A (reconstituted) interview with Marc Andreessen
Thanks to a slightly unfortunate messaging glitch (which of you entrepreneurs would like his labor of love to be compared to "fruit fly experiments" in the Wall Street Journal), pmarca a.k.a Marc Andreessen has been drawn into in-depth conversation on HackerNews.
What great opportunity for entrepreneurs to get insights from Marc Andreessen. I scavenged through the HN thread to build this lazy weekend recomposition post (sue me) on the A16Z investment strategy and some insights on Consumer and Entreprise startups ... as well as turn Marc into a startup agony aunt.
There is no Try.
A16Z Strand one : Intercept the best consumer companies once they start scaling
- Consumer startups more and more have this very interesting "lightning in a bottle" effect where sometimes they take off like crazy and sometimes they just don't. I give full credit to the teams that figure out how to get the flywheel spun up, but it is also important to realize just how many highly capable founders are hard at work trying to get traction who don't. There are a lot of really excellent founders pursuing consumer ideas that just never work -- that's why companies like Yahoo and Google and others can do so many acquihires. So, if we have the theoretical ability to invest in a given category -- remembering that we can only make one primary venture investment per category -- in either the A or B round, we find it often makes sense to let other firms fund the A rounds before anything is proven and wait to see the early signs of lightning and then step in hard at the B. The end markets are so large for the winners that the investment returns in the B can still be outstanding, and we can still offer a lot of useful help to the companies at the B stage such as talent sourcing.
A16Z Strand two : Go hard after ambitious Enterprise plays early
- In contrast, enterprise startups are much more (take your pick) tractable, execution centric, brute force, predictable (as startups go). If you back a killer founder with a great engineering team, with a great idea, into a big market, the odds are high that magic will happen -- a very interesting product will get built, early customers will adopt, and value will be created. In other words, the link between founder/team competence and success is more direct. One thing that helps a lot is that whether the product will be adopted by customers or not is far less of a mystery -- you can simply go talk to the likely customers ahead of time and they will give you a very good indication. That plays well to our market development program where 1,200 big company management teams are coming through our office every year -- we ask them what they think about new ideas and they tell us. So here, backing the A round when possible makes more sense.
Dear Marc, why are consumer startups so unpredictable ?
- My working theory is that consumer ideas are both art and engineering. The art component either takes in the mind of the consumer or it doesn't. Like movies or music, sort of. Lots of great engineering teams can't get the art to work with high probability, and even the great consumer internet artists swing and miss as often as they hit (eg odeo vs twitter). And if the art doesn't take, the engineering won't save you.
- Whereas the enterprise ideas are mostly engineering - or rather the art lies in really understanding the customer and the domain, which is relatively straightforward for the great enterprise entrepreneurs, because they are already so deep in it and you can easily go talk to the customers one at a time and learn what you need to know to predict success or failure with pretty high confidence. Not easier but different.
- These are all gross over generalizations of course. I think of this as a framework for thinking - one of many - not a literal description of the truth in all cases. One lens.
So OK Marc, let's pivot to enterprise. How do I nail scale there ?
- Enterprises have a continuous ongoing need for new technology. Some they build in-house but like anyone else they are mostly busy running their current business and so they tend to buy important new technology from technology companies. I bring this up because it was in doubt a while ago -- and enterprises really slowed down buying new technology between ~2000 and ~2008 -- but I think it's a constant truth.
- Just like consumers, in enterprises there are early adopters, mainstream adopters, and laggards. The good news is that there are almost always early adopters for any interesting new idea -- we always tell enterprise startups to look for the first 5 customers -- if you can make them happy, then you can reference sell to the next 10, then the next 50, then the next 100, then the next 500, and then you are huge.
- Consumerization of the enterprise is real. The bar on usability and ease of adoption is being set by the consumer product industry; employees are increasingly bringing their own devices and services with them to work; there are more and more enterprise products that can be bought and adopted bottoms-up.
- However, it is hard to get a lot of MONEY from enterprises through only bottoms-up adoption. To get the money, at some point you have to strap on your big boy shoes and go in top-down and explain to senior executives why your technology is going to give them real competitive advantage or save them a lot of money. (This is the "enterprises don't have credit cards" principle -- you have to go get the money.)
- There are real constraints around what technology enterprises can adopt and how they can adopt it. A short and incomplete list: internal bureaucracy, sunk costs, existing vendor relationships, regulations, data protection laws (e.g. in Europe), security requirements, need for integration with existing systems. At first these seem very frustrating to deal with. Later you realize that these can become a source of competitive advantage for you once you are in. Figuring out how to navigate that is really key and something the best enterprise entrepreneurs are very good at.
Dear Marc, I am depressed. There are no more white spaces, so this is all well and good, but how does my Enterprise startup generate the large exits that A16Z needs ?
- [Firstly] there are a bunch of plausible acquirers at scale -- of the new companies Salesforce and Workday are certainly candidates, and a bunch of the older companies as well -- it will be interesting to see if a new CEO of Microsoft embarks on a major acquisition binge of enterprise cloud companies (perhaps in conjunction with spinning off or killing some of their less-successful consumer efforts).
- However, it's also possible this cycle plays out differently, or at least at much larger scale and over much longer. The three big arguments in favor of this are:
- 1. New enterprise cloud/SAAS vendors may be able to sell into much bigger markets than traditional enterprise software -- since there are many more companies that can use online services than could ever install and use enterprise software on premise. In particular, going downmarket is far easier with the new model. Plus, globalization and the developing world could dramatically increase market size. So new entrants may be able to get much larger as independent companies than the last generation.
- 2. New enterprise/SAAS vendors may exist in many more categories than traditional enterprise software. New development/adoption/business models make it reasonable to think about a lot more horizontal and vertical applications and services than old enterprise software was capable of addressing. So maybe new vendors get much larger than anticipated since they can cover a lot more functions and verticals, or alternately maybe there are many more new vendors than we can conceive of now. We are already seeing a trend towards enterprise use of a lot more cloud apps per customer at this point in the cycle than a lot of people expected.
- 3. As a consequence of the prior two, the independent market caps of the new cloud/SAAS vendors may end up being a lot higher than you might anticipate from history. This could really remove the incentive to sell hot new cloud/SAAS vendors as quickly.
- I think these are live topics right now, and the answers will determine a lot of what happens in the enterprise startup ecosystem for years to come.
Dear Marc: I read Fred's post on Post Seed Chaos and I too am depressed. What is it going to take to raise my Series A ?
- I think it's mostly situational depending on the kind of business.
- For the classic, pure, viral, social and/or user-generated content businesses -- that will probably be monetized with advertising -- the generic headline metrics like daily/weekly/monthly active users and engagement/retention rate are important. There are just so many new products that attempt to be the next Facebook / Twitter / Youtube / Pinterest that showing that you are already punching through the noise is pretty important.
- For two-sided marketplaces (the next eBay/Etsy/AirBNB/Uber) it's most important to have a real theory about how you're going to get both sides of the flywheel spun up. The traction doesn't need to be gigantic but there needs to be a real plan. We still see too much handwaving in this category -- it is REALLY hard to spin these up from a standard start and most simply languish and die.
- For ecommerce and ecommerce-like businesses (the next Fab /OneKingsLane /Zulily), the most important thing is showing a model, with initial proof, of how the cost to acquire customers is less than the lifetime value of those customers. For example, in recent years it has become harder to build these businesses based on Google keyword advertising -- search volume isn't growing very fast, and lots of people are trying to acquire customers in most categories, and so keyword ad rates often get bid up to just past the point of unprofitability (the delta is the amount of excess funding going into businesses in these categories). So creativity on customer acquisition -- and showing that in economic terms -- is key.
- I think that a credible team with any of this in reasonable shape from a seed round is not going to have trouble raising an A in this environment. But for those that have already raised an A, it has become really critical to have these factors nailed (whichever are appropriate) to be able to raise a B.
Dear Marc, I am Fred's dad. This post is full of jargon I don't get. What does this all mean ?
- Time flies like an arrow. Fruit flies like a banana.
- [OK, that last quote is not from him]
And a final note on Lightning and Flies.
Note the much smarter messaging of Marc to describe "extremely unpredictable consumer startups": "Lightning in a bottle" ... versus the language used by his partner Scott: "fruit fly experiments". Hard to bottle lighting which may explain why they're rather fund later on, but sure sounds a heck of a lot better to an entrepreneur.