20VC a16z's Martin Casado on How the Venture Model is Broken, Why VCs Should Be Running Wall St, Who Wins and Who Loses in the Next Generation of Venture & Investing Lessons from Marc Andreesen, Ben Horowitz and Chris Dixon

In this episode of 20 VC, host Harry Stebbings interviews Martin Casado, a general partner at Andreessen Horowitz, who shares his journey from a failed physicist to a successful venture capitalist with a focus on enterprise investing. Casado discusses the evolution of venture capital, advocating for a mature market investment approach that scales with companies throughout their lifecycle. He emphasizes the importance of innovation in finance, suggesting that technology-positive investors should dominate Wall Street. Casado also reflects on his operating career, noting that his experience as a founder and CTO at Nicira (acquired by VMware) has given him a unique empathy and understanding that aids his investment decisions. The conversation covers the role of junior partners, the challenges of scaling venture firms, and the need for rigorous debate in decision-making. Additionally, Casado touches on the importance of category creation and go-to-market strategies, offering insights into his investment philosophy and the future of venture capital.

• Speaker A believes it's time for venture capital to mature and serve as a driving force on Wall Street, beyond traditional finance individuals.
• The venture capital model is outdated and should adapt to the scale and maturity of the current technology market.
• Venture capital should embrace innovation at all stages of a company's lifecycle, from seed through public offerings and debt financing.

"So I think, like where venture's broken is it's time to grow up."

This quote signifies Speaker A's perspective that the venture capital industry needs to evolve and mature to better suit the current scale and influence of technology in the market.

"I think that we should be running Wall street, not the finance people that don't believe in any of these things."

Speaker A is advocating for venture capitalists, who are supportive of innovation and technology, to have more influence in the financial markets, traditionally dominated by figures less interested in these aspects.

• Speaker A categorizes board members into three types: average, frustrated operators, and phenomenal board members.
• Average board members have investment experience but may lack the ability to add significant value regarding product-market fit.
• Frustrated operators are former executives or entrepreneurs who may try to control the company, often disrupting its operations.
• Phenomenal board members, like Ben Horowitz in Speaker A's experience, have significant operational success and a deep understanding of the company's needs.

"First, in my experience, you kind of have three types of board members."

This quote introduces the categorization of board members based on Speaker A's personal experience and observation.

"And then periodically you get like a pretty phenomenal board member. Like for me, that was Ben Horowitz."

Speaker A highlights the value of having a board member like Ben Horowitz, who has both significant operational success and a deep understanding of the company's needs.

• Speaker A discusses how an operating career can influence an investor's approach.
• Operating experience might not necessarily aid in investment decisions but can provide a deep level of empathy and understanding of startup challenges.
• An investor with operational background can be valuable if they recognize it's not their company to run and avoid being disruptive.

"But on the operating side, you can realize it's not your own company."

Speaker A explains that while an investor with an operating background can be valuable, it's important they understand their role and do not try to run the company themselves.

• Speaker A manages a heavy board load by working long hours and leveraging a strong team of junior partners at Andreessen Horowitz.
• A combination of hard work and support from specialized experts within the firm enables Speaker A to effectively serve on multiple boards.

"There's an awful lot of time in the day. And even if you're on a lot of boards, it's nothing compared to running a 4000 person team."

Speaker A compares the time commitment required for serving on boards to the more demanding experience of running a large business unit, indicating that with time management, handling multiple boards is feasible.

• Speaker A's personal interest lies in infrastructure and systems, and this passion aligns with their professional activities.
• Engaging in discussions and communities that focus on technology and innovation is a natural extension of Speaker A's interests, which also benefits their venture capital work.

"My first love is infrastructure and systems. I just absolutely love it."

This quote reveals Speaker A's genuine passion for technology, which drives their professional focus and personal interests.

• Speaker A believes the venture capital model is broken due to its roots in a much smaller and less mature technology market.
• The model needs to adapt to the current scale of the market and should consider venture investments more like mature market investments.
• Venture capitalists should be the ones scaling investments across a company's lifecycle, not traditional financiers who may not prioritize innovation.

"I think where venture is token is it's time to grow up."

Speaker A calls for the venture capital industry to mature and adapt to the current scale and influence of the technology market.

• Speaker A sees a barbell effect in venture capital, where success lies either in operating at scale or in niche, specialized plays.
• Scaling up in venture capital means providing support to companies throughout their entire lifecycle, from early stages to public markets.
• Venture capital should challenge the traditional financial industry by emphasizing innovation and backing founders consistently.

"Either you're operating at scale, you can help a company everywhere, from seats Republic."

Speaker A explains the importance of venture capital firms operating at scale to support companies throughout their growth stages.

• Speaker A criticizes the traditional financial industry for prioritizing predictable returns over innovation.
• There is an opportunity for venture capital to redefine its role and influence across the financial industry by maintaining a focus on innovation.
• Speaker A envisions a financial industry where tech-positive investors manage capital throughout all stages, including public markets.

"I believe tech has matured to the point that you can scale tech innovative investing for the lifecycle of a company."

Speaker A advocates for a shift in the financial industry where innovative tech investing plays a central role throughout a company's lifecycle.## Founder Importance and Innovation Belief

• The significance of founders in driving company success is highlighted by citing examples like Reed Hastings and Jensen.
• The belief in innovation and the ability to scale capital deployment beyond early funding rounds is emphasized.
• The importance of having investors who support innovation and believe in the potential of teams is underlined.

"It's the fucking founder, man. It's the person that made the magic to begin with. It's the person that has the credibility. That's everything."

This quote emphasizes the crucial role founders play in creating and sustaining a company's success due to their original vision and credibility.

• Discusses the potential negative impact of founders having to continuously sell their vision to multi-stage investors.
• Highlights the importance of a healthy relationship between board members and founders.
• Mentions the alignment of interests between board members and founders during fundraising stages.

"The board member is very aligned with the founder when it comes to the next raise."

This quote highlights the necessity for alignment between board members and founders, particularly when it comes to raising additional funds for the company.

• Addresses concerns about venture capital returns potentially diminishing as the industry matures and resembles private equity.
• Discusses the concept of creating funds for different risk profiles and providing limited partners (LPs) with appropriate exposure.
• Emphasizes the speaker's focus on technology as a force for good and the desire to invest in top innovators rather than maximizing returns.

"I'd like to think at much more of an index across innovation and much less specifically about, if you give me a dollar, I'm going to kind of make this $1 go up or down by hitting every aspect that I can of a market."

This quote reflects the speaker's broader investment philosophy, which is focused on supporting innovation and technological progress rather than solely on financial returns.

• Discusses the speaker's approach to pricing in deals and the market's influence on investment decisions.
• Differentiates between setting high valuations and companies achieving high valuations independently.

"I'm normally on the low end as far as prices that go in."

The speaker asserts that they typically invest at lower valuations, contrary to any perception of being insensitive to price.

• The speaker's investing style and philosophy have evolved over time.
• Acknowledges the complexity and unpredictability of early-stage investment success.
• Prefers to study industries deeply to make better-informed investment decisions.

"I used to have the hubris to believe that if a company walked in, I could look at the company and I could determine if it's a good investment or not... I've decided that's a totally underdetermined problem."

This quote reveals the speaker's realization that predicting the success of early-stage companies is extremely challenging and has led to a change in their investment approach.

• Describes the process of learning about new topics and the importance of founder networks in identifying promising investment areas.
• Emphasizes the significance of understanding how technologies impact markets and the process of category creation.

"I think the founder network is just more intuitive and smarter and more prescient than any other network."

The speaker values the insights of founders when exploring new investment areas, considering them more insightful than other sources.

• Discusses the lack of resources on category creation and the importance of market annealing.
• Highlights the need for startups to invest significant effort in creating new market categories.

"Selling into an existing market is easy. The annealing you've got to do to soften up a market for categories harder."

This quote underscores the challenges and the required dedication for startups to establish new categories in the market.

• Addresses the importance of aligning with market trends and readiness when creating a new category.
• Discusses the effort required for startups to establish themselves in new markets.

"Working against a macro trend is just brute... if you're in a new market, the amount of work you're going to have to do to make the market pliable is going to be commensurate with your speed."

The speaker advises that startups should align with macro trends and expect to work hard to make a new market receptive to their offerings.

• Stresses the crucial role of storytelling in not only educating the market but also in leading a team.
• Suggests that CEOs with marketing backgrounds excel at defining and communicating the vision of their companies.

"It's very important at some point in time to kick everybody out of the room, sit there for three days, and then write down the very lucid, very description vision of the company."

The quote highlights the importance of having a clear and compelling company vision that can guide all aspects of the business, from culture to sales.

• Argues that cost-cutting and category creation are not necessarily at odds.
• Criticizes the practice of freezing hiring as a first response to financial pressure.

"Companies should be sized to the market opportunity and the funding environment."

This quote advises that companies need to adjust their scale according to the market opportunities and the current funding environment to remain viable.## Market Contraction and Company Adjustment

• Companies must adjust to market contractions and reevaluate their operating plans.
• It's necessary to make cuts in spending, which could affect various areas, not just layoffs.
• Category creation is essential regardless of whether spend is cut or maintained.
• Thoughtfulness is crucial when dealing with capital and market contraction.

"If you have a market contraction, you need to decide is our existing operating plan, is that still viable in the current market because you can't control the macro."

This quote emphasizes the need for companies to reassess their operating plans in light of market contractions, recognizing that external economic factors are beyond their control.

• Scenario planning becomes critical in economic downturns.
• Founders should create plans for different market scenarios: median, bear, and bull cases.
• The exercise of planning for various scenarios is essential even if immediate action isn't taken.
• Scenario planning prepares companies for potential adverse outcomes like missed revenue targets.

"Normally in downturns, you move to scenario planning."

Speaker A suggests that during economic downturns, companies should engage in scenario planning to navigate the uncertain environment effectively.

• Layoff strategies should focus on keeping the company solvent and protecting employees.
• Decisions on layoffs should come from a top-down replanning based on the current economic environment.
• Boards may have different risk profiles and responses to economic changes.
• Decisions should be made from an operating plan, not arbitrary targets.

"The right approach is to create an operating plan given the current economic environment."

Speaker A advises that the approach to layoffs should be based on a carefully considered operating plan that takes into account the current economic climate.

• Former operators can overfit their experiences onto new companies.
• Board members should provide data and insights, not strategies or operational advice.
• Junior board members are valuable for their market knowledge and should be leveraged.
• The role of board members is to support decision-making, not to dictate company direction.

"The best junior board members that I know don't try to be helpful with advice. They try to be helpful by doing stuff that only VCs can do and companies can't do."

Speaker A highlights the importance of junior board members focusing on providing unique insights and data that founders may not have the time to gather themselves.

• Vigorous debate is necessary for making decisions in complex systems.
• Debates should span over days, weeks, or even months for thorough exploration.
• Teams should make decisions collectively, with junior partners having significant influence.
• The timing of deals can pressure decision-making; preparation is key.

"For any hard decision, the only way you can get to the bottom of it is lots of vigorous debate."

Speaker A concurs with Andy Grove on the importance of rigorous debate for making difficult decisions within complex systems.

• Operators may need to unlearn habits to become good investors.
• Engineers and operators might have fixed ideas based on what historically works, but investors need to be open to new ideas.
• Successful companies often result from multiple iterations and pivots.
• Positive futurism is essential for investing, as opposed to a curmudgeonly engineering perspective.

"The reality is many companies end up working after three or four iterations."

Speaker A reflects on how companies like Google and Facebook found success after several attempts, emphasizing the importance of flexibility and openness to new ideas in investing.

• The venture capital industry has evolved to become more disciplined and specialized.
• Modern VCs are more engaged, knowledgeable, and treat investing as a serious discipline.
• There has been a shift from generalist VCs to those with deep understanding and hard work ethic.
• The VC landscape now includes individuals who are passionate about innovation and finance.

"I think now there are people that you can talk to that really view this as a real discipline on the order of taking over all of finance."

Speaker A expresses a positive view of the current state of the VC industry, noting the increased professionalism and dedication among modern venture capitalists.## Value Accrual to Innovation

• Over the past 15 years, there has been a growth in the belief of value accruing to innovation.
• Serious and smart individuals are now prominent in the field, recognizing opportunities that were previously non-existent.
• The current downturn is expected to drive away less committed individuals, leaving behind a cohort of dedicated and intelligent people.

"And they really believe in value accrual to innovation and applying money to that problem."

The quote explains that there is a strong belief in the value of innovation and the importance of investing in it.

• Scaling in venture capital is still an unsolved problem, unlike in finance where assets are fungible and there are no conflicts.
• Decoupling operations across investing arms like bio, crypto, and venture funds has been a positive change, allowing for focus on specific areas.
• The worst aspect of scaling is the complexity it adds to basic processes, such as budget allocation and determining responsibilities.

"I will say scale is an unsolved problem in venture capital."

This quote emphasizes the challenges of scaling in the venture capital industry, which is still an area without clear solutions.

• Leaders often receive more credit than is due, overshadowing the team's contributions.
• Ensuring equitable recognition is important for career development and accurately reflecting where value is generated.
• Speaker A prefers to highlight the team's achievements rather than individual accolades.

"I think I get a lot more credit than is due. I think my team is so phenomenal."

The quote reflects Speaker A's belief in recognizing the collective effort of the team and ensuring fair credit distribution.

• Investing requires a clear approach and the ability to control emotions and avoid principal-agent problems.
• Speaker A advises focusing on top companies and spaces where founders have deep insights.
• Success as an investor involves adhering to a consistent approach and mitigating emotional and biased decision-making.

"I think this entire job is literally about controlling the things that you can control."

This quote advises investors to focus on what they can control and to have a clear investment strategy.

• Speaker A does not advocate for thesis-driven investing, which can be prone to confirmation bias.
• The value in investing comes from understanding the spaces led by founders, not from creating grand unified theories.
• The role of the investor is to identify leading companies within a given space, rather than to drive the direction of the space.

"Founders are smarter than I am."

The quote summarizes Speaker A's investment philosophy, which is based on respecting and following the insights of founders.

• There is a concern about whether future investments will fund innovation or seek predictable returns that may stifle innovation.
• Speaker A hopes that venture capital will resemble traditional finance in ten years, with a focus on funding innovation.
• The venture ecosystem is expected to erode traditional finance's hold on companies earlier in their life cycle.

"I think there's going to be a question of, like, if there's a dollar deployed in the future, is that dollar going to fund innovation."

This quote expresses the hope that future investments will prioritize funding innovation over predictable returns.

• Speaker A has learned to improve their bedside manner as a board member and has shed a lot of hubris.
• They acknowledge having missed many investment opportunities and emphasize the abundance of opportunities still available.
• The advice to follow the founder network has been valuable.

"Life would have been easier if I didn't have to take the hard path that way."

The quote reflects on personal growth and the lessons learned from missed opportunities and challenges faced.

• Ram Sriram is highlighted as an underrated angel investor who works hard and adds significant value.
• The role of angel investors is critical in the venture ecosystem, and their contributions can be substantial.

"Ram works so hard. It adds so much value to the boards that he's on."

This quote praises Ram Sriram's dedication and the impact he has as an angel investor.

• Speaker A aspires to continue influencing how west coast investment strategies can transform east coast finance.
• The focus is on maintaining a founder-focused approach to investment.

"I would love to continue to focus on how west coast product focused, founder focused investment can continue to rotate at East Coast Finance."

The quote outlines Speaker A's ambition to influence the convergence of different investment philosophies and regional approaches.