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Invest Like the Best with Patrick O'Shaughnessy
David George - Building a16z Growth, Investing Across the AI Stack, and Why Markets Misprice Growth - [Invest Like the Best, EP.450]
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- [00:00]
Patrick O'Shaughnessy
The best operators have a relentless focus on leverage, finding ways to multiply their impact rather than just working harder. But here's what I see happening in finance teams everywhere. Brilliant people getting buried in expense management. Busy work. If you think about it, you become a finance leader because you love strategic work. Modeling scenarios, optimizing capital allocation, finding the insights that actually move the business forward. But instead you're chasing receipts and categorizing transactions. It's the opposite of leverage. This is exactly why I'm so bullish on what the team at Ramp has built. Kareem and Eric understood that every minute spent on manual expense management is a minute stolen from high leverage work. So they automated all of it. Automatic categorization, receipt matching, spending controls that actually work. I love the network effect that this creates. When finance teams at companies like Shopify and Stripe automate the mundane stuff, they free up cycles to think bigger, to ask bigger questions, spot patterns others miss and make the kind of strategic bets that separate great companies from good ones. The math is simple. Get your time back, focus on what matters. Check out ramp.com invest and see what happens when you eliminate the busy work cards issued by Sutton bank member fdic. Terms and conditions apply. To me, Ridgeline isn't just a software provider. It's a true partner in innovation. They're redefining what's possible in asset management technology, helping firms scale faster, operate smarter and stay ahead of the curve. I want to share a real world example of how they're making a difference. Let me introduce you to Brian. Brian, please introduce yourself and tell us a bit about your role.
- [01:25]
David George
My name is Brian Strang. I'm the technical operations lead and I work at Congress Asset Management.
- [01:31]
Patrick O'Shaughnessy
How would you describe your experience working with Ridgeline?
- [01:33]
David George
Ridgeline is a technology partner, not a software vendor.
- [01:36]
Patrick O'Shaughnessy
And the people really care.
- [01:38]
David George
I get sales calls all the time.
- [01:39]
Patrick O'Shaughnessy
And I ignore them.
- [01:40]
David George
Ridgeline sold me very quickly.
- [01:42]
Patrick O'Shaughnessy
We went from $7 billion to $23.
- [01:44]
David George
Billion and the goal is $50 billion. Ridgeline was the clear frontrunner to help.
- [01:48]
Patrick O'Shaughnessy
Us scale in your view, what most distinguishes Ridgeline, they reimagined how this industry should work. It was obviously they were operating on another level. It's worth reaching out to Ridgeline to see what the unlock can be for your firm. Visit ridgelineapps.com to schedule a demo. One of the hardest parts of investing is seeing what's shifting before everyone else does. AlphaSense is helping investors do exactly that. You may already know AlphaSense as the market intelligence platform trusted by 75% of the world's top hedge funds, providing access to over 500 million premium sources from company filings and broker research to news trade journals and over 200,000 expert transcript calls. What you might not know is that they've recently launched something game changing AI powered Channel Checks Channel checks give you a real time expert driven perspective on public companies weeks before they show in earnings or consensus revisions. AlphaSense uses an AI interviewer to run thousands of expert calls with real human experts every month, asking consistent questions across experts so the signals are clean, comparable and useful. You get live updates as interviews come in full transcript access and coverage across every major sector. Instantly compare insights across experts and analyze quarter over quarter trends in sentiment and key performance indicators. For investors trying to stay ahead of the fast moving markets, it's already table stakes. Hello and welcome everyone. I'm Patrick o' Shaughnessy and this is Invest like the Best. This show is an open ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts@joincolasis.com.
- [03:33]
David George
Patrick O' Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit Psum vc.
- [04:02]
Patrick O'Shaughnessy
My guest today is David George. David is a General Partner at Andreessen Horowitz, where he leads the firm's growth investing business. His team has backed many of the defining companies of this era including DataBricks, Figma, Stripe, SpaceX, Anduril and OpenAI and is now investing behind a new generation of AI startups like Cursor, Harvey and Abridge. This conversation is a detailed look at how David built and runs the A16Z growth practice. He shares how he recruits and builds a Yankees level culture, how his team makes investment decisions without traditional committees, and how they work with founders years before investing to win the most competitive deals. Much of our conversation centers on AI and how his team is investing across the stack from foundational models to applications. David draws parallels to past platform shifts from SaaS to mobile and explains why he believes this period will produce some of the largest companies ever built. David also outlines the models that guide his approach, why markets often misprice consistent growth, what makes pull businesses so powerful, and why most great tech markets end up winner take all. David reflects on what he's learned from studying exceptional founders and why he's drawn to a particular type. The Technical Terminator Please enjoy my conversation with David George. I think early stage investors can often give you an interesting opinion about what the distant future looks like. Probably great growth stage investors like you can give a really interesting view on what the near to medium term future looks like. The companies that you've backed are a who's who of leaders across different technology sectors. If you had to think three to five years out, what are some of the most interesting ways you think the future will be different than the present based on your experience with the companies that you've backed?
- [05:40]
David George
So obviously the big topic that we're tackling and trying to figure out in the near future is the impact of AI. We've backed a ton of really exciting companies at every layer of the stack and we can talk about that and that's been part of our strategy. From the model layer, infrastructure and tools, applications. I would break it apart into what do consumers do and what do enterprises do in the AI world. And then I have a bunch of views on how the world's going to be different as it relates to American dynamism, hardware plus software, robotics, autonomy, stuff like that on the AI side for consumers. I think we need to be really humble about where we are right now. I don't think that we have yet found the dominant product in AI. We may have the dominant brand and OpenAI and ChatGPT has grown faster than anything in the history of technology. I think they reached the same scale as Google, something like four times faster. A billion people using it and they're only monetizing a tiny piece of that, which I think is a really exciting dynamic. But I don't think that the future of how we interact with AI is going to be a chatbot. I just think that's way too limiting. I think the big shift will be what is reactive today to something that's proactive in the future. And ChatGPT may be able to capture that and I think they probably have the best chance of doing so. But I think the way that we interact with all this stuff is going to change dramatically. It's going to have long form memory, it's going to be multimodal and it's going to be proactive. It's going to offer us solutions in how we do things. So I'm super excited about that. But I think the open ended upside of what companies can capture in economics from that is endless in size. I like to look at history of consumer Internet companies and what were our perceptions and then what actually ended up happening in reality. So I think it's instructive to look back at Facebook and Google and I remember when we were in the private markets looking at investments in things like Snap and Twitter ten plus years ago and we would always sit and say, well yeah, but Facebook and Google only monetize at X certain amount and all the consumer Internet businesses or P times Q businesses and quantity has ended up being billions of users, two and a half billion users or more in each case. But we always said, oh, Facebook or Google, they make 20 bucks a user, so that's the upper bound. And fast forward 10 years later and Facebook and Google make 200 bucks a user in the developed world. So when we look at things like ChatGPT, it's really fun to think about this. It's like, okay, how much time do people spend? What value do they get? How much consumer surplus is there and how do we think about valuing that? And it's pretty open ended, which is really exciting right now. So the really interesting thing is if you look at ChatGPT and the consumer stuff, there's like a billion users. They monetize less than 50 million of them and how will they monetize the rest? That's a really fun problem to try to tackle.
- [08:16]
Patrick O'Shaughnessy
You think it's just ads?
- [08:17]
David George
I think it's hard to describe what it'll be. I think it'll be some form of like an affiliate thing that happens. It's like a new native thing. The thing I always say to people is again, we gotta be humble in how we think about this. We never would have predicted what a feed based advertisement is. No one would have known what that is because we didn't even know what the feed based product was. It turns out it's probably the best advertisement format in history. It's really, really compelling. So it's not surprising that it monetizes really high and people actually really like it. I really like Instagram ads. So a year ago this light bulb went off for me. Maybe it was six months ago. I did deep research on, you'll probably relate to this. A new baseball bat for my son. He's nine years old and it's pretty complicated. It needs to be a certain length and drop and all these certain specifications and there's this year's version and last year's version. And if I had to do that on Google, it would be a total mess. I would struggle with it. Amazon? No chance, because of the ads. Deep Research was really, really, really good at it and it solved my problem for me. So light bulb went off for me at that moment. One, the models are going to get so much better. And two, to me, it's an execution problem of building the capabilities to go execute that stuff on your behalf on the web. So I think that's a really exciting future. There's going to need to be tons of guardrails built into it. You got to build a ton of product and piping to do so. It's really hard. Instagram famously tried to do shopping kind of natively and it's just too hard. But I think that's a pretty exciting future and shopping is just one category. So if I take a step back and I think about AI today, really active users spend almost 30 minutes a day in the products for context. Users spend 50 minutes a day on Instagram, 70 minutes a day on TikTok. They're monetizing only a slight few of them. Today, consumers get a ton of value. There's going to be a ton of consumer surplus available. And I think that could lend itself to the creation of a huge company, a massive company. And again, I think ChatGPT is in the lead today.
- [10:06]
Patrick O'Shaughnessy
But it's early in that specific area of the world, this pure AI part of the world. Where do you feel the most different than your peers in what you think matters, what you think is exciting or not exciting, worries you have. Where do you feel most divergent for your friends?
- [10:21]
David George
I feel like I'm probably reasonably consensus on the excitement on the consumer side. I can put it into context around this upside around price that you get on the P times Q Especially if time spent continues to go up, which I think it will as the models get better and they have memory and things like that. I think on the enterprise side, one of the lessons I learned from SaaS and Cloud, which by the way, the advancements of SaaS and Cloud are tiny compared to the advancements of what AI is going to do is I think maybe a little bit more expansively on what the companies can become on the enterprise side. But maybe I'm slightly more skeptical about what their ultimate business models will be. So one of the really fun topics that people debate with high degrees of confidence that I have very low confidence in is what is the ultimate business models of these companies and People put up these super compelling slides that are like, hey, you know, the whole software industry is only $400 billion, but look at how big white collar labor is. And we're going to go get a ton of that. And to me that's a little bit hand wavy. So there's a couple of areas where the business model has progressed in a compelling way to go tackle that directly. So customer support is one. But because there's a very discreet task with very simple completion analysis that you can do, it's simple to price it on that. You can shift the business model from a cpace thing for Zendesk or something to a new business model where if you successfully complete the task, you can charge on that. Maybe the next furthest developed area is coding, but it's not completion of a task, it's consumption driven. And especially in the developer world, that whole world is used to paying things on consumption. It's how it has all shifted over the last 10 years. Everything else I think is pretty TBD. It's going to be very hard. And I think when you see major technological shifts, it's very tempting to say, oh my gosh, there is so much economic value that all these companies are going to capture top down. The reality of doing it is much harder. And I always say to people, 90% of the technological surplus is going to go to the end users. Just start with that as the assumption whether it's consumer, whether it's enterprise. A funny analogy that I heard from somebody else is how is the steam engine ultimately priced? It wasn't priced based on replacing 50 laborers. Competitive forces drove it to a certain price where there was an appropriate return on capital. But the vast majority of those productivity gains went to the end users of those machines, not the maker of the machines. So I think something similar will probably happen in the enterprise. Even with that, you can create the biggest businesses in the world. So an analogy would be Apple. What would you pay for your iPhone?
- [12:50]
Patrick O'Shaughnessy
A lot more than I do.
- [12:52]
David George
The sky's the limit. 90% consumer surplus is probably low if the iPhone costs a thousand bucks or something like that. So I'd say the same for Google, I'd say the same for Facebook. It's going to happen in consumer. Consumers are going to be the ones who realize the surplus. The same's going to happen in business. But I think the next generation business companies can still be much bigger than the previous generation of companies, given the capability gains.
- [13:11]
Patrick O'Shaughnessy
When I last ran into you a couple years ago in person in San Francisco, we were talking about Waymo and you were in the mode of intensely studying that company and thinking about it, which makes me very interested in this class of companies where you heard about Waymo and self driving as a service for a really, really long time with nothing happening. And then all of a sudden, last time I was in San Francisco a couple weeks ago, it's just every other car. And the explosive nature of Waymo example is really cool to watch. There's all these other technologies, you might call them American dynamism. At Andreessen Horowitz, whether that's robotics or small modular reactors or really exciting big technology ideas which you understand the potential. Like if we had an in home robot, that'd be awesome. But it's really hard to figure out how long it will take. Maybe similar to how long Waymo took or something. How do you think about investing in those kinds of companies where it's incredibly exciting? Clearly if we had it and it worked, it would be really valuable. But it's really hard to know how long it's going to take to work.
- [14:06]
David George
Often these are the ones that are the biggest market opportunity. Robotics is the biggest market opportunity. We were all obsessed with llc.
- [14:13]
Patrick O'Shaughnessy
Yeah, if you knew it was going to work in five years, you'd put.
- [14:15]
David George
All your money, you put all your money into it. I happen to think it will take a little bit longer. Part of that is informed by my experience with Waymo. I'd contrast maybe what Waymo does, and increasingly Tesla and some others with what a robot needs to do. And it's very different. A car needs to basically stay in a lane, avoid anomalies, collisions, go a certain speed limit, find places to park.
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Patrick O'Shaughnessy
Sounds simple when I describe it that way.
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David George
It's much more complicated than that. But simply put, that's what it has to do. I contrast that with what a robot has to do. What does a robot have to do in your home?
- [14:46]
Patrick O'Shaughnessy
A lot more degrees of freedom.
- [14:47]
David George
Endless degrees of freedom. Make a cup of coffee, go do my laundry. But it took Waymo 10 years. And if you go back to the DARPA challenge, the whole industry, decades to get to this point. Two decades to get to this point, roughly. So my expectation is technology is advanced. Obviously the generative AI techniques can be applied to robotics to help it go much faster. But I think it's going to take a long time.
- [15:09]
Patrick O'Shaughnessy
So how do you invest in that?
- [15:11]
David George
We have an early stage team that is studying all the robotics companies. We meet them all, we're learning a ton, we're waiting for them to find the team that they can do an early stage traditional seed or series A investment in, and then at the growth stage, ideally they find that and we can invest in it. Or one of these companies that we're not investors in really starts to work. And we've debated what does it mean to work. I think we'll know it when we see it. There will be things that start happening and customers pulling their products that we will have not seen before.
- [15:37]
Patrick O'Shaughnessy
What's the lesson from Waymo there on what it means to start to work? What do you think in the history of Waymo was the point at which you would have said, okay, now something happened and that makes this more investable.
- [15:47]
David George
So the interesting thing about Waymo for us, I'll tell you the history of our Waymo investment. We originally invested in 2020. They came to us to raise outside capital for the first time. So it's just purely funded by Google over time. And they thought it would be helpful for employees for hiring, all that stuff, outside counsel, all that diversify the cap table to bring on some outside investors. So some folks invested in it. We're the only VC firm that invested in it. We invested out of our first growth fund. And it was really fun because I think this is seeing the future. Taking the ride in 2019, it was doing some pretty amazing stuff in retrospect. Could do unprotected lefts, it could avoid construction sites. And the thing it didn't know how to do actually was park. We got to a parking lot and it stalled and we had to override and go drive up to the front. But you could see signs that it was going to be pretty interesting, but it wasn't on the road. We knew they were going to be conservative about rolling it out. So Mark and Ben came to me and they said, hey, we got to do this Waymo investment. And I said, no, I don't like this at all. This is crazy. It's going to take 10 years. The valuation that we come in at is going to be really high. And they said, you know what?
- [16:50]
Patrick O'Shaughnessy
Don't care, don't care.
- [16:52]
David George
This is autonomous driving. Are you kidding me? This is the mother of all markets. If they have the thing that can drive cars autonomously, it's going to be worth a ton. Stop overthinking it. And my team, we had built all this analysis and why it would take forever and the economics were going to be strained. So we compromised and we made a small investment in Waymo at the time. And I was excited to be a part of it. I Just thought the returns would be stretched. Fast forward five years later. At the end of 2024, they raised money again. And at the end of 2024, they had cars on the road. And it turned out to. Your question. Consumer preference slapped you in the face. Anyone who was in San Francisco who had the choice was taken awaymo. But at that time, we had the chance to invest more money and it was working. So we took that opportunity to write a much larger check and invest. By the way, one of the really interesting things about Waymo. So you said you're in San Francisco, you see it everywhere. How many cars do you think they have on the road In San Francisco?
- [17:43]
Patrick O'Shaughnessy
10,000?
- [17:44]
David George
They have 400. Wow. So it turns out if your cars are driving optimal routes and fully utilized and not running into some of the problems that drivers have, it's pretty good. So you can have a lot of coverage. There are something like 50,000 Lyft drivers in the San Francisco Bay Area, and Waymo overtook them in market share.
- [18:01]
Patrick O'Shaughnessy
It feels like the appropriate time to disclose that you and I went to college together. The reason I mentioned that is usually when we get together, we don't jump into talking about investing. We talk about other stuff. Which makes me realize, I don't think I've ever actually asked you, what is your investment philosophy or strategy or style or taste? What is it and how did it develop?
- [18:20]
David George
My style and taste is very much. If I were to summarize in one line, I like to pay fair prices for great companies, and everyone would say they would like to do that. The art in that, I think, is recognizing where greatness may lie, where other.
- [18:36]
Patrick O'Shaughnessy
People don't recognize that unpriced greatness.
- [18:40]
David George
No, it's priced, but not to the fullest extent. So I've studied the history of technology companies and why they outperform and how they outperform. Often in growth stage investing, it's always on the growth side. It's like, hey, the growth side is where you get things really right. I tell the team that we can make a lot of mistakes on forecasting margins and business models and unit economics and all that stuff, but lots of people know how to do that analysis that's out there. So where can you actually get edge? You can get edge from product insights, market insights, and people insights. So how do we maximize our likelihood of doing that on the people side? I'll start there because that's probably the hardest to do, and I've gotten it right a number of times, and I think I have reasonably good taste. In people. I really like a certain archetype of founder. I call him the Technical Terminator. I'm very close with Ali from Databricks. So Ali is the Technical Terminator.
- [19:32]
Patrick O'Shaughnessy
It's self evident.
- [19:32]
David George
It's self evident. It wasn't self evident all along. He actually wasn't even the CEO. He became the CEO later, but he.
- [19:38]
Patrick O'Shaughnessy
Started the open source project.
- [19:40]
David George
Yeah, he was one of seven. So he was not the CEO. There was a much more established guy who we've partnered with on a lot of companies. He's been a co founder of a lot of companies. Great companies have come out of his lab. Jan Stoika and Berkeley. The thing that I like about these technical terminators is they start technical and then you never know if these people are going to become commercially minded, excellent business people. So you have the grounding, you have the products. Those are the people that are likely to figure out the next product area because they're technical, because they're in the products. Mark Zuckerberg is an example of this. Elon's a great example of this. And then over time they learn the business side. So it's been so fun to work with Ali because he knows more about sales ops and hiring processes and reporting lines and all these things you have to do as a manager than probably any of our CEOs, but he learned them all.
- [20:28]
Patrick O'Shaughnessy
Do you have a favorite counterexample to the Technical Terminator? Somebody that is completely non technical?
- [20:34]
David George
Travis at Uber. So one of the elements of people judgment is what is the right founder for the right market. And that market was just a pure battle.
- [20:43]
Patrick O'Shaughnessy
You fight mayors.
- [20:44]
David George
Yeah, like you fight mayors, you fight competitors. And by the way, there were competitors. So you just needed to be ruthlessly competitive and driven and operationally intense. And he's the perfect counterexample. I was an investor in Uber at ga and he's the archetype. But there's a lot more of these technical ones that become great business people in my life. George Kurtz from CrowdStrike is a great example of it. I'll tell you one more example which is not as obvious. Dave from Roblox when we met him, I met him maybe 10 years ago or something in early days of whether it was actually working. And he was technically brilliant and he was so deep in the product. And he's the kind of guy that on the surface, if you didn't really know him well, you would be like, oh, he's a little quieter. And it turns out he's ruthlessly competitive and he really cares about market cap creation and his stock price going up for the right reasons. Dylan from Figma is a great example of this. He's so nice. He's one of the nicest guys in our industry, but he is brutally, ruthlessly competitive. The new AI guys and women, it's been really fun to see them develop this. Michael from Cursor, Shiv from Abridge, who's a practicing cardiologist who has then shifted his attention to building a technology company. He lives in Pittsburgh and he commutes to New York to work most of the time. And I was with him in the office the other day, and he's showing me the office and I'm like, oh, yeah, cool, that's great. That's nice. He's like, yeah, I'm gonna put a bed over there. I'm gonna start sleeping in there. You're like a doctor with kids and stuff. And he's like, no, no, no. I wanna be working all the time when I'm in town. So I love that. Relentlessness, intensity, paired with technological capabilities, product understanding and backing. People like that, they're gonna pour everything they have into winning, but they're also more likely to figure out the next things and navigate complex markets and changing environments.
- [22:25]
Patrick O'Shaughnessy
If I had access to your entire calendar for the last five years or something and saw all the companies and the debates where you ultimately didn't invest, but almost did, what would I learn from that batch of companies and founders?
- [22:37]
David George
This is a very humbling job because we make so many mistakes and errors of commission are really painful. Errors of omission are really, really painful too. And they're more costly just economically, because you can lose one times your money if you get things wrong in an era of commission. But you can forego making really high returns if you get it wrong. There are no common patterns. I would say when we get it right on not doing an investment, it's typically for the right reasons. It's typically because we see something that we don't love about the business quality. We feel really, really, really strongly about market leadership.
- [23:12]
Patrick O'Shaughnessy
Why?
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David George
Do you know the Glengarry Glen Ross movie?
- [23:15]
Patrick O'Shaughnessy
I know the movie. Yeah.
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David George
You know the scene with Alec Baldwin?
- [23:19]
Patrick O'Shaughnessy
Refresh our memories.
- [23:21]
David George
There's the scene with Alec Baldwin where he's running a sales contest, a boiler room setting. And he comes in, he's running a sales contest. And he walks in and he's like, okay, guys, new contest. Here we go. First prize gets Cadillac. Second prize gets a set of steak knives. Third prize, you're fired. So we've adopted that as a way of describing most of the technology markets that we live in. So we happen to think, and I happen to think strongly, and my experience has been the vast majority of market cap creation is going to go to the market leader. And this is probably underappreciated. We see this all the time with our peers in the growth investing industry where they say things like, yeah, you know, even the number two player is going to be really viable, maybe, but more often than not, that's not the case. That's obvious in network effect driven businesses, consumer in our companies, Google, Facebook, et cetera. It's less obvious in enterprise companies, but it happens just as often. There's no number two to Salesforce. Salesforce is Salesforce, Workday is Workday, ServiceNow is ServiceNow, and you'd feel a lot of pain if you did the number two or God forbid, the number three in those markets. In early days of technological shifts, markets tend to fragment in ways that we don't foresee and they end up being less competitive in certain areas and people settle into different areas. So on the model side, so far, the way it looks like it's played out is it will be more like the cloud industry. It's not going to be a winner take all. Certain technical advantages seem limited in timeframe. There's always this constant leapfrogging of the model industry. So I think it will look like the cloud industry in the sense that there will be multiple players, there will be profit pools for them. Early days, we were saying, is this going to be aircraft manufacturing or is it going to be airlines? Those are the two extreme ends of the spectrum. Aircraft manufacturing has high profit margins because there's really high capital intensity and it's extremely hard technically. So that would seem to mirror the model industry. Airlines, on the other hand, are horribly competitive industries and they all go bankrupt in the fullness of time. So it seems like the model industry is going to be like aircraft manufacturers or the cloud industry.
- [25:21]
Patrick O'Shaughnessy
Well, why did cloud play out the way it did? Is it just size of market?
- [25:25]
David George
I think it's size.
- [25:26]
Patrick O'Shaughnessy
Is it that simple that if a market's big enough, you're just going to have multiple winners and not a winner take all.
- [25:31]
David George
That one is all size of market. It's just so vast. And cloud is such an interesting market because if you could just independently own aws, Microsoft Azure and gcp, those would be some of the most valuable companies in the world. Those would be awesome businesses to own. On the other side of it, one of my partners, Alex Rampel has a statement that he likes to say which is the best businesses in the world don't have customers, they have hostages. That's not actually the case in cloud. Sure there are some things like egress fees. The clouds are anti competitive with egress fees. They make it really hard to leave and get your data out and all that stuff. But that's minor. Generally speaking, the customers in that market are well served, they're happy, it's been positive sum for them. And at the same time, the clouds are really good businesses. I think the same is likely to happen in the model space. So the market is going to be so big it will fragment in ways that we don't yet expect. And even if you're in a number two in terms of absolute revenue size or market awareness, that's okay. What's not okay, probably, I would think is being in the number two in something like the dominant consumer chat interface.
- [26:35]
Patrick O'Shaughnessy
I want to talk about competition in our industry for investment opportunities in the market leaders led by technical terminators or others. It's become in our collective careers, you've been in this specific business much longer than me, but across your career it's become way more institutionalized. There's way more players, there's way more money. The people you are up against on a daily basis are probably more talented, sometimes by a lot. So you have to keep up with that. Describe the competitive dynamic when you are trying to make a big investment in a big exciting company led by a consensus amazing person in a big market. What does that feel like now? And I'm also interested in how it's changed over time.
- [27:14]
David George
So Mark and Ben have told the stories about the origin of starting the firm and their experience with the venture capital product and why they built the firm the way they did. And whenever they tell those stories, I'm like, that's great man. Wouldn't it have been fun to compete in that time? That would have been awesome. The market is definitely more competitive now. It's become a lot more institutionalized. It's become a lot more institutionalized. For good reason though. The thing that I'm telling our team and I talk about with my partners now is we're a grown up industry now. This is no longer some little bespoke asset class. When I started my career, you and I were getting out of college. There were probably one or two technology companies in the largest 10 market cap companies in the world. Now it's eight of 10. And seven of the eight are West coast technology venture backed companies. That realization hasn't really fully hit the finance industry. But if you look at that, tech has overtaken all of the market cap creation and is mostly driving force of the stock market and the economy. The private markets have become a real asset class. This is something I'm studying now because the venture industry seen as this small, non scalable thing. Turns out there's 5 trillion of private market cap that is up 10x in the last 10 years and it's honestly some of the best companies in the world. That market cap represents almost a quarter of the entire S&P 500. It's more than half of the Mag 7. So I think that we now are in the grown up in the big leagues and we need to start acting like it. So we've adapted our firm a lot to that realization. And oh by the way, one other comment just on that industry, how it's changed, we just did this analysis. If you look at our public universe, so where do we spend most of our time? It's software consumer and fintech stuff, the public universe. In those sectors there's less than five companies growing 30%. It's kind of staggering. That's a low number. Our portfolio on average dollar weighted is growing 112%. And some of these companies are big enough to be the large companies. And if you look at the small cap universe in the public markets, first of all, public markets have shrunk by half in the last 20 years. And if you look at the composition of small cap public companies, the quality I would argue is so much lower than what is available in the private markets. So the industry is real. It shouldn't be a surprise that the competition has intensified. I think about the competition similar to how our venture folks think about it, which is the market has become a barbell. So we're faced with the large multi stage firms that have very strong venture practices on the one hand and those are the fiercest competitors for us. I respect my peers there. They're trying to play the same game as us, which is when we have something special at the Series A or the seed, we want to hold it really tightly and they want to do the same thing. And sometimes they're effective at it, sometimes we're effective at it. But we have to battle that out. On the venture side, it's bespoke. In the retail analogy there's the superstore like the Walmart and Amazon, which is how we would get characterized. And then the other side is like the Gucci store, the Prada Store, which is like deep specialization. So Nat and Daniel would have been an example of the Elad and then there's many others that do a really good job at what they do. So I have respect for a lot of the crossover folks who are in our world and have built private businesses and have done a good job with it.
- [30:25]
Patrick O'Shaughnessy
So what do you do to beat these people? And I'm especially curious in the actual extreme versions of the answer, the lengths that you're willing to go to to win.
- [30:33]
David George
I think you would love to have some story that's like sensational in the moment where we did something crazy. The reality of the growth stage business is we win deals based on years of relationship building. We recently did a deal where the founder, we had worked the founder so hard that he called us and he was like, hey, I'm ready to do this, I'll just talk to you. And I'm like, oh, wow, okay. Fruits of my labor, two years of this. This is good. And then at that point, it's one of the best companies in the market. And the dynamic that we are faced with is okay, this is awesome. I got a clean look. I know for sure if he was going to market, he would get a higher price than what he just told me, but can I bear the price? So that's often the exercise that we have to go through as growth investors is what do we know differently about the product or the market or what are our expectations that will allow us to do it that maybe aren't as obvious.
- [31:26]
Patrick O'Shaughnessy
What are you doing in those two years that earn you that right? Maybe that's where the extreme measures are.
- [31:31]
David George
Helping them as if we were already investors in their company. So helping them with candidates, helping them with customers, spending quality time and showing that we understand their business. Often that's the biggest thing, honestly, for the companies where we're not existing investors, oddly enough, sometimes it's easier because our platform is so strong, our brand is so strong. I'll give you another fun example which was Dylan at Figma. When we first invested in Dylan at Figma, I was considering joining the firm from GA. This was 2018. I knew all the guys already at the firm. And so I'm spending time with Peter Levine, who is one of our partners. And I come in and I'm like, Peter, what's top of mind? How are you thinking about the growth business? What can I tell you? And he was like, we need this tomorrow. We gotta invest in Figma. We need this tomorrow. I don't know how we didn't we missed it. I was late to it. We just need a growth business and it was a growth deal and we should have done it. It's crazy. We did GitHub early. How did we not do this one? And he was just apoplectic. I need this. That was very encouraging. Exciting. So day one, I told you I knew the six companies in the portfolio. I also knew the five ish companies that I really loved outside the portfolio. Roblox was one that I was close to. Figma was another. So from the moment I joined, we had done the full court press on Dylan. He came to our summit. It was Mark and Ben bear hugs. He was really into crypto. We bear hugged him on the crypto side. We did everything we could with him helping him with a board search. We placed a person in our network onto his board. We were trying to do everything and trying to catalyze a deal. And he was like, I'll let you know when. I'll let you know when. So Covid strikes and he calls us and he's like, now's the time. Oh, my God. This was in the moment of COVID where we all thought the world was going to end and everything was screwed. Stock market was way down. I felt like, oh, great. Good timing. So at least we got the look. So he came and pitched. We had done all the work and we're having the debate as a team. And me and my team were taking this traditional growth lens, looking at it, and we're like, the market for designers is not that big. It's really small. And if you do the math of the market size of designers and what they charge, I don't think the price makes sense. At $2 billion, it's too limiting. And our venture guys were losing their minds in this discussion. They're like, you guys are totally missing the point. The ratio of designers to engineers is basically double for the modern technology companies. So that's a leading indicator that ratio is going to change. There's going to be double the designers in the world. More importantly, the whole engineering to design process is changing. And there's a melding that's happening of front end engineering and design. So thinking about this as the market for design is way too limiting. So you're just missing the point. So we were debating it and it was like speaking past each other. And finally Ben called it off. He's like, okay, all right, we're not going to solve this tonight. And ultimately it was a call on the growth fund side. And I slept on it and I Woke up and I was like, look, this is an exceptional business model. And we're squinting to believe enough on the market size. Great founder, great business model, is the market good enough? And I'm happy to take that risk. The risk I don't want to take is, is quality of business, quality of founder. But you really had to have a nuanced view of the market in order to get there, like with a traditional growth investing lens. And so fortunately we got there and it worked out really well. I bring up that story, one, to say that's an example of something where the price is the price and you have to figure out if you can take it if you're willing for the very best of the best companies. But two, I think it speaks to the advantage that we have and what you need to be successful in growth investing. You need those product and market insights or you're just going to live in a spreadsheet and die in a spreadsheet. So everything that we've done, or I have done and our team has done to design a process of tightly integrating with our early stage teams has been in the spirit of optimizing insights around people, products and markets. And I think that's where you actually get success.
- [35:12]
Patrick O'Shaughnessy
One thing that I'm trying to do more of, because I'm just interested by it, is to hear about the minutiae of your day and life in this incredibly competitive environment. I've become interested in how some of the best investors literally just like run a given day and what that looks like for you. And I think you'd be surprised how in the weeds I'm interested in learning about. So, like air on the side of detail. I'm just curious what the actual life of your job feels and looks like.
- [35:38]
David George
Bob Swan, who is a longtime mentor and friend of mine and an operating partner at our firm, gave me this really good advice that he and John Donahoe at the end of every year always went through an exercise where they spent two hours looking at their calendar from the year and then they had an objective of cutting 30% of stuff that was on their calendar. There was a way for them to make sure that they were giving responsibility down to the people on their teams, but also that they would get leverage. So he's given me that. And then he reminds me of it when he can tell I'm too busy with things that I shouldn't be. So I think I'm not very good at this, but I'll answer the question anyway. I try to make sure I'm spending Adequate time meeting companies. So right now our investment business looks something like 2/3 relatively known companies and 1/3 newer stuff. But I want to make sure my time is spent pretty differently than that. I want my time to be 20% on those known companies and spending time with people like Ali and the Founder's Mandrel, like whatever it may be, Flock safety. But I want most of my time spent on the new stuff because I need to be learning about those new markets. So constantly meeting with AI founders, talking to smart AI employees and making sure that I'm deep and conversational and have an understanding of those markets. So I spend a lot of my day on that. I've started to move away from doing one on ones and I'm like, you know what, I don't need to schedule one on ones. I talk to my team all the time. I'll call them after hours. I've started to very deliberately block off hours and days. So I block off two hours every Tuesday, two hours every Thursday, and then I also put an hour and a half block twice a week in afternoons. And that often gets consumed with things that are pressing and I need to make calls or whatever it may be. But I find that I learn a lot and develop a lot of my own thinking just by having think time. I'm the kind of person that has 20 things open in the browser and I want to read them all and then I don't get to them. So unless I block off a bunch of time, I actually just don't find that I'm spending the time learning as much as I should. So trying to learn about companies, spending time with entrepreneurs. I want to be 80% of my time and then 20% is spending time with founders. Internal management time shift.
- [37:50]
Patrick O'Shaughnessy
When we're fundraising, how many new companies do you think you meet a week?
- [37:55]
David George
We as a growth fund probably meet 30 companies a week. Not new, probably 30 companies a week. I personally probably meet 10 somewhere around there.
- [38:05]
Patrick O'Shaughnessy
How do you run those meetings? If I came into One of those 10, what is the structure of the meeting?
- [38:10]
David George
I keep the introduction super brief. I like to jump in and say, hey, why don't you please spend five minutes explaining to me the strategy and your vision? Because I've read your website, I know a little bit about the company. I've talked to some customers maybe, but what is the bigger thing? You tell me and then I just ask questions for 20 minutes. Okay, so what do you think about this? What do you think about that? This may be a stupid question, but can you tell me about this, and I find that to be a lot more effective. And the ultimate compliment that we get from a founder is, thanks, you've done your research, or hey, thanks for asking that question. That's pretty smart.
- [38:40]
Patrick O'Shaughnessy
If you think about the reasons why you do this versus something else, what are the most important ones? Why aren't you a founder? Why don't you work in some other industry? Why don't you have your own firm? There's other things that you could do. What are the most important reasons why this is the thing you do?
- [38:55]
David George
So my wife would say that I have a low attention span. And what she means by that is, I'm interested in a lot of different things and this is a really cool way of getting to learn about tons of new stuff. I suspect this is the same reason that you like to invest is how lucky are we? We get to sit and spend time with the entrepreneurs who are building the most interesting companies in the world right now. We get to learn about the most cutting edge technology stuff that if you were in the public markets or just in a job, you would never get a chance to learn about. So I love to learn and I love to be around great founders as they're exploring really interesting things. So that part of it is really, really attractive. There's another part that plays to a totally different side of me, which is this business is a scoreboard business. And I convey this to our team all the time. There's a scoreboard in this business and our expectation is that we win. Now, it's a very long dated scoreboard, especially in the venture side. But on the growth side, even it's a pretty long dated scoreboard. But at the end of the day, we have to put up returns. Our customers are founders and our LPs, and on the founder side, we need to make sure we do a great job with them. And there's a virtuous flywheel if we do. On the LP side, it's pretty simple. Are we doing a good job generating returns? A16Z. We're known as running ourselves a little bit differently as a firm. Mark and Ben really drive that. We do things like Ben runs every new employee onboarding and he runs through our culture document. When you sign an offer letter at our firm, you sign your offer letter, but you also have to sign our culture document, which lays out our cultural principles. I also created a subset of principles that I wanted to convey for our growth fund. The scoreboard and we expect to win is a very direct way of saying we better be competitive I have one that is we are the Yankees and we're going to act like it. And what I mean by that is not we're going to be arrogant or we think we're the best team or something like that. What I mean by that is we're lucky enough to be a part of a firm that has an incredible brand. So we're going to run our team. Very, very high performance. If you're on the Yankees, you better be performing. This is the big stage. So our expectations for our team, we're very collaborative. We care about winning as a team. But you better be good. You better be doing your job really well. You better be working hard. This is one of the things that maybe is not as obvious to people. It wasn't as obvious to me actually, until I joined the firm. It's so funny, when I was considering it, my perception from the outside before I really started the process was Mark and Ben. They're like celebrities, semi celebrities. Do they really work hard? They got all these other interests and I got in and man, it is a competitive place. We are very intensely competitive. We want to win and everybody works really, really hard. No one is resting on their laurels. We're all constantly chatting nonstop late at night. We're all working hard, we're kicking around ideas, and I love that. I love the dynamic of partnership, but high expectations around performance on the why am I at a 16Z? Why don't I run my own firm? I always tell people I have a dream job. This is awesome. I got to join a firm that was on the top of their game. They were on the ascent, but there was a real latent opportunity for us to build a franchise on the growth side. And I came from a place with a really strong culture at ga, but I joined a place that is full of optimism. And I think you need that in growth investing. Like that is the number one ingredient is you've got to be optimistic. You got to be able to see what can go right. But I also got a chance to hire the team. I got to set the strategy, set the investment process, take what I felt were some of the learnings that I had, which were great, and bring those things with me and leave some things behind. So, for example, one of the things that we set up at the outset was a bit of a different investment decision making process than a traditional growth equity investment firm. So most growth equity investment firms have an investment committee. It's central. You go, you present, you battle to get the votes and then they disappear. And then the Smoke comes out and here's the decision. And what we decided to do at the firm in the growth fund was do it totally differently. So we were going to actually make the decision process just like our venture process, which is single trigger puller. And the expectation I have set with our team and that Mark and Ben have conveyed and I think we do a pretty good job of is you got to be intellectually honest, you've got to be transparent, and we openly expect disagreement. But once you disagree, you disagree, and then you commit. I think by doing it this way, you encourage people to fully explore the risks of investing and fully explore the rewards. You're never in this temptation to sell or to politic for a vote or try to influence someone's decision for the wrong reasons. You really like something and you really want to push. We don't have that dynamic. So I think it allows us to more openly explore the merits of an investment. And I think it's been a reasonably good process. And we're small, so we move very fast. We do this very iteratively. It's not like we need to have a Monday investment committee process. My first investment committee decision was before I even joined the firm and it was Mark, Scott and I having breakfast and we were deciding on an investment at breakfast. So I like to keep it informal, but we want to make it rigorous at the same time. The other thing I did that's a little bit different is when we hired the team. By the way, I feel very lucky. It's one of the most special parts of the job for me.
- [44:12]
Patrick O'Shaughnessy
How big is the team?
- [44:13]
David George
It's about 10 investors, so it's pretty small. The reason we can be so small is because we have the early stage teams. But a cultural trait that I think we've done a pretty good job of building is just collaboration and the willingness to roll up your sleeves and help people. As part of the team's promotion criteria, evaluation, et cetera, I've put in their contribution to collective investment judgment, entry level, from the start. This is part of your job. You better be contributing to our collective investment judgment. And it's something that we're going to evaluate you on from the start. So it's a little bit different for a junior person to be faced with that. And a lot of times the junior folks, when they join, they have to find their footing and when do they chime in, when do they not? But I think it's made us better as a team at making decisions.
- [44:52]
Patrick O'Shaughnessy
If you think about the environments that are better or worse for growth investing of the type that you do, what are those conditions? If you could cook up in the kitchen the perfect environment for you to be deploying dollars, what are the features of it?
- [45:05]
David George
Well, the optimal would be early product cycle, bad capital cycle. But those rarely happen and coincide with one another. If I had to pick, it's all early product cycle for the style of growth investing that we do.
- [45:15]
Patrick O'Shaughnessy
What does that mean, early product cycle?
- [45:17]
David George
It means we're at the outset of a new technological change.
- [45:23]
Patrick O'Shaughnessy
Beginning of a market wave.
- [45:24]
David George
Yeah, a new market wave. So maybe it's easiest to highlight in retrospect. It turns out that when you and I were starting our investing careers, we started at a really good time.
- [45:34]
Patrick O'Shaughnessy
You did. I was in public markets.
- [45:35]
David George
Well, you were in public markets and so you had to deal with GFC and stuff. But notwithstanding that, it's capital cycle, that one. It's obvious in retrospect, but it's really hard to feel it in the moment, maybe less so because AI is so well covered. And the question is, are we in an AI bubble now? Not is there a good product cycle ahead of us? But turns out that at the same time we had the mobile, we had cloud, SaaS, E commerce, all at the same time. And that was a great setup for us. If you look at all the mistakes that we've made as an industry, 2021 is very well covered. I always tell people the biggest mistake from 2021 is that we were actually late product cycle and we just didn't realize it at the time. There was a bit of a head fake with COVID but we didn't realize we were late product cycle. And what that means in practice is the ideas are just worse, the market opportunities are worse, it's just harder to go be successful. Right now when I talk to our investors, our LPs, they're all asking me all of the questions, are, are we in a bubble? Is the market too hot? How are you dealing with valuations? And I'm like, look, we're trying to be very balanced about this. At the same time, ten years from now, there's going to be a bunch of really, really great companies. So we gotta be in the market on the field. It turns out that the last two years coming out 22 to early 25, I think are a really good period. I think this is going to be a great vintage of time to have been investing. We also have been surprised at how long the companies have stayed private. They've stayed on the bingo card for us longer than we expected. And that's been great because we've converted those in a really attractive way. If you look at the last year of our activity, our portfolio dollar weighted is growing 112% and we entered at 21 times revenue. So I'll have this debate. First of all, I recognize that revenue multiples are flawed and all that, especially for traditional investors. But what I tell our investors is if I could invest for the rest of my career in 112% growing companies that are really, really great and good end markets at 21 times revenue, I would do it in a heartbeat. I would do it in a heartbeat. And oh, by the way, we used to have this debate at ga. I think that's way less risky than something where you're buying a 12% grower in PE for 15 times EBITDA. In a weird way, it's less risky because growth just takes care of so much for you and de risks so much for you. I think above 30% growth, the market still doesn't fully value the growth rate.
- [47:42]
Patrick O'Shaughnessy
Why is that the case?
- [47:43]
David George
I think it's just hard to model my conclusion. I've studied all these companies that are, I call them the model busters, but I've studied all these companies and it is just so hard for any investor to build a five or ten year model where high growth persists. It's just not natural. No one built a financial model for Google or Visa that had them growing 20 years into existence at 15 or 20%. It would just be totally unnatural to do so. If you look at the moment of the iPhone and this goes back to the point about product cycles and how much you can get surprised in 2009, if you looked at consensus estimates for Apple and Then compared for 2013, so 2009 consensus estimate for the year 2013 and compared it to actual performance in 2013, consensus estimates were off by 3x. That's a massive number and that's the most covered company in the world. So I think you can be surprised on growth on these things. I get a big kick out of that. I try to learn a lot about it. But I think it's not natural to model anything that way. It's so natural to just say, hey, this company's growing 80%, then they're going to grow 65, then 50, then 40, then 30, then a terminal growth rate and a terminal margin. And here's what our numbers are. It's very different than a company if it grows 80 and then their growth rate persists 75, 65. It's like a 3x difference in your valuation, so you can just get it massively different. So that's why I love high growth. It's obvious that's the math behind why I love it. But again, it's actually just hard to appreciate it because it's not natural to build a model that way.
- [49:11]
Patrick O'Shaughnessy
You and I have talked before about this idea of push versus pull companies. Can you describe that difference and how that's an idea that you care about when evaluating them?
- [49:19]
David George
It's magic when you find a pull business. So I have a post it note on my computer in the office that says, is the market demanding more of your product? It's the most special thing when it happens, by the way, a lot of these AI companies, what's so magical about the way ChatGPT has grown? It's a billion users, it's organic, it's all brand. And the shocking thing about that one, by the way, is it doesn't have a network effect. That was one of the more surprising things for us. So is the market demanding more of your product? Is probably the most important question that we can answer. Because when it happens, especially in consumer, it tends to create the most special companies in the world. So we've seen it in companies like Roblox when it really works and that one has two network effects and so it's super special. We also see it in companies that aren't network effect or consumer, like in the case of Anduril. Turns out the market really, really, really is demanding more of their product. And there's many reasons for that. We've reached all at the same time, this confluence of AI capabilities, autonomy, know how and how to navigate governments, mostly from alums of companies like Palantir and SpaceX. At the same time that we have a desperate geopolitical need, the market is demanding more of their product. And that's really special. One of the things that I say about push businesses, which is you gotta go sell it. Sometimes those are really successful. And there's industries where this is the case, like cybersecurity and things like that. They don't tend to get easier over time, they tend to get harder. If you have to go sell or market your product, the bigger you get, often it gets harder. So that's not always the case. Sometimes you get increasing returns to scale from brand and things like that. But especially on the consumer side, it almost always gets harder if you're a push business. TikTok maybe is the exception to the.
- [50:54]
Patrick O'Shaughnessy
Rule because they pushed it early.
- [50:57]
David George
They pushed it early and so aggressively and obviously if you're Facebook, you probably sit around and think about that decision forever. Maybe it's not even a decision. I wasn't on the inside obviously, but the growth of TikTok was fueled by advertising on Facebook in large part, which is crazy to think about. But especially if you're a Google or Facebook driven ad business, it almost never gets easier, it always gets harder. And Google and Facebook are the ones who accumulate better economics over time at the expense of the people who advertise on them. So the push first pull thing. So right now we talk about this in the age of AI, I think there's. How do we assess AI businesses? Right now is an interesting thing. One is ease of customer acquisition. And we see this with the really, really special ones like Cursor, which has been largely viral growth. So ease of customer acquisition, it happens even with things that need to be sold like a bridge. You gotta go sell to hospital systems. It turns out hospital systems are dying for this because the doctors love it. It's really good, it saves em a lot of time and it's really valuable. So ease of customer acquisition is something that is sort of a must for us in this AI wave. The second is customer behavior, customer retention, customer engagement, customer. There are some head fakes that we've seen of things that grow really fast and then they fall off and they're experimental. So the things that have durable behavior, things like Cursor, where the users really, really use it and ideally or increasingly use it over time. Harvey is an example of a company where as the models have gotten better, customer engagement and usage has actually really grown. It actually took a step change which we've seen, which is interesting to see because happened at the same time as the reasoning breakthroughs. We were like, oh, that makes sense. Actually lawyers need to reason and turns out models got really good at reasoning and people use the products a lot more. So ease of customer acquisition, the behavior that we observe on customer retention, engagement and then there's gross margins and we give a little bit of a pass on gross margins. Right now we're in this funny environment where late stage SaaS Cloud, we would look at a company and it's like, oh man, if you're not 70% plus gross margin, you're not really a SaaS business or cloud business, whatever, that's going to be a knock and people will trade you differently and that's when you get valued as revenue versus gross profit or whatever. Now it's like a badge of honor to have low gross margins because we're like, oh, at least people are using your AI products. We get these pitches and they're like, I have an AI thing and I got 75% gross margins. I'm like, well no one's using the AI stuff then that doesn't really seem like an AI product to me. So we give a little bit of a pass on that. The expectation is the cost is going to continue to go down.
- [53:12]
Patrick O'Shaughnessy
Just inference cost.
- [53:14]
David George
Inference cost is going to go down over time. I mean there's so many existential questions about market structure that will predict inference cost, but the history of technology would suggest that it's going to go down over time. The cost of inference has gone down at the same time that reasoning happened. And so token token usage has gone way up. So you haven't yet seen any improvement in gross margins. But I think over time that's likely to happen.
- [53:37]
Patrick O'Shaughnessy
Do you basically just not care if a company has 0% gross margin, for example, but the revenue growth and the customer love and all this stuff, the poll is all there. Does it round to we don't care.
- [53:47]
David George
There's a big difference between having 30% gross margins and 70% gross margins. So we do care. Our expectation is if you're producing a lot of customer value and if the models get a lot better over time, you're going to increasingly produce customer value, that the cost is going to go down. There's not going to be so much market power. The model providers that it's going to settle out where these businesses are probably higher margin businesses, I think they'll be lower margin businesses than SaaS businesses. Maybe they end up as 50% margin companies as opposed to 80. But the size of the impact and the usage and the amount that they'll be able to capture to our point on business model earlier is probably so high that it's fine.
- [54:21]
Patrick O'Shaughnessy
How much do you care that the way the product behaves and the way it's distributed is truly singular and different than competitors versus just the best of a class of company.
- [54:33]
David George
There's so many ingredients to the best of. There's sort of a foundational point which is every great company either has unique product or unique distribution. The best companies in the world have both. The best companies in the world have such unique product that it leads to unique distribution. But if you don't have either of.
- [54:51]
Patrick O'Shaughnessy
Those, what's your favorite example of that?
- [54:54]
David George
I'll use a recent one that the product is so good that people just naturally gravitate to it as cursor and again maybe in the Fullness of time, that'll get harder. But GitHub is a great example of this. I'll tell a funny story about GitHub too. So GitHub was so special of a company that for a long period of time they never actually talked to customers. So the first time I ever met GitHub, they were like, we got to tell you this, this is so awesome. We sold to Walmart and they're paying us 400,000 bucks and no one ever talked to them on the phone. We were like, wow, this is an incredibly magical product and an incredibly magical market. Just imagine if you had talked to them on the phone, what would they have paid you? If you just called them on the phone, like, they've probably paid you $4 million. So unique product, that leads to unique distribution with a founder that wants to optimize the situation. So the AI founders, I'm not the one involved with Cursor, but Michael is a very special founder and his team, they recognize what they have and then they are aggressively pursuing the enterprise at the same time. So that's a really good combination where you have unique product, you have great product people love that leads to some uniqueness of distribution. And then you can build on that advantage by saying, hey, we have all this bottoms up use, like we're going to go sell enterprises. And so a big part of what we do as a firm is we help to facilitate customer introductions, new business. We call it our go to market function. They're referred to as EBCs sometimes and we get notes after every one. And this is the most fun thing in the world of AI because we get these notes and in the case of Cursor, every single time, it's like immediately to poc, immediately to poc, proof concept, whatever, immediately to POC and oh, immediately to full sail deal. And you can see that that's actually incremental data for us and making decisions. But you can see it, it is magic when it happens. So Martin led the A of Kurser, one of my partners who leads our infrastructure fund. And after one of these emails he chimed in and it's a big list, it's like a hundred people on the list or something. He wrote product fucking market fit. So now we're like, oh, you know, PMF is now pfmf. So when you see that, you know that's unique product, that's unique distribution and you have a founder or founding team or full set of employees who really wants to optimize it, that's magic.
- [57:02]
Patrick O'Shaughnessy
What are the trade Offs of the way that Andreessen is structured. No firm is perfect. There's choices for how you have structured and nested the team. Lots of different groups, leaders of groups like you. What are the negative parts of the trade offs for how Andreessen is structured versus a more monolithic structure or something that was just different.
- [57:20]
David George
Our strategy for scaling is pretty well covered. But effectively, we think scale allows us to bring more power to the entrepreneurs and give them a greater chance to be successful in the market. That's the fundamental thesis behind the scaling for us. And with more resources, you can bring more resources to bear for the entrepreneur. So for us, when I joined every single Monday and every single Friday, we used to sit in the room together, all of us, and we'd hear all the pitches and then we'd have long meetings to talk about each of them all as a group. So Dixon was leading our crypto fund and we'd have bio fund pitches and we'd all listen to all of them and then we'd all debate. And then we realized at a point that was not the optimal use of time. Dixon weighing in on a bio investment and vice versa probably doesn't make sense. And you could extrapolate that out to a bunch of our investment processes. Ben and Mark decided to decentralize the firm and put more power down into the investing teams that ran each investment fund. And the reasoning behind that is twofold. One, we thought it would allow us to have better expertise around the table. If you're only just fully deep in infrastructure or applications or American dynamism or crypto or bio, that's an advantage. It's both an advantage in making decisions, but also an advantage in go to market with the entrepreneurs. And then secondly, if we are going to scale, you can't scale an organization with 25 or 30 decision makers around a table. It's too hard. You can't make a trade off between should we put an incremental dollar into a bio fund investment or a crypto investment, or how should we think about reserving this versus that? It's too hard. So we shrank the size of decision makers by doing this to a smaller group who's in charge of their own funds. And so far that's working really well. And I think that's mostly a function of the fact that our early stage folks, they're really good and we're all really collaborative. The only trade off that we have at the growth fund is selfishly that process that I described where we all sit around the table is Valuable for me. It's good for us to have access to all information at all times because we sit across all of our early stage funds. The way we operate is we invest across all of our sectors.
- [59:20]
Patrick O'Shaughnessy
What percent of the investments you make did the firm have a prior investment in?
- [59:24]
David George
It's a little over half. And then if you take the number of investments, so if you just do it by dollars, it's a little over half that are preexisting venture investments. And then if you add the dollars that we're investing in, preexisting investments that were preexisting growth fund originated investments, follow ons, it's something like 70%. So 70% of the dollars that we're investing. We got deep knowledge on the companies. I call it game film. I talk about game film all the time. It's so important when assessing an investment. When assessing a founder. Game film is not just numbers, it's how has the founder done this?
- [59:57]
Patrick O'Shaughnessy
How do you do reserving in the growth fund? Is it materially different than elsewhere?
- [60:00]
David George
When we first started the growth fund, I was like Scott, zero reserves. Let's do it. Every single dollar is going to have to be scrutinized. Literally every dollar. It turns out that's not really practical. You need to reserve a little bit. So we reserve a tiny amount and this is for small follow ons where our participation is important but we're not a lead. We do zero reserving for large investment amounts that we think we're going to make in a company. Because I think that would lead to lazy decision making. We'd say, oh well, we reserved for it, let's do it.
- [60:28]
Patrick O'Shaughnessy
So you just treat it as a new investment next time.
- [60:30]
David George
Every single thing is a new investment. So if you look at our largest investments in the growth fund and just run down the list, Databricks, SpaceX and roll, OpenAI, XAI, Flox, safety, Figma, Stripe, Coinbase, most of them are across multiple funds and that's by design. We want to be flexible and say, hey, if we're super excited about a new investment, it's fine, just keep going. We have no target metrics for industry infrastructure versus American dynamism versus crypto or whatever. It should always be best ideas when. But I manage the fund and so I closely track how are we doing on those metrics. And generally speaking, thematically, do we feel like the fund is a good reflection of what we see as the opportunity set for the next 10 years?
- [61:11]
Patrick O'Shaughnessy
Can we talk about selling? This is such an interesting topic to me because you can ask lots of investors that invest in private markets when and how they sell. And most of the answers you hear are fairly simple heuristics. One you hear a lot is when there's a crystallization, you sell a third, hold a third, hold a third forever.
- [61:27]
David George
It's like the Fred Wilson now, later, never.
- [61:29]
Patrick O'Shaughnessy
That'd be one example. There's lots of similar heuristics. How do you think about. Especially because you're investing at the growth stage, probably closer to the opportunity to sell to another investor or the thing going public. Talk about what you've learned about selling and just how you've done it so far.
- [61:45]
David George
Selling is so hard to do this job. So we've tried a number of different variations. So I think it's different at the venture stage. Your Fred Wilson model, the third or third or third, I think it's totally sensible because he's coming in extremely early. So for him that's relatively simple. We have our own version of. It's not algorithmic, but semi algorithmic decision making for the early stage. And we take some very simple qualitative things like is the founder still running the company, which we value a lot. And then a sort of qualitative. Are they the market leader that we feel great about? And if so, we would bias to hold longer and if not, we would bias to exit sooner. We also try to overlay an assessment of how it's valued versus performance, which is really, really hard. So I would say we've been fortunate in that generally we've gotten it pretty right.
- [62:33]
Patrick O'Shaughnessy
Why don't you buy whole companies?
- [62:35]
David George
One of our folks in IR asked me yesterday, why haven't we done a buyout fund? I think culturally it's totally different than what we do. All that we want to do and all that we stand for is helping the next generation of companies go beat the incumbents. So culturally, buying the incumbent and trying to make them last as long as possible and squeeze as much as they can out of their customers or whatever it may be, it's just culturally antithetical to what we do.
- [63:00]
Patrick O'Shaughnessy
What are the most interesting strategies or things that upstarts do to beat incumbents? What are your favorite ways that companies beat incumbents?
- [63:09]
David George
Business model shift is a super powerful thing that's very hard for incumbents to react to. That's part of what is so exciting about the customer support industry and decagon. The odds are so stacked in their favor because the business models can be very hard for incumbents to react to. And it's on the customer Side Better, faster, cheaper, fully better, faster, cheaper by a lot, by an order of magnitude in each case. So business model shift is one the two simple components that I'm looking for, which generally we're not really seeing yet is completely reimagined UI and then completely new sources of data. So we're large investors in databricks. We're very optimistic about the data layer. I think they'll have some success in enabling applications built on top. But the UI UX thing and the data thing paired with a business model shift I think are what are going to give the startups the best chance against the incumbents. And the more dramatic the shift in those, the harder it's going to be for the incumbents. So take salesforce.com I use this as an example. It's a good company. I never would have thought it would be as big as it is. It's a good company. So maybe they'll be one of the incumbents that survives and reacts. What do people do in salesforce. Com? It's basically like a sophisticated form checker with some analysis and it's brutal. It's painful to use. The future with AI is not going to be anything like that. It's just going to be to my point earlier about proactive versus reactive. It's just going to be a proactive thing. You, a salesperson, you're going to log into your Salesforce and it's going to be like, hey, these are the five customers that you have business that you should be doing. Oh, by the way, I've been monitoring what they've been doing online. There's a shift in this group. You got to be aware of it. I've drafted a call script. This person actually likes to be talked to on the phone. This person wants just to engage via your AI email. I've drafted one for you. I've already taken a bunch of action on your behalf. Here's what you needed to do. That's going to be the future, I think. And then the data that goes into informing that is no longer the database that makes Salesforce so powerful. It's all the unstructured data that's getting pulled from every interaction that everyone has everywhere. So my hope is that the fullness of the new product has that entirely reimagined UI ux. The fact that it's pulling all this new data from different places is an advantage to incumbent because Salesforce is so sticky because of the column or database that they have. And then if you on top of it have a new business model that's attached to it. I think that's a really good shot for a startup to be able to finally go rip Salesforce out. If you look at the SaaS and cloud wave, basically the whole story was a 7xing in the amount of revenue in the market. There's this question of like who wins the incumbents versus startups. It basically split 5050 so 7x more revenue. Incumbents grew a bunch of they took half of the new share, startups took half the new share. I think the more dramatic the shift, especially with the more dramatic the shift in potential business model, the more likely it favors the startups. That's the bets we make. My hope is that's what happens, but.
- [65:50]
Patrick O'Shaughnessy
We'Ll see it's incredibly fun to explore all this with you in a formal way. Having done it so informally for 20 years or whatever it is. I think you might know my traditional closing question. What is the kindest thing that Enamored done for you?
- [66:02]
David George
I do know that question and I've thought a lot about it because there's a lot of things that I consider in my life that have broken my way. I grew up in Kentucky, far away from this world, and a lot of lucky breaks went my way. The thing that I reflect on the most is we spent the whole time talking about work. The other thing that I do in my life is my kids. And something has become really clear to me with my kids age that they are now, which is the sacrifices my parents made for me are extraordinary. They're incredible. And my dad always brings up oh, I was on the sidelines in the rain watching you and driving you. From soccer to baseball to basketball sports and all the activities that I was able to participate in as a kid I think made me into the person I am in a lot of ways. And now I see it with my kids because I have to do that work and I have such a greater appreciation for what my parents gave to me and the sacrifices they made.
- [66:53]
Patrick O'Shaughnessy
Amazing simple thought. Thanks for your time man.
- [66:55]
David George
Great to be with you.
- [66:58]
Patrick O'Shaughnessy
If you enjoyed this episode, visit joincolas.com where you'll find every episode of this podcast, complete with hand edited transcripts. You can also subscribe to Colossus Review, our quarterly print, digital and private audio publication featuring in depth profiles of the founders, investors and companies that we admire most. Learn more@joincolasis.com subscribe.
- [67:22]
David George
Sam.