but they're going to need some signal. At the end of the day, they do need performance and to get performance at some point. They need to tell you.
Since they're going to look for some other proxy, we've got various companies that are operating in the space. One of them is in our company, audacity has been doing this for quite a while now with this concept of nanodegrees. So here's another thing that you see. So here's another thing that happened where I think the education system of pathological. This is always this thing whenever people who like, run universities kind of talk in public. It's interesting thing where their University presidents, always seem to take great. Pains to point out that the purpose of a college degree is not to get a good job. The purpose is not to get a good job. The purpose is not helping by eight purposes, not this and that. And they
These Odes to like living a good life and you know, achieving social justice and all this stuff and it's like people grow up in different settings. I grew up in the rural Midwest. I always knew the entire purpose. The college degree was to get a good job. I was never confused by that because I always knew what the Alternatives were. I knew what the default ones is like working at a gas station, which God bless people, work at gas stations, that was not for me. What some of these new private sector Solutions have is they get away from maybe the flight of fancy of the whole thing and they get much more down to brass tacks, which was like okay skills for a job for employer and
And by the way, it turns out employers are pretty interested in that. And so there's a lot of Partnerships. And if you'd ask these example, where they have like, explicit Partnerships with employers, and they work, with the employers up to run on, Crafting the curriculum. And it's like, okay, if somebody goes through this program and if they get these skills, they know how to do. Let's say mobile app, development of machine, learning and data analysis. Then there are these jobs available and we'll hire these people for these jobs. It's a much more fundamental, you know. I don't know. It's like the knowledge we could go in a trade school or something like that. If you can get the good jobs coming out the other side of that for a while.
That's like wow that's fantastic. And maybe I don't have whatever and I believe School in the resume but I've got a great job and a great life and a great Mobility provide for my family and all the same skills and it's great. And by the way, if I like philosophy I can spend my spare time reading about philosophy. I guess put it this way, the more abstract and weird and detached the Legacy system gets the more practical and pragmatic. I think the private sector will be in filling the Gap and in the other day, look employers need people who are smart, who can do the work, there is an opportunity here for a new kind of system with just works better.
From a selfish investing point of view. Do you think that focus of entrepreneurs on these big areas that have not seen the cost, deflation the slow sectors can or will result in higher returns for technology like Investments because there's so much white space to make improvements.
Good news, bad news, we talk about this all the time. So this is very much, a good news/bad news story. The good news with these low sectors. Is the markets are gigantic? The good news. Is that competitors are like not good.
Generally, not only not good, like they generally have instead of wired in the wrong direction, we've got the thumb and Louis strategy, it's like driving themselves off the cliff for reasons. I don't fully understand, but they're going for it. I don't understand how the universities are going to continue their claim on this amount of federal student loan funding with all their other Behavior. Like I don't understand how that continues, but may seem on board with it. So the incumbents are like, headed in the wrong direction, and then, yeah, there's very little technological, change happening. And so, you would think that if you could inject technology and have a better way to do things, you can probably build something very large. I think that's all True. By the way, the bad news is these suckers are just harder to operate.
And for all the reasons we've discussed like, they're very entrenched, there's all these systematic kind of issues you have to work through and then again go back to the government, the government is very involved. Take education is example. If you're going to start a new education company trying to compete with colleges universities in a way, you have this fundamental question which is, are you going to have access to the federal student loan money or not? If you do have access to it, you have to fit into the existing system. In which case can you really innovate? If you want to do something different such that you're not going to have access to it? Then you're at an immediate economic disadvantage to the incumbents because you don't
Access to that money. So you've got this real basically economic disconnect core of the business model you have to figure out a way through. And so basically what we find is these Founders the founders of the slow sectors are different than the founders, the factor. So the founders that factors are just like I'm going to build a better product. I'm going to take Market, I'm going to focus on the customers. I may have some Theory but most of what I'm doing is just I'm going to hit the market as hard as I can with best product I can and I'm going to kick but it's going to be great. The slow sector Founders have to be, I would say much more sophisticated more sophisticated because their business models are more
Complex and there are more issues. And so they have to have like a fundamentally like the government relations, kind of approaching the very beginning. They have to have some sort of more advanced theory on business model. If kind of fundraising plan, the company will kind of stage Capital differently. It might take longer to develop their more things in go wrong, by the way, they come, it's a very powerful. The incumbents have achieved almost complete regulatory capture in these spaces and so new education startup should be ready to come under, just withering, assault from Washington or from Sacramento because all of the teachers unions and all of the universities like and all
People who are basically wired into those systems are going to just try to kill it. I don't know. It's like it's hard mode. It's attractive to certain kind of founder. Some of those Founders are very naive and they just get kind of crushing the process on the other hand. Some of the founders of very sophisticated and very ambitious. And then there's this giant brass ring at the other end. So they're going for
it, obviously you've been extremely focused on funding this software, eating the world Trend. What about Hardware it seems that this is kind of, the, this doesn't fall on either the categories. We've talked about so far hard work as a technology.
Has been key part of the world story over the last 300 years. How do you think about who finances? This, who builds it? What's important to build that we haven't? What are your thoughts and Hardware Tech more generally
Hardware is just more difficult. The easiest Tech startups are always a hundred percent software. It gets more difficult from there. There are 10 things in Hardware that can kill you as a company that just don't exist. If you're just doing software. Well, the most notable one, especially playing out right now, for a lot of companies, which is because of covid their system. So called supply chain Interruption happening right now, from ships, and
There are a lot of components you're building a hardware product. The product is usually made out of components, are multiple places. There's a whole bunch of chips and other kinds of things you need to build these things. And then a miniature Hardware is if you're missing one of those components, we can't build your thing. If your thing has 40 components and you have access to 39 of those you're stuck, which is why I, like the honest example, running Tesla, he's always put this big focused on, he's trying to Vertical as their supply chain. He's been trying to bring everything in house as much as he possibly can. It specifically to get past this risk, where any one vendor can hold him up, either intentionally or on
Potentially, there's a bunch of other companies right now that I can't build product because they can't get chips. By the way, there's another big issue which is this is a startup challenge, which is when Apple goes out to like, buy chips in Asia, they open the negotiation with a check for five billion dollars. They buy out all future, manufacturing capacity of a certain kind of chip for the next three years and that you show up as a start-up and you want to buy like a thousand of those chips in your opening Gambit as a check for two billion dollars, you can get laughed out of the room. It just puts you in hard mode. Like many of the Great entrepreneurial successes have been Hardware startups because it is harder.
Your play, there's less competition and if you win the prize, it's bigger. It's a harder Road, the best, those hundreds of you, they tend to be very good at fundraising quickly, this way. There's a reason why you end up with these multinational basically industrial conglomerates. There's a reason you end up with these companies like, you know, the old days ger and the new world apple or whatever that are operated. All these different sectors and new hardware at such massive scale and it's because there is a big scale advantage in that industry. So it's harder. And again this is why any of this is why software has been such a blessing in some sense, which is software, as a technology has just really opened up.
Up entrepreneurship lot more sectors of the economy because this really this Tennessee and so, you know, I think generally that's been a net positive. I don't think we've lost anything because that's happened. I think Hardware was always hard to do, is just now we have something. That's somewhat easier to do a lot of hard work is commoditizing. There's a really interesting actually economic phenomena that been trying to figure out recently, which is there's this concept of What's called the flattening of the supply chain. Another example is ephemeralization concept, which basically is like, well you think computers is example? If you open up an old computer from like 20 or 30 years ago, like just the number of parts in the computer is just a
For the number parts and computer today. Like you have a computer today this like it's a future concept. Now, in computers called system-on-chip, you literally have these single chips that have the equivalent of what used to be, you know, a dozen or two dozen or three, dozen other chips and they just all been integrated onto a single chip that idea. Basically, that's happening broadly in the hardware World which is basically the number of Parts is shrinking, which is actually pretty exciting. It's basically like a lot of constant stress and drama around global trade has to do with very complex, and fly chains with all of these different kinds of components that go into making a car or Foe.
Or something like that. And if you get these Hardware products to the point where they just have like a lot fewer pieces from a lot fewer places than you can start to strip away a lot of that complexity start to strip away, more of this dependence on foreign partners, that might not be reliable. I also think there's this sort of underlying thing that's happening which is the supply chains are being flattened. So maybe in the years ahead, it'll be easier to build Hardware just because you need fewer pieces. It'll still be harder than doing software but maybe gets easier
thinking back to this idea of factor productivity growth and the idea of just really complicated projects. Your partner. Alex had a
Suggestion, which was to ask you, how you think about financing things that are very complex, the specific framing he recommended, which I love is, what would like a series, a round into the Manhattan Project, have looked like, how do you think about this financing of very complex, and therefore, meaningful and worthwhile projects
due process of kind of Illumination work backwards, which is like, why do you need Apple to do that? - why wasn't the iPhone a start-up? There were a lot of big advances over the last 30 or 40 years. Dear Point like especially in like these more complex Fields they come out of these big companies.
He's tripping ORS penalty, building building, the software. Because back this thing of like, why do you have these large scale industrial conglomerates? Why can't you have our startups are like Tesla and SpaceX is ultimately, the question part of that is you read the story of Tesla and SpaceX and it's the story of just a couple things jump. How do you want is this? The story of just, unbelievable drama and stress and risk Ilan? Almost lost, both companies at different points in a multiple times, very tenuous, whether those companies could raise money at each point. In time, the classic venture-backed financing model, you raised a new round of money, every two or three years. You need to assume you're doing with a new lead investor each time.
You need five or six or seven rounds of financing to get accomplished product to Market. If you can't raise that third or fourth round of financing, it's game over. You lose. The whole company is I would say this is a criticism of Silicon Valley that I give a little bit of Chris to which is like these big hairy audacious projects that involve lots of moving Parts. Like they are just hard to do with the classic been Adventure fancy problem because of this fader is multiple rounds. Couple what would be the alternative that like what would be the counterfactual? Where were you could have told me on musk up front? We're just going to like pre-commit five billion dollars to build.
Tesla or SpaceX by the way. Oh, this is the other thing with Tesla SpaceX, which is there the only examples. Why aren't there a hundred more Tesla and SpaceX is why are there not companies building like Automated machine factories, building, thousands of houses for a fraction of the cost of today or why are there. Not like these huge universities, or robotic, automated hospitals, like all these things that the world pretty clearly needs, like, where the startups to do those things, why do we only have a line of? Why do we only have cars and Rockets? So it's like, okay, well, what if you had a system in which you could like pre-commit five billion dollars and you can
Bed, five billion dollars to a project like Tesla or SpaceX or any of these other projects and you were willing to do that because you knew that if the thing works you would do what Tesla space I think done which is you would generate Equity value for our next is of that. So we put five going into Tesla over the course of whatever its first 10 years and then if it worked, it's worth 500 billion on the other side and you make a hundred X that's Adventure, scaled Venture Capital style proposition, that actually looks quite attractive, so that's like, well, what would it take to basically make it upfront commitment to somebody for five billion dollars? It's like, okay,
That's interesting. So question number one is, could you raise the money to do that? And actually like in the old days, the answer that probably was no in the current world. The answer to that is probably yes, there are a set of hacking PCS or private Equity firms. That could probably raise that money to have a program like that. Those are Global savings glut. There's this just trillions of dollars accumulated capital on the economy that just doesn't know where to do. There's fifteen trillion of negative yielding government dad in Europe. Like there's these giant Sovereign wealth funds that had no idea how to invest their money and so if they had a chance to invest in another dozen or a hundred attempts to have a new Tesla bait,
They would go for it if you had a responsible plan. So it's like, okay, could you raise the money to do it? And then there's the like, what's the responsible way to pre-commit fighting kill doing know? It's right, right? How do you let the entrepreneur dry it or some? Right. Exactly. And there's an old idea that I think could be brought back and it's a term called project finance. And it's basically how you finance a dam or a bridge or a new like highway or something like that. It's crunch money, it's Rog money. Corresponding to Milestones, you basically have a plan. The plan has very specific milestones.
Stones along the way the burn rate escalates over time. You've got these Milestones seconds over time and then you, pre-commit the money. But the money gets released in chunks and the money gets released additional progress. You predefined a plan and a much more rigorous way than the general Metro Tech startup does. And then you kind of unlike the money as you go, and then basically, you would build a portfolio of these Investments. So you would probably start, he's raised some huge fun. You would not only commit five billion each to a whole bunch of projects and then you would basically Darwin would take its course and a bunch of the projects would not hit their Milestones. Hopefully, relatively early in the process, you kill those.
Projects, you would end up funding, most of the money into the set of projects that actually that we're making the right kind of progress. This is a doable thing. It's a doable methodology. It's actually like how you've ever read those that Augustine. What was his name is it? Former CEO of Lockheed wrote These great books about large-scale project management and it's basically like at least I bet used to build like your fighter planes, it was a very similar kind of process
not Skunk Works as a Skunk
Works. That works was like a lightweight version of this. It was like the Venture Capital Labs version of this. I'm talking about Mainline. How they did the mainline projects like how they built the house.
Scheme. It's like on a government contract, but it was like, I'm government contractor. Milestones? So then it's like, okay, what would it take? Because this is a different way of operating them. The venture-backed startups. The way Venture of experts working out like this, we venture-backed startups work, is they reform way to plan on each race. At each step they have a plan is designed to appeal to the next investor as compared to a plan that's designed to appeal to the investor who pre-committed upfront. And that's a that's a great big difference and then you need a different kind of founder, the result of that, right? Which is you need a Founder, who's willing to basically pre-plan.
Thanks years in advance, you need somebody who's really systematic and really rigorous, you probably want to Tamp down a little bit on the creativity of wildness. This sort of characterize this high-tech and you want to probably amp up on the rigor and methodology kind of side of things, and operating discipline side of things. And then at least in theory, if you found a Founder like that, you can line up against this, you know, the course, that basic question of our times, which is how many more elon's are there, how many more lines are there? And then it's like, well, our elon's nature nurture or they can we grow?
Them exactly. Where are the cloning tanks, how should they be trained? And then, how would you possibly find those people? Evaluate those people, the counter-arguments. Everything that I'm saying is basically the Venture Capital ecosystem of the way it exists today. Did Finance, Tesla and SpaceX CEO. Elon did need this new method. He was able to make the old method work. Maybe we just need more people who are more ambitious, like Elon and they just need to go make it work. And I mean, God knows there's no shortage of venture capital today. So if you can't do it, today's entry couple environment. Like when would you ever do it on the other hand you go right back.
The original question, which is like, why aren't there more elon's? There's something in there, there is some possibility here of like I would say a major kind of conceptual breakthrough that feels like it may be a sitting right in front of us, but nobody's saying, yeah,
you are a knot in your firm or non in significant player in this question and it's a good excuse to talk a little bit about what you're building with injuries and Horowitz The Firm. I think a lot about velocity and Vector for all kinds of companies and it feels like most investment firms for to skate away from all the hard questions that we asked of the companies that we invest in your
Thinking about building the firm in what seems much more like a enduring long-term way and I'd love to hear you, I guess first just frame the scope of the ambition for the audience in what you're building at a 16z. And I'd love to talk a bit about how you came to these ideas that you're trying to deploy the morning. We're talking, you announced both a very large, new crypto fund, a new general partner. My good friend David Haber, and it just seems like the velocity is incredibly high at Andreessen Horowitz. Oh, I'd love to learn a bit more about the vector. Like what direction are you going?
They're sort of the obvious one which is just tells you neutral in some sense. Technology is a tool in every case and it's up to people how people use it in there are Technologies used for very bad things but like on net Technologies. Good on that technology leads to the world becoming better because we've been discussing today like they're all these fields of human activity in which very clearly, I think we need more technology and it's going to come from this kind of process these kinds of entrepreneurs. These kinds of startups. So we're big Believers that like the world needs more of this and work position to kind of do more of this to help these companies kind of get financed and built in the right way. So honestly,
Part of it is just conviction. We really believe in what we're doing and why it's good. There is a structural I wouldn't say it's a secret plan but I don't talk about it much just because it gets a little bit abstract but it's sort of a structural idea that we have underneath us. Your audience might actually be more interested in an internal audience so I can go through that if you like yeah, bring it on. This is gonna sound really weird but like we thought about it a lot. I call it HP 2.0 Hewlett-Packard 2.0. So if you look at those are talking about earlier, if you look at basically the history of technological development industrial production,
Basically up until the 1970s, the model was basically the industrial conglomerate there were these companies GE was kind of the classic for a long time. GM was an example and then even in the computer industry, for the first 30 or 40 years, computer industry, you had IBM, you had digital equipment, which was another one of these big ones at the time. And then you had HP HP was like the founding company of Silicon Valley literally found in the 1930s. It was put on ice for World War II. They resurrected it. When I came back from the war and they built HP and the point is like between basically call it 1945.
1970, I don't know one or two or three, the way new technology products got invented and developed was primarily not by a start-up. It was primarily by like a new division of HP are a new division of IBM. And so, literally Bill and David HP, others focus on them. They would pick a high performing, a cover engineer product manager, general manager. And they would basically anoint that person and say, you know, you go forth and build the laser printer and then that person would create a new division inside HP, and they would go and do that and it would either worker.
Wouldn't. And if it worked they would kind of see it money and resources and talents and if it didn't work they would want it down and transfer those people to the project and people would work for HP for their entire careers. But they would go from division to division. They would be in subdivisions that we're growing fast. They get some divisions that were winding down, maybe starting to Visions so forth and so on. So, and then from the perspective of HP itself, Bill and Dave, they basically ran the classic organizational structure. So, when the GM used to have that Alfred Sloan record his whole book about which basically is like you have the central office and the
So office basically has a set of functions. It's got this people Talent evaluation function. So centralized HR, you have a common pool of talent. These companies were famous for moving their high potential people. From division to division. I was an intern at IBM. If I'd stayed at IBM. Hopefully, I would have been part of one of these programs, but I was in China. I saw it happen, which is, if you were an up-and-coming executive at IBM in the 40s, 50s 60s 70s. They were hopscotching you from business to business like every two years for the first like 20 years of your career because they were trying to get you to be as well-rounded and
Journalists and skilled in as many areas in the businesses they possibly could because you were a future potential CEO of the company. And so they had this really serious effort devoted to leadership development Talent. They knew the same thing that for engineers then you get a really good Engineers where they would move them around. If you were in a business at HP, that had a particular technical problem. They would transfer in an engineer for another division, then you come to solve that problem. So then you had to allocate talent and it was great if you're going to work at one company for your whole life which was the model down. You wanted your employer to know who you were and I care about you and try to develop you like that. So that was great.
They had Capital allocation, they would decide where the money goes, they would have strategy office. So they would have some sense of the future market trends. They would have like, a sales overlay function. They would have liked large account management out of the central office. So, they'd have relationships with other big companies. There be somebody at the HP central office, who owned overall relationship with General Motors as a customer or JP Morgan as a customer and had overall responsibility for that. So, they knew what all the other big companies were thinking, they had an MBA office in mergers Acquisitions Regulatory Affairs.
They have branding marketing, they have this big marketing campaigns about Innovation and all the great stuff he's doing but then they'd have all these divisions. And then each division, the division would own the product. They would own future roadmap for the products. They would often have their own sales force, their own marketing campaign. They have their own HR internal division, they have their own Finance internal Division and actually would give the divisions quite a bit of autonomy. And in fact, it's actually funny. They would actually put the divisions for the most part, not in Silicon Valley. For the most part. The divisions were often other cities. We say IBM, same thing back. They'd have 20 or 30 other Geographic.
Where they actually have all these old established running and then you'd have these general managers of the divisions who actually had a lot of control. They had a lot of control and autonomy over running the business. They have to report up to Bill and Dave then they were expected to do a good job of the business and hits our financial metrics and so forth. But like they were like many CEOs but running a companies and in fact basically what happened was Venture Capital to merge the 1970s and basically what happened was Venture Capital strip-mine the talent out of these companies especially the entrepreneurial Talent. So basically the founders and CEOs of a lot of the great tech companies in the 70s 80s.
These were either top general managers, our top Engineers out of HP IBM and deck. Venture Capital basically was a siren song. Basically saying, look, do what you're doing today, run a business, but instead of being a mini CEO, be a real seat. You and instead of working for the greater glory of Bella, Dave work for the greater glory of yourself. Instead of having to constantly have your best people be stripped away from you to move to another division. How about you just like, keep all your best people forever and why don't you build your own company, right? And by the way, if you're mr. HP general manager. Starting on company will finance. It will venture financing.
It, you'll control it. You'll be the CEO, but will be a majority investor in your. You could do your thing. And by the way, if you grow up, ultimately, maybe you'll be the next HP. And then within your company, you can have multiple lines of business. And then the implicit underneath that was then at some point other venture capitalist will cover all try to take. All those people to start more new companies and that was the bootstrapping process for Silicon Valley. Like, that's why it exists, and that's why that conglomerate model kind of stopped working, which is basically the Venture Capital, strip-mined, the talents of created, this entrepreneurial ecosystem out of it. And I think the net result of that was good, having a thousand or ten thousand come.
When he's in Silicon Valley is better than having three and we just have like a much broader range of products. And you know, much larger number of jobs today than they would have if everything was still in these police conglomerates. But there were advantages to that structure that just like basically got lost. So then you kind of say okay, what if I'm just a start up today so I've just like a rough start up company and I'm just starting it's just me and my friends are trying to build a product. What is it? That we're lacking and of course, what we're lacking is. All the stuff. The HP central office used to do. We're lacking brand, we're lacking distribution, we're lacking money. We're lacking Talent.
Lacking any stroke of the government whatsoever. We're lacking. Any ability to deal with the Press? We're lacking. All these things, we're lacking somebody, we can call when the shit hits the fan. We're just kind of on our own run, an isolated island by ourselves. Basically, you can kind of tell where this going is. This is this idea of sort of HP 2.0 which is basically, can we construct in the context of a venture capital firm? It is a minority investment in companies. Can we construct the modern equivalent of what would have been at HP central office from like making 60 and provide our companies with that pie?
And of kind of overlay capability with all of that kind of reinforcement, and brand, and help and power that you would have had as a division of HP. But then, of course, it's a different deal. We're not control, hey, she was in control of all these divisions. We're a minority investor, right? So we ride along founder. So it's a different kind of relationship. They don't work for us, but with the huge advantage that we have no need for strategic consistency. We're not an operating company. And so as a consequence, we are completely unbounded in terms of how many different sectors we can invest in. We're completely unbounded in terms of how many different
Please we can invest in something we can find Quality Companies. We know, just give an example. We now have 250 companies active in the portfolio today where we are more than 10% of the. Company's HP IBM at the peak of their power. They didn't have 250 Provisions. I didn't know you were close to 250 divisions. There is a scalability in the Venture model that in theory is much broader we can provide like a much bigger umbrella across all these companies with the trade-off that we don't have majority ownership. We have minority ownership and we don't have control and so yeah it's sort of a Back to the Future thing but completely evolved for the more appropriate model today which is
Is the incredibly aggressive will the power entrepreneur who really wants to run their own thing? The last thing they want is boss, we don't propose to be the boss but we propose to kind of do all the things to help them along the way that otherwise would be missing.
I love the inspiration from HP. Do you take any inspiration from what I'll call traditional East Coast Financial firm, sort of traditional Wall Street Banks or private Equity firms or seems like a very again different set or way of doing things. Do you intend to borrow Concepts from east coast and blend them into the West Coast style of investing?
Yeah, so the East Coast examples are they're all from more than a hundred years ago. So the answer is not for the last hundred years. Abstractly, right? What has been the role of the east coast and kind of American Business culture or Society for the last hundred hundred fifty years, right? It's been basically consolidation consolidation professionalisation scale. What has been the role of the West? The West is the frontier, this kind of how the country got built out, it's not an accident because ended up in these roles like the West Was Always the frontier up until ultimately the physical Frontier was closed. Now, we created these new virtual
Frontiers the west, or the Western mentality. And by the way, there are plenty of people in East Coast with the Western mentality or with the frontier mentality. So there's no law that says people have to give away on either side of the Mississippi, but just generally speaking you could say there's a West Coast mentality that says let's invent something new by the way. It's not just Silicon Valley. It's also like La is another great example. It's like a laser. All the movies are made. Make a new movie, that's the only thing. Let's own the movie studios in New York thing. It's the same thing in Tech, right? Let's start a new tech company. That's a West Coast thing. That's the frontier thing. Let's take that company public and then like a tear
Get the shit out of
it for the next 30 Years
and demand that give all the cash back and stop doing new things. That's an East Coast thing. Consolidation of control. They both have their roles. The American engine has been fantastic on both fronts for a very long time. We're busted. It's actually fairly amazing. You think about it? We're best at both. We're best at the new Ventures and we're also best at the scale multinationals are Fortune. 500 multinationals are like just outstandingly capable of doing what they do in terms of like servicing customers all over the world, they're primarily run out of New York. They for the most part have stopped doing new things.
Things. But they're great. They're at like, enormous scale. And they've had a huge impact on the world and they generate huge amounts of cash. And then they get that cash back to shareholders, who don't know what to do with it. On the West Coast, we've been really good at the start of part. Of course, what the West Coast has not been good. At, is the scaling consolidation control Park. Historically, my turn for this. I call this little boy big boy problem, which is where the little boy, we start these companies. We get to a certain point and then we had them off. They get adopted, they get adopted by new parents, those bears live in fancy places in New York. In those parents have very different expectations than parents have very different garments and
Those parents are going to love our companies as much as we do, but probably not. Maybe they're going to want them to continue to do new things and invest in new R&D programs and probably not one of my ambitions for the Valley, West Coast respective, Silicon Valley, kind of mentality. One of my ambitions is that we grow up over time and basically, you know that, we basically scale our ability to have our company scale. And this is one of the reasons like we've gone. So heavily into broken questioning ourselves at the farm, is basically to be able to be with our company's four years later beyond the classic Venture Capital stages. We don't need to do the handoff. There's an opportunity to kind of
Across that. But we're gonna give it a
shot. Do you think that obviously the traditional Wall Street firms? Especially the younger one. So maybe the West Coast mentality ones or more flexible have gone from public investing down into private, very aggressively and very quickly and often, they're more full stack style of investors meaning, they'll do debt, they'll do Equity, they'll do all sorts of stuff in between. Do you think that the biggest Silicon Valley firms will go in the opposite direction? Meaning, you know, take a radical example. I can't recent has a portfolio, that's all public.
Equities or something like that. Do you think that you'll meet the East Coast infringing on private investing with you investing in public
companies? No. Yeah, for sure. And by the way, the best of hedge funds that do private growth, the best of them are also working their way down the adventure. They're coming earlier sack, we're working our way up right now. We're all private but like they wouldn't be crazy. If at some point we decided to continue to expand up the capital stack, the big thing there, I guess that I would say it's like we don't do it. We compete with some of these East Coast firms from time to time on a deal that's not most of how we experience them though.
Most of how we experience them as partners on our companies. So generally speaking, they're investing in companies that either. We've backed or that other firms like ours, in fact so we end up working with them a lot more than we end up getting with them. I would actually say like there's actually been a lot more Cooperative kind of synergy as opposed to them being some Pearce Toretto. I think it's worked out well for them. It's worked out. Well for us. The big thing that happened is I would say they are the aberration to the East Coast mentality. The big thing that happened was the East Coast mentality kick in really hard after and run in particular and run and run and world come, this is the thing. It just amazes me about how this history played out which is
Have the.com. Crash of 2000. Yeah, there were startups didn't work, but there was also this like, passage most of the money was Telecom. It was called at the time. What. TMT Tech media Telecom. Most of the money that was lost was Telecom Telecom was like another zero on top of pack and then Worldcom was like, the big Scandal, which up there were a bunch of others feel like road comes the big Scandal and then Enron, you know, was this kind of Bolt from the blue and they were in theory in the Telecom business. With this kind of bullshit, penetrating thing where it turns out the phone's the trading floor weren't actually hooked up been around. Worldcom kind of became
This giant Scandal, and then there was this, just like a normal purse, freaked out, by the way, justifiably so by like investors and then politicians and that Wall Street and then regulators and they were just like, holy shit. We can't let Enron Worldcom happen again and that led to these regulatory reforms like sarbanes-oxley ultimately, in the later years you know finished Services Dodd-Frank after the financial crisis and then those regulatory reforms it's like sarbanes-oxley was supposed to prevent another end run around. Calm that Frank was supposed to like stop that
Getting to be too big to fail. What ended up happening? Is those regulations ended up being massive subsidies to the big companies then ended up being masculine punitive to startups for AT&T, to deal. With sarbanes-oxley, is like easy because AT&T has 10,000 players accounts 10,000 people in like Regulatory Affairs and like they've got the whole system like figured out already. It says, just another process for them to work through for a start-up to deal with sarbanes-oxley as totally different things. It's just a much much harder fundamental Gators building a company. Yeah it's not the only one. There's a bunch of other things like this to happen. The East Coast.
Mentality to prevent these Big Blocks basically implemented a set of reforms that have the effect of punishing startups. The result of that was the startups basically said, okay fine we just won't go public. We don't need to do sarbanes-oxley. Also other stuff we don't Republic is early and so like we'll just a private for Walker because if we're private we only have accredited investors and all these regulations don't fly and it's going to be all fine. And so that led to this phenomenon were all these private companies. Just started staying private, a lot longer, but we needed the financing. Obviously that they would have gotten once they had gone public or Don secondary public market. And so then that by the
Creation of this category growth equity. And then of course, the result of all this was an exacerbation of income equality because it was a removal of high growth stocks, young growth stocks in the stock market where anybody's retirement money can be invested in them and is removal of all of those new companies for public market of the trench and transfer. Only two people like us who run private money, right? So, the results of the reform was their withdrawal, and Economic Opportunity from the population at large, and the concentration of that Economic Opportunity in the hands of private Equity managers. And so it's one of these like weird the blowback effect
Course outcomes, right? It's a regulatory capture playing out in another model. Anyway, my point is the result of that was the East Coast mentality one. They call the New York DC mentality one in the sense of they just basically put a Chokehold and IPOs for 20 years. They got what they wanted. Fundamentally, they got company started by public companies, kept developing firms, like ours, scaled up to do more private Capital to keep them going and then to your point, some East Coast investment firms. Basically, I would say a small number of them have adapted but it's like a dozen or so of those firms and adapted to come into private Tech investing, most East Coast firm,
Most money in the stock market is retirement money. Most of that money, is managed by public managers that don't do privates and can't do privates. Most of that money is in, mutual funds are index funds, they can't do privates, they're not allowed or their index funds. They can't make any conscious choices whatsoever as if that's a good idea. And so most of the money basically, it's really dramatic. Most of the money that people need, whatever, seven, eight, nine, ten percent gains over time on to be able to finance their retirements. Most of that money doesn't have access to the most dynamic parts of the economy.
Don't understand how that makes sense. If somebody were looking at that on a sheet of paper today, I don't think you would want that outcome, but it is the outcome that it is. And the implication from that is that this private growth investing phenomenon, probably has real likes
to closing questions for you. We started with the idea, the observation that you had famously that software is eating the world. Last year, you issued one that was maybe seemed lesson, observation more of an imperative, which is it's time to build. I'd love you to just sum up that message. I think it's a great place to end. Thought it was a great article that came at a very interesting time. What is this imperative? Why
The time to
build. Yeah, there was like the micro thing at the time, which was why I wrote it the week that York City put out the call for people nearby residents to take their rain ponchos to local hospitals because they were running out of surgical gowns. This is on top of like the ventilator crisis. And this is on top of like oh my God, are we going to be able to make drugs? And so it's just like how has the most advanced industrial civilization history. Work herself in the position where we can't like make surgical guns. I kind of couldn't take it that week. The big broad saying is it's a civilizational question, it's actually the same it's related to
About with the frontier, we had a culture, we had a culture in the United States from conception through to like 1970. The culture was basically production, the culture was production, it was achieving things, it was building things, it was construction development of nature for the purpose of basically making the wife of man better. It was Unapologetic. And it was just like, we're going to do these things. We're gonna build houses and we're gonna like, have those houses are going to have like even then they're going to have this new thing called air conditioning, and it's going to be great because it's going to make everybody's lives better. And then something basically changed in the safe.
The 70s where we culturally decided to kind of really strongly tilt in a different direction. And I guess I would say that, I think there are people with very good intense, strong arguments based on their own, kind of moral views, that it was time to kind of make that change. And you know, that change is kind of represented by environmentalism is kind of the big one, but then there's other theories of basically just it's everything from animal rights to urban sprawl, always arguments basic as building things that emerged, maybe it should be somewhere in the middle. Maybe there should be, I don't know, like a smart growth agenda or something like that. I just think we seem to have ended up to
too much in the ditch on the stuff. We seem to vent it too much in a state where basically we have a system, some people call it be talk or see in which to get basically approval to build anything of significance. You have to get so many people to say, yes, that practically speaking. It's becoming impossible right back. The housing is like, what would it take to build? The most obvious thing in the world. It's build another, you know, whatever million houses within, you know, a short commute distance in San Francisco, but it's just impossible inconceivable the way the political system is set up. Its kind of is everything. It's just like, there's just no way. I mean much less, a new freeway, much less, a new bridge, much less anything.
Any size and significance that was involved in building a new hospital at Stanford, as I was involved in the original project planning back in the house on the board at the time of the early 2000s and then the we hope Manson and the hospital was finally opened a couple years ago. It's like an age of your project. The process you have to go through any amount of money involved is just, I mean mind-boggling. So crazily, extreme and tilt in the direction of not doing these things. They, I'm sounding like a cough, a novel, like it's just absurd where you have to go through. In the number of authorities that have veto rights in the number. Negotiations, you have to have in the things that get extracted, I think it was Health Care is just crazy.
The point of the essay was it's time to rebalance this, like it's time to get back to the idea of what counts is not the process. What counts is not the debate, the discussion that this the that all the concerns at the end of the day. When councils did something actually happen, it's something get built, did things get better? As a result of that. I want to argue basically. It's like you could have a left-wing view on this in a right review on this. The left review on this is to the extent. The electric argument, generally is government should have more power, then the government should be scored more on its ability to build things. The right way view on this is that the market should build things, but in that case, then if you're on the right,
You really need to live up to being pro capitalism ethic, corporatism anti-corruption, anti-regulatory capture anti-monopoly. Anti over cowboy type crony capitalism. The institutional right has become let's say in pure on those topics over the last 50 years, right? It's too entangled with big business. So I think both sides of the political Spectrum could actually adapt to this. Interestingly, I got very positive feedback on this message, both from aoc's Chief of Staff on the left, who thought it was great. And Kevin McCarthy, we can Speaker of the House who thought it was. Great. I succeeded in crossing the
And and appealing to both parties and then actually Boris Johnson. Actually, I'm going to Cummings, actually picked it up there for about a year. The big message in the UK was Boris Johnson's. Podium was built, built built. So we'll see where it goes. But at least I was trying to fill up the conversation at least a little bit better action.
Well, I think it's a wonderful closing imperative. The last question I asked everybody is what is the kindest thing that anyone's ever done for you?
It's hard to say any answer for me other than, you know, Jim Clark. Originally picking me up off the ground in Silicon Valley and starting a company with me. Let me generalize it out because I get super nervous and rattled. Imagine
But emotional things. So as an engineer, the most amazing thing about the Silicon Valley, ethos that people in the valley, all get and understand and people outside the valley really don't get. And then I hear it all the time from people who come to the valley for people who come from LA or New York or DC and they come to the valley and they Join. One of these companies, they become part of this ecosystem. You always hear the same thing, like three years later which is, I never realized what it would be. Like to be an environment in which people genuinely want to help each other. They genuinely want to help each other advance in their careers in a way where it's not.
Not out of because they want something for you in the moment not because they have some hidden agenda but every entrepreneur has experienced this, you know, I'm starting a company is like people come out of the woodwork and say, hey can I help? Can I send you my friends? You know, do this guy introduce you to Fester you having a security issue can out, you know, come in this weekend to help you figure it out. There's this incredible, Pay It Forward ethic of the whole thing. My Hollywood friends, always, they know about this, they're always laughing because it's like, Hollywood is like famously, the exact opposite. If there are two people in Hollywood in their friends, in each of them is trying to make a movie, the famous thing is one of them. Halfway, nice, the other would rather lose the friendship and see their friend make a living.
Anyway, so I've been a beneficiary of this for a long time. I think part of it is just, it's in the water. It's the Pay It Forward thing which is other people have been nice and supportive to you and so you feel an obligation to contribute but also a big part of it. And this goes back to this Frontier concept, a big part is the sense of unbounded future possibility. So I can Hollywood the reason why they're so mad at each other all the time is because there's only so much financing for so many movies. There's various large number of want to make movies only a small. Number of moves that are going to get made. And so basically, it's like a zero, some kind of mentality in the valley. Like There's no practical
I'll limit on the number of new ideas for attack, and There's no practical limit on the number of new startups. And by the way, there's no practical limit on the number of people who can participate, There's no practical limit. On the number of people who can learn to write code, learn to do all the other things involved in building these companies. And so there's this sense and a track record that validates. This, there's this sense of There's No Limit. If I have a friend and his startups exceeds, mine can also succeed. And in fact, we might succeed together. In fact, we might really help each other along the way. It's a positive, some view of the world. And then you just look at the history of the industry. Like, that's how it's worked for a place that's so kind of
Capitalist and aggressive. And sharp edge is just an amazingly helpful supportive. Happy generous environments. I've just say, I've been the beneficiary of that for a very long time and I try to assess, I can't do that.
Mark, I wish we could do this for four hours. There's a million other things. I wish I could ask you, this has been so much fun. You've been really generous with your time. Thank you so
much. Thank you, Patrick. That's been a great to be on this episode was brought to you by
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Not like a handful of calls, there are like a hundred of them. And from my see when I'm just starting to look at that name, I'm like geez, which one would be the most value, add for me to start on and I don't have a clear signal in that sense. And
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sifts through and curates maybe a few packets nuggets or direct me to. This is the most read call or this is the most highlighted column the name. That's pretty interesting because anything that saves my time in that sense,
So obviously I want to cast a pretty wide net but especially when I'm just getting started on something I want to have an angle that I could hone in on
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