Jan 2, 2019, 12:25 AM ETInterview, Fireside Chat

a16z Podcast | What Makes the Valley Work

Motivation for Investing: The partner transitioned from founding three companies to venture capital after accumulating enough "bad judgment" and mistakes to develop strong judgment, aiming to help future founders.
Operator-Only Model: The firm consists entirely of former founders, CEOs, or operators; there are no former professional venture capitalists, and all general partners are trained from scratch.
Cultural Shift: Moving from the accountability of being a builder to the advisory role of a VC is described as "disorienting" but "gratifying," allowing the team to work on 10–20 projects simultaneously rather than just one.
Veterans Program: The firm supports a veterans program in Silicon Valley facilitated by Entry St. Horowitz to bring together veterans in the region.

Phase 1 (1980s–1990s): Companies were built by "mad scientist" founders who were later replaced by "world-class professional CEOs" (often with sales/finance backgrounds) to achieve commercial success.
Failure of Professional CEOs: This model frequently led to collapse after two years as product innovation stalled, forcing founders to sell the company before the product became obsolete, preventing the creation of enduring franchises like Microsoft or Oracle.
Phase 3 (Current Model): The firm now advocates for founder-led companies where the product innovator remains CEO, citing Mark Zuckerberg (Facebook) and Larry Page (Google) as successful templates.
Role of the "Cheryl": Instead of replacing founders, the ideal model pairs the founder with a COO/Operator (nicknamed "Cheryl" after Sheryl Sandberg) who handles sales, finance, and HR while remaining integrated into the engineering-centric culture.
Partnership Requirements: Successful founder-operator pairs require a high level of mutual trust, shared office space for daily interaction, and the operator's willingness to subordinate ego to the founder's vision.
Exceptions: The firm acknowledges that not every founder can be CEO; in some cases, a professional CEO is necessary, requiring a delicate "art and science" to partner with a product founder without feeling threatened.

Personnel Over Markets: The firm believes 90–99% of their investment success relies on the team, specifically founders who have "gone through the idea maze" (testing ideas, failing, correcting, and persisting).
"Idea Maze" Test: A key screening method involves challenging a founder's strategy; founders who have truly tested their ideas will argue against changing their course, whereas those who haven't will readily pivot to please investors.
Founder-Market Fit: The ideal candidate demonstrates an obsessive, long-term identification with the problem, where the company and their identity are inseparable (e.g., Ben Silbermann/Pinterest).
Rejection of "Lean Startup" Extremism: While endorsing the Lean Startup methodology for early experimentation, the firm warns against using "fail fast" as an excuse to avoid commitment; true success requires a "struggle" and long-term determination.
Commitment as the Differentiator: The firm emphasizes that 95% of startup success is driven by the courage to refuse quitting during crises of confidence, rather than just tactical execution.

Smartphone Penetration: The firm predicts every person on the planet will have a smartphone by the end of the decade, creating the first era where everyone has a computer, can run software, and is globally connected.
Universal Opportunity: This connectivity allows developers to access a global customer base, enabling products like Facebook or Pinterest to potentially reach the entire human population.
Industry Disruption: The thesis applies "software" to traditional industries, citing examples like:
- Transportation: Uber and Lyft optimizing car utilization from 4% to near 100% via software matching, potentially reducing the global number of cars needed.
- Real Estate: Airbnb applying software to unlock underutilized housing inventory.
Future Sectors: The firm identifies Education, Healthcare, and Financial Services as the next major verticals for software-driven disruption and value creation.

Fund Size Logic: The firm raises the maximum amount of capital consistent with their ability to invest judiciously and maintain their fee structure, avoiding dilution of fees that occurs with excessive fundraising.
Return Expectations: The firm operates on a "grand slam or strikeout" philosophy, aiming for moonshots or total failures rather than incremental returns, with a 10-year horizon to realize returns.
Timing: The first fund was raised in March 2009 at the market bottom, allowing for investment when other firms were retreating, though the returns are still maturing.
Big Data Experimentation: The firm is exploring a 180-degree shift in sourcing strategies, using big data (Google trends, social signals) to surface hidden winners outside their traditional network, potentially identifying companies in non-traditional locations like Croatia.

The "Silicon Valley Effect": The region's success stems from a "network effect" where talent, capital, and support converge, driven by a culture that expects new companies to emerge rather than existing giants to dominate.
Bureaucracy vs. Creativity: A key challenge for growing companies is scaling without losing creativity; the firm emphasizes that successful companies must become "real" entities with sales forces (e.g., Google has 10,000 salespeople, not just engineers) and professional HR functions to handle complex personnel issues.
Myth vs. Reality: The firm corrects the "self-service" myth of tech giants, noting that massive sales and HR infrastructures are essential for global impact and cannot be bypassed.
Forward-Looking Vision: The firm aims to leverage its established reputation to select the most committed entrepreneurs and expand its influence in hard-to-reach sectors like healthcare and education over the next five years.