a16z Podcast: Ben and Marc Explain (Practically) Everything – Part 2

“Probably one of the most challenging things to learn while you are out there is how macroeconomics impact markets, and how private funding can change, very, very rapidly. At Opsware and LoudCloud it was incredibly difficult to go from a funding environment where basically there were the highest multiples in the history of anything, to there was no money available – period.” — Ben Horowitz

“To be against disruption is to be pro the status quo. And to be pro the status quo means however the world is today that is as good as it’s ever going to get. The disruption argument is that things can become much better. Products can be much better, businesses can be much better, opportunities for people can be much better.” — Marc Andreessen

The five-year anniversary segment with a16z founders Ben Horowitz and Marc Andreessen picks up with a discussion of Clayton Christensen’s theories around disruption. Why Christensen’s thinking is very much on the mark today, and how his theories help guide the firm in making decisions about what NOT to invest in. Ben offers one of the things he wished he had known as a young CEO, and Marc describes a trait that every great entrepreneur possesses. Part two of two.

 

TRANSCRIPT

Michael: Hello. I’m Michael Copeland, and this is the a16z Podcast. You’re about to hear part two of the Ben and Marc Explain Practically Everything Podcast. If you missed part one, find it on A16Z.com. Part two picks up with a discussion of disruption theory.

Michael: Disruption theory has been in the news of late, as it relates to Clayton Christensen, the master of this. I just want to ask you guys, not so much about the criticism of him, but, from where you sit, that theory and his thinking kind of galvanized itself into a book in 1997. Do you build companies differently today? Do those theories still hold water, or what’s changed?

Ben: Yeah. So I think his book was actually quite brilliant. It’s funny that it’s coming under criticism now, after he’s been proven completely right in the general idea that he had. It actually reminds me of the creationist attacks on evolution, where . . . Yes, from a . . . It’s like intellectualism at its worst, right? It’s like, “Oh, here’s something wrong with Darwin’s original theory.”

Michael: Right.

Ben: It’s like, “Okay.” Now, we based all of biology on it. We made tremendous progress. How about that? This is kind of like, “I don’t believe in it. I don’t believe in electricity.” This is kind of the business kind of version of that, where he developed the theory. All of us in high tech . . . It was an amazing business book at the time because it explained a phenomenon that now is kind of obvious, but in 1997 it was tricky, which is really — why did there need to be new companies?

Michael: Right.

Ben: What’s happened, we just got through talking about, there’s an explosion of new companies, and these companies aren’t trivial. They’re becoming very, very important companies, like Google and Facebook and so forth, so, he’s kind of been proven right. Not only has he been proven right on kind of the large level, but the mechanics that prevent the kind of incumbents from innovating at the same rate as the new company are still completely in effect. We use his models all the time in our thinking and our analysis. No doubt, there are probably some minor problems with examples he’s used or the way he worded it or what have you, but basically he was right.

Marc: Yeah, I would also say two things. I’d say one is we actually use his theory basically to tell us what not to invest in, as well as what to invest in.

Michael: How so?

Marc: For example, we have basically this theory that basically is very, very dangerous. One of the great things about our industry, about venture capital, is you get to do these things that basically disrupt sort of the big established companies. Conversely, a very dangerous thing to do is to attack companies that are, our internal term is the new incumbents. It’s one thing to go attack a tech company that’s been in business for 50 years, that’s on its sixth CEO or something like that. It’s another thing to go attack Google, being run by Larry Page, because Larry Page is fully aware of the theory of disruption and in full command of his company. If he sees a disruptive threat coming, he is quite capable of doing the things to head it off that a fourth-generation professional CEO might not be able to do.

Anyway, so that was one thing I wanted to say. The other thing I want to say is disruption, I agree with
Ben. It’s funny that this is a topic now, but since it is, it’s worth talking about, which is the term “disruption,” by its very nature, the term itself has negative connotations, right? Disruption seems like it’s one step away from destruction. It’s getting this kind of popular conception that there’s something bad about it. The actual way that Christensen used the term was actually in a very sort of applied way, in a very specific circumstance in business and actually in a very positive way, which is, basically, he described it as a way that progress happens.

Progress doesn’t happen by old companies deciding to do new things. Progress happens because new companies decide to do new things, and then disruption is the process by which the new things are able to take over for the old things. If you decide you don’t like disruption, what you’re basically saying is you don’t like new things. Basically, to be against disruption is to basically be pro the status quo and pro the status quo means however the world is today, that’s it. That’s all we’re going to have. The way things work today, this is as good as it’s ever going to get. The disruption argument is, “No, no, no, no, no. Things can become much better. Products can become much better. Businesses can become much better. Opportunities for people can become much better.” It’s a negatively connoted term that has very positive implications. I think that that’s really, at least in the last couple years, that’s been lost in a lot of the commentary.

Michael: You mentioned Google and one of the things that we’ve seen through the technology industry’s history is that it’s very, very hard to disrupt yourself and kind of make a transition from one thing to another. IBM may be the only company that’s done it. Google, they’re trying everything. Facebook is trying everything. Do these companies somehow change the rules, or is it the same rules applying, and disruption theory catches up with them in 50 years maybe?

Ben: I think you kind of have to break that back apart and go back to what Marc said. I think that people often think of, “Big companies can’t innovate. Little companies can,” but the real truth is new companies can innovate, and companies that are so old that the original inventors are gone have a lot of trouble doing it. If you go back to HP or IBM or any of these companies, when the founder, when Thomas Watson was running the company, when Dave Packard was running the company, they didn’t have any trouble doing new things.

Marc: Right.

Ben: They did it phenomenally. HP, in particular, did a crazy number of new things, just amazing and, in retrospect, really phenomenal. If Mark Zuckerberg is running the company or Larry Page is running the company, that’s not an old company. That’s a new company. As innovators, we believe, and this gets back to why we don’t attack them, because they’ll attack right back and very effectively. They’re going to be able to do new things. Sometimes, that will mean bring in new talent through acquisition or new technologies through acquisition, but they’re going to be able to think about the problem through a lens that is not the business they’re in.

This is the amazing thing that Clayton Christensen laid out, was that if you’re an old company run by professional managers, you’re really good at studying and optimizing the business you’re in, so, if there’s a new business that comes along that is inconsistent with that, you get stuck, but if you’re Mark Zuckerberg, who created a business from nothing, then you have a very different view of the world. It’s not like, “Okay. How do I optimize the business that I’m in?” It’s like, “Well, how do I get another business that’s like Facebook?” That’s more the way you think about it.

Marc: The other thing is the fact that Christensen was able to articulate this in a theory that’s so clear and put it in the book is . . . I think the best professional CEOs in the tech industry today now understand this in a way that maybe their predecessors 10 or 20 years ago didn’t understand it.

Michael: Right.

Marc: I just got to give you two examples of people I work with, John Donahoe at eBay, like when mobile came along. Sort of classical professional CEOs, when mobile comes along, would look at it and say, “Well, I’ve got this great business on the web. If I move to mobile, it may or may not work as well. Maybe I don’t want to try to make the move. Maybe I want to stay on the web and reinforce the web and not take the risk of ‘disrupting’ myself by making the jump to mobile,” but since John understands disruption theory, and it’s been articulated and explained in a way that makes sense, he was able to do a phenomenally successful job. He went full-throttle into mobile, and they made the jump. They’ve done very well.

Meg Whitman’s been doing the same thing with this . . . Just one example is this Project Moonshot, which is these cartridge-based servers.

Michael: At HP, right?

Marc: At HP, that are direct attacks on the existing Blade Server business. The Blade Server business at HP is a very, very big and profitable business and HP is basically self-disrupting with this new kind of cartridge-based server. Again, when you have an HP board meeting and you have the discussion, you’re like, “Okay. Why are we taking the risk of damaging this big, existing, profitable business by doing this new thing?’ The answer is because it’s the right thing to do, according to disruption theory.

Michael: Right.

Marc: It is. There is a logical framework. Again, think about what’s happening, which is something new is happening. Progress is happening. This is now the reason and the motivation and the explanation and the justification to be able to make progress. So it’s an incredibly powerful, positive thing.

Michael: Let’s get to entrepreneurs and entrepreneurship. You guys founded the firm, in part, I’ve been told, because of what you wished you’d been told or helped in certain ways. What’s one thing both of you wish you knew or someone had told you, as entrepreneurs?

Ben: Well, that presumes we would’ve listened. There’s just so much that we did not know, going through it the first time. One of the great things about the entrepreneurial experience is it’s just an amazing learning curve about everything, from markets to organizational structures to compensation to everything. Probably one of the most challenging things to learn while you’re out there is kind of how macro-economics impact markets and particularly how private funding can change very, very rapidly. This wasn’t as harsh a lesson at Netscape, but at OpsWare and LoudCloud, it was incredibly difficult for us to go from a funding environment in which we basically had the highest multiples in the history of anything, to there was no money available, period.

It was the most traumatic fall imaginable, from the highest of highs to the lowest of lows. To have the Nasdaq fall over 80%, and that’s Nasdaq. That’s not tech. Tech fell 95%. It’s just not something you could even imagine or get your head around. I wish we would’ve known that. I don’t know if we would’ve believed anybody if they had told us that, but that would’ve probably made it a little less painful if we had any idea how bad it could be.

Michael: It would’ve made a worse book, I’ll tell you that, that you wrote, but still.

Ben: Yeah. Yeah.

Michael: On the other side of the table, what do you want more of or less of from entrepreneurs?

Ben: It’s very different across different businesses, but the one thing that would probably be nice if there was less of, that’s pretty consistent, is it’d be nice if it wasn’t so important to entrepreneurs what their peers’ valuations were.

Marc: Yep.

Ben: That is probably the most meaningless thing to focus your mind on, as an entrepreneur, imaginable. It’s just like irrelevant.

Michael: But wait, you don’t have anything else to base your value on. Do you?

Marc: No, no, no. You go ahead.

Ben: Yeah. Your company is your company. Their company is their company. You’re looking at the price they got, not any of the business metrics that they have or how the company is going, so you’re not actually basing your valuation on anything in that sense. There’s better data to be gotten, for sure. We have better data. We can talk to them about all the kind of valuations based on actual revenue and so forth, as opposed to the person they went to school with or the person they worked at their last company with.

Michael: Right.

Ben: People get very wrapped around the axle on that because it’s kind of the thing that Peter Thiel talks about, where competition is actually really destructive. That’s the worst kind of competition because it’s competition that’s irrelevant to anything in life, other than you can go tell your friend what valuation you got. I think that it causes bad errors in judgment and delays in decisions that need to be made quickly and things like that. It’s one of those things where humanity gets the better of you and less of that would be good.

Michael: Marc, anything you would offer on that?

Marc: Well, the thing that the great entrepreneurs all have in common, we talk about this a lot, but you just see it every day, is the great entrepreneurs all have amazing courage. I would say we’re blessed, in that a lot of the entrepreneurs we work with, and we select for it. We try very hard to select for it, but the entrepreneurs that we work with that are amazing, one of the things they all have in common is they’re incredibly courageous, by which I mean they don’t give up.

They don’t quit, they don’t flinch, they don’t get demoralized. Well, actually they may get demoralized or depressed, but they show up to work the next day, and they work their way out of whatever problem they’re in. They just keep pounding and pounding and pounding and pounding. I think there’s a little bit too much in the Valley right now of the pivot and the lean startup and everything is experiment and minimum viable product and failure is good and kind of all these excuses to be able to give up when things aren’t going well.

I think that the great entrepreneurs, through history, have always been the opposite kind of personality to all that. They’ve always been, “I’m going to make this thing work, hell or high water. No matter what, I am going to knock my way head-first through any barrier that I run into. I don’t care what people say about me. I don’t care what kinds of problems I have. I’m going to figure this out, and I’m not going to give up.” I would just say we love working with people who have that personality type.

Michael: Right.

Marc: You can never have enough of them.

Michael: Elon Musk comes to mind. Cars and space?

Marc: Yeah. Yeah. So to start, think about this. To start a new electric car company and, by the way, think about the last car company started in the United States. They literally made a movie about the catastrophe that resulted, which is this movie “Tucker.” So if you want a story of a horrible business…

Ben: Which went better than Delorean.

Marc: Yes. Well, actually yeah. Well, he had the cocaine-smuggling business on the side, which helped to fray the expenses. Car companies, like all the car companies in the US that are successful, are from the 1910s, 1920s.

To start a new car company in the electric car category, where all the electric cars had failed, simultaneously to start the first new private rocketry company in the United States in probably 40 years, to go straight up against the big boys, to do those at the same time and then to go through the 2008 crash. He has actually recently opened up on this. He almost lost both companies in 2008. They almost both vaporized, and then to gut through both of those and have both come out the other side, just gigantic screaming successes, it’s a spectacular performance. A huge part of it is he didn’t give up.

Michael: Ben, let’s touch on your book a little bit, “The Hard Thing About Hard Things.” One thing, it got great reception, but you’re like, “Well, yeah, that sounds good for you, Ben, but that was your story.” How can I embrace that and make it my story? Was there anything in the response that you wished people had pushed you harder on?

Ben: Well, the things that people pushed me on actually annoyed me, so it’s hard to say that I wish about that. I think that, to your point though, it was my story. The reason for that, there was a really specific reason for that, which is building these companies tends to be very dynamic and very situational and so a very frustrating thing about management advice in general, and particularly both in books and then things that you often get from board members or kind of pattern-matchers, as it were, is that they’re giving you advice, and it’s based on something. What it’s based on may or may not be relevant to you. If you don’t know what it is, it’s very difficult to interpret it. I always found that management books would give guidance, and you’d be like, “Well, okay. Is that what I should be doing?” But I have no idea where it came from, so, it’s hard to say.

A lot of putting my story in was just to say, “Look. This is why I’m telling you this. If your situation is completely different than this, then that might be the part of the book that you ignore, or at least maybe you can map it onto what you’re doing.” I think that without knowing why somebody is telling you something, it’s pretty difficult to get value out of it.

Marc: On the topic of the entrepreneurial journey, we have to go see a pitch.

Michael: All right. That’s what you guys get paid to do. Ben and Marc, thanks so much. We will do this, well, we won’t do it in five years. We’ll do it much sooner than that. Thank you very much.

Ben: Sure. Okay. Great.

Marc: Thanks, Michael.

Ben: Thanks, Michael.

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