20VC a16z's Alex Rampell on The Struggle Between Innovation vs Distribution, When How To Determine Whether An Application is Optimised Through Centralised or Decentralised Networks & Why Most ICOs Today Are Ridiculous

In this episode of "20 Minutes VC," host Harry Stebbings interviews Alex Rampel, a general partner at Andreessen Horowitz, delving into his journey from a young software developer to a leading venture capitalist in fintech. Rampel shares insights from his entrepreneurial ventures, including founding TrialPay and Fraud Eliminator, and emphasizes the importance of distribution over pure innovation for startup success. He discusses the challenges of high valuations in fundraising and the potential of ICOs in protocol monetization, despite the prevalent skepticism and risk of scams. Additionally, Rampel highlights his recent investment in Propel, a company digitizing food stamp access, showcasing his strategic approach to finding startups that solve distribution issues and have the potential to become platforms for underserved communities.

• Harry Stebbings introduces Alex Rampell, general partner at Andreessen Horowitz.
• Alex Rampell leads fintech investments at Andreessen Horowitz and serves on several boards.
• He co-founded TrialPay, Fraud Eliminator, and other companies before joining Andreessen Horowitz.
• Alex Rampell is also a significant angel investor and has advised SV Angel Fund.

"And I'm very excited to welcome Alex Rampell to the hot seat. Now. Alex is a general partner at Andreessen, where he leads the firm's fintech investments and serves was on the boards of branch, Peer, Street Point and Quantopian."

This quote introduces Alex Rampell as a general partner at Andreessen Horowitz and highlights his role in fintech investments and board service.

• Alex Rampell started as an accidental entrepreneur at age 10 with a Macintosh computer.
• He wrote a screensaver program and sold it as shareware, making $100 a week.
• His early experience revealed that most people are reluctant to pay for digital goods, leading to his idea for TrialPay.

"I was not trying to be an entrepreneur, I was not trying to start a business... I wrote a screen saver... I said, if you like it, send me $5. About four days later, I got a $5 check in the mail."

Alex Rampell describes his unintentional start in entrepreneurship by creating and selling a screensaver, which eventually led to consistent weekly earnings.

• Alex Rampell's experience with shareware led to the creation of TrialPay and other venture-backed companies.
• He realized his passion lies in coaching and brainstorming rather than operating businesses.
• His insights from operations influenced his approach to venture capital.

"I just realized that the thing that I'm really most passionate about, it's actually not so much operating businesses... I like coaching people, thinking of new things, brainstorming with people."

This quote explains Alex Rampell's shift in interest from running businesses to a role where he could mentor and collaborate with others, which is a key aspect of his venture capital work.

• Alex Rampell discusses the importance of distinguishing between features, products, companies, and platforms.
• He emphasizes the significance of distribution in the success of startups.
• The concept of "innovation vs. distribution" suggests that startups must gain distribution before incumbents innovate.
• Distribution often trumps innovation due to the control incumbents have over market access.

"The battle between every startup and incumbent comes down to whether the startup can get the distribution before the incumbent can build the innovation."

This quote captures the essence of the challenge startups face against established companies, highlighting the critical role of distribution in achieving success.

• Startups should consider distribution strategies early on.
• The landscape has changed, with dominant players controlling various sectors.
• Building on a platform can be risky as incumbents can easily replicate and integrate innovations.

"I think you have to think about the way that you really crack this distribution. Not early, because in some cases, I actually admire people that are very, very young and very naive about this whole concept because they can just focus on product."

Alex Rampell advises startups to consider distribution strategies from the beginning, despite the potential benefits of initially focusing solely on product development.## Challenges of Startup Distribution

• Startups often face a significant barrier in distribution channels.
• They either have to rely on expensive paid marketing or become dependent on another platform for free distribution.
• Paid marketing can consume all the economic rent, benefiting platforms like Facebook or Google.
• Free distribution through another platform risks the feature being copied by the platform owner.

"But in most cases, they run into a very, very big wall, which is either you have to rely on paid marketing, which is a really, really tough challenge, in which case all the economic rent of your business goes to Facebook or Google, or you're reliant on somebody else's platform from a free distribution angle."

This quote highlights the dilemma startups face in distribution: either spend heavily on paid marketing, with profits going to advertising platforms, or risk dependency on a platform that might clone their features.

• There is a concern about a fallow period for consumer startups due to the incumbency advantage of established distribution channels.
• Startups must find ways to overcome these challenges, as history shows mankind has always adapted to challenges.
• Companies are aggressively acquiring potential disruptive threats to control their destiny.
• New platforms like VR and AR are being explored as alternatives to current dominant platforms.

"I think it's unfortunate if that's the case. I mean, mankind has always found a way, I would say, across millennia, to kind of overcome a challenge, and I think the same will be true here."

Alex Rampell acknowledges the potential fallow period but remains optimistic about the ingenuity of mankind to overcome such challenges and innovate.

• Data network effects refer to the increasing value of a service as more data is contributed to it.
• Startups need to achieve an insurmountable advantage through their data over time.
• Companies like Google have leveraged their vast quantities of data to improve machine learning and maintain competitive advantages.
• Startups must consider how to utilize initial data to create a minimum viable product (MVP) and grow their data advantage.

"The more writes that you're able to do... The more valuable the read that you're making from that cluster of data can be."

Alex Rampell explains how the accumulation of data (writes) increases the value of the insights derived (reads), which is the essence of data network effects.

• Inflection points are critical for startups to identify for sustained growth and strategic advantage.
• The timing of targeting consumers is essential; too early or too late can lead to failure.
• Startups like Sofi capitalized on mispriced assets to build relationships and expand services.
• Finding an inflection point involves identifying an underserved or mispriced market segment to gain an initial customer base.

"So the key thing is finding the inflection point where there still is interest, where there's some notion of pull from the consumer, but it's no longer so crowded that it's effectively overfitched."

Alex Rampell discusses the importance of identifying the right moment to engage consumers, before a market becomes oversaturated.

• Sustaining growth through inflection points requires discretion and strategic planning.
• Startups must find unique ways to acquire customers without relying solely on large advertising budgets.
• Inflection point strategies should be kept secret to avoid imitation and maintain a competitive edge.
• Over time, startups need to evolve from relying on inflection points to developing a more sustainable business model.

"So I think it's a hack. I mean, the reality is that if you have a good inflection point strategy, you almost want to keep it secret."

Alex Rampell emphasizes the strategic nature of inflection points and the need for startups to protect their growth strategies from competitors.## Selling at the Point of Transaction

• The best time to sell a product is when a customer is already engaged in a related transaction.
• Engaging customers at the point of another transaction does not rely on waiting for them to show intent.
• Startups can have an advantage by using this strategy as it may not be viable for larger companies.
• The intent to purchase is self-evident, unlike platforms like Google where intent is shown but costly.

"Because the best place to sell ketchup is when somebody's buying fries, or I guess I should call them chips. So that's the best time to actually sell ketchup."

This quote highlights the strategy of selling a complementary product at the moment a related product is being purchased, using the example of ketchup and fries.

"Not, you actually want to do things that don't scale. I mean, ideally you do a lot of them, but that's one of the ideas behind this as well, which is selling to somebody at the point of another transaction where you're not waiting for them to show intent, but the intent is almost self evident."

Alex Rampell discusses the importance of capitalizing on the customer's current engagement in a transaction to sell an additional product, emphasizing that this approach may not scale but is effective.

• The debate between public and private blockchains is significant, with various opinions on their respective merits.
• Some people misunderstand blockchain as a buzzword or a catch-all solution for data issues.
• The true value of blockchain is in specific cases where governance or longevity of data is a concern.
• Governance issues can be addressed by a distributed ledger to prevent centralized control.
• Longevity ensures that data remains accessible even if the company storing it ceases operations.

"A lot of people that say, I want a blockchain, the same people that a few years ago were saying, we want big data, which in a couple of years will saying like, oh, AI is very important to us."

Alex Rampell points out that blockchain is often seen as a trendy technology without a clear understanding of its specific applications.

"The way to do it would actually been to have made it a distributed ledger, because that way there wouldn't be any one point of control where any party in the network could go change the rules of engagement."

Alex Rampell explains how a distributed ledger could have prevented centralized control and solved governance issues using the example of Visa's history.

• Tokenization can provide a secure way to handle confidential data, such as Social Security numbers and credit card information.
• The concept of tokenization is not limited to ICOs and has broader implications for data security and authentication protocols.

"Certainly for confidential data, that makes a ton of sense, because the idea that in the United States, a Social Security number is the number that never changes, that you just, what is it? It's nine digits, and it proves that you are you. It's absurd."

Alex Rampell advocates for the tokenization of sensitive personal data to enhance security and privacy.

• The ICO market is controversial, with varying opinions on its sustainability and legitimacy.
• Bitcoin is seen as a successful store of value, not as a currency.
• ICOs can potentially monetize protocols in a way that was not previously possible.
• However, many ICOs are viewed as scams or are run by inexperienced teams.
• A few ICOs represent true innovation but are overshadowed by the majority, which are not viable.

"So what I would say is that the vast majority of icos are kind of ridiculous right now, but there are a few that are very, very interesting and represent a true innovation in an inherently kind of business model and computer science problem of the last 30 years, which is, how do you monetize a protocol?"

Alex Rampell discusses the potential of certain ICOs to solve the long-standing problem of monetizing protocols, despite the overall skepticism surrounding the ICO market.## Integration of ICOs in Traditional M&A

• Traditional M&A corporate acquirers face challenges in understanding and integrating ICOs.
• ICOs represent a new funding model and revenue stream for companies.
• Companies holding a percentage of their own tokens can monetize them if their value increases.
• The analogy of ICANN and domain names is used to explain token monetization.

"What happens is when you do one of these token offerings, the quote unquote company that does it will hold on to some percentage of the tokens, and then that way they can continue to monetize them."

This quote explains the concept of a company retaining a portion of its own tokens after an ICO to benefit from potential value increases, similar to how ICANN could sell domain rights.

• Alex Rampell identifies as an "optimistic pessimist" in the venture capital industry.
• He believes large incumbents are capable of mounting "counter-revolutionary strikes" against startups.

"I probably am more skeptical... I actually do think that the ability of large incumbents to go mount a counter revolutionary strike is actually not as atypical as a lot of people in Silicon Valley mock them for."

The quote reflects Alex Rampell's skepticism towards the common Silicon Valley notion that large companies cannot effectively respond to disruptive startups.

• Alex Rampell emphasizes the importance of reading primary sources to avoid misinformation.
• He uses Twitter as a tool for news intake and follows Chris Dixon's writings.

"So what I try to do whenever possible, is actually get to the primary source."

This quote emphasizes the value Alex places on original research and information to form accurate understandings, avoiding reliance on potentially biased or inaccurate secondary sources.

• Excessive valuations can hinder a startup's ability to sell or raise further funds.
• Alex advocates for reasonable valuations, aligning with long-term company health over short-term gains.
• He stresses the importance of a startup's next funding round prospects over current valuation.

"Too high of a valuation can really kill a company."

This quote highlights the danger of startups accepting inflated valuations, which can lead to challenges in future funding and potentially harm the company's prospects.

• Alex invested in Propel for its innovative approach to digitizing food stamp access.
• Propel's platform could potentially offer other financial products to economically disadvantaged customers.
• The investment aligns with Alex's interest in fintech and unique distribution strategies.

"They have come up with a brilliant way of both helping and acquiring customers early on, and then they can offer them other financial products."

This quote explains Alex's investment decision in Propel, which is based on the company's potential to serve as a financial platform for the economically needy, without the high costs of traditional distribution channels.

• Alex Rampell appreciates the introductions and support from his network.
• He recommends using Raiden travel cases and Simba hybrid mattresses for better travel and sleep experiences.

"Thank you so much for joining me today. It was such a pleasure to have you on the show."

This quote is a polite sign-off and expression of gratitude to Alex for participating in the interview, reflecting the amicable nature of the conversation.