Benchmark vs a16z: Why Stage Specific Firms Win

In a lively discussion, Rory and Jason delve into venture capital dynamics, contrasting mega funds like Andreessen Horowitz with focused funds like Benchmark. They explore the impact of AI on labor markets, predicting significant job displacement and emphasizing the need for agility in investment strategies. The conversation touches on recent acquisitions and market shifts, highlighting the challenges and opportunities in the tech industry. They also discuss the importance of maintaining relevance through strategic content and deal activity, while acknowledging the evolving landscape of venture capital and the pressures on endowment funds.

• Benchmark and Andreessen Horowitz (Dre) have different strategies and outcomes in venture capital investments. Benchmark has a higher hit rate at 10% with fewer investments, while Dre has a lower hit rate at 2% but with more investments.
• The dilemma of mega funds versus focus funds is highlighted, where focus funds have better hit rates but lower absolute numbers compared to mega funds cranking through more deals.

"Benchmark did something like 63 series A's and had a 10% hit rate across 15 years. And Dre did a 454 series A's and had a 2% hit rate."

• This quote highlights the contrasting strategies of Benchmark and Dre, illustrating the difference in hit rates and investment volume.

• Wind Surf's acquisition for $3 billion reflects the rapidly changing market dynamics and the normalization of large acquisition numbers.
• The acquisition is seen as a strategic move for OpenAI, providing a significant use case for AI and aligning with developer interests.

"Wind Surf potentially confirmed acquisition of $3 billion literally like half an hour ago. Tweets going out. How do we feel about this?"

• The quote captures the immediacy and impact of the Wind Surf acquisition, emphasizing its significance in the current market landscape.

• Investors' reactions to acquisitions vary based on their position in the investment stack, with different levels of concern and satisfaction.
• Shareholders must consider potential regrets when turning down large offers, as market dynamics can shift quickly.

"Do you worry if you're a shareholder in cursor now? Obviously, you've just paid $10 billion."

• This quote addresses the concerns shareholders might face when significant acquisitions occur, questioning the timing and decision-making involved.

• Investors often have biased perspectives based on their stake and position, leading to divergent advice and feedback.
• Understanding the motivations and biases of different stakeholders is crucial for CEOs during M&A discussions.

"It's not that you can't trust the advice. It's just it's so biased, right?"

• The quote underscores the inherent bias in investor feedback, highlighting the need for CEOs to navigate these biases in decision-making.

• The landscape of venture capital is shifting, with larger funds becoming more prevalent and influencing investment strategies.
• Mega funds have the advantage of capital, allowing them to participate across multiple stages and potentially dominate the market.

"I think multi-stage win the next 10 years."

• This quote reflects the belief that multi-stage funds will dominate the venture capital landscape due to their significant capital and strategic positioning.

• Inception investing, or investing at the very early stages, is challenging but crucial for identifying future winners.
• Larger funds may find it difficult to compete in inception investing due to their focus on more established opportunities.

"The real inception is finding the guy down the street from you, Harry, at the carriage house that didn't go to college."

• This quote highlights the essence of inception investing, emphasizing the importance of identifying potential in unconventional founders.

• Allowing successful investments to grow without prematurely selling is crucial for maximizing returns.
• The potential for significant returns lies in holding onto investments that show strong growth trajectories.

"Letting the winners run is the first golden rule."

• The quote emphasizes the strategic importance of holding onto successful investments to achieve substantial returns.

• Smaller venture capital firms face challenges competing against mega funds with vast resources and the ability to influence market dynamics.
• The presence of mega funds can disrupt traditional investment strategies and create pressure on smaller firms.

"A lot going on in that, right? So, do you think on winning? I think in some elements they've won."

• This quote acknowledges the dominance of mega funds in certain aspects, while also recognizing the ongoing challenges faced by smaller firms.

• Discussion on the challenges of investing in seed deals and the importance of having relationships from the seed stage.
• The debate on whether to focus on numerous small investments versus fewer, more concentrated bets.
• Founders generally prioritize receiving substantial funding with minimal hassle and maximum support, regardless of the investor's stage-specific strategy.
• The impact of a firm's investment strategy on its success rate and the role of bundling in venture capital.

"A founder wants two things from his venture investor: wants money, lots of it with the minimum amount of hassle and perhaps the maximum amount of help."

• Founders prioritize financial support and assistance over the specifics of an investor's strategy.

"There's no forcing function between the founder and the investor that worries about investment return quality."

• The relationship between founders and investors is not primarily driven by concerns over investment return quality.

• Analysis of different venture capital firms' strategies, comparing focused versus diversified investment approaches.
• Benchmark's higher success rate in hitting $5 billion companies compared to firms with broader strategies.
• The dilemma of mega funds versus focus funds and the implications for investment returns.

"Benchmark did something like 63 series A's and had a 10% hit rate across 15 years. Andre did a 454 series A's and had a 2% hit rate across the same period of time."

• Benchmark's focused strategy resulted in a higher success rate compared to Andre's diversified approach.

"The focus fund is better at hit rate, has more as a percentage and lower as an absolute number than the guys cranking through 454 A."

• Focused funds achieve better hit rates, although they may have fewer absolute successes compared to larger funds.

• Discussion on the potential for trillion-dollar exits and the impact of the global economy's size on venture capital returns.
• The role of AI in potentially transforming industries and its implications for future investment opportunities.
• The debate on the number of trillion-dollar companies that can emerge in the current economic landscape.

"There are six companies with a trillion-dollar market cap, and I think all of them but Berkshire were founded by VCs and founded within my lifetime."

• Venture capital has been instrumental in creating trillion-dollar companies, highlighting its potential for significant returns.

"If there's 10, there's a business. I totally agree. And which is why it won't be on the series A though."

• The possibility of numerous large-scale companies indicates a viable business opportunity, although not necessarily at the series A stage.

• The potential for AI to replace significant portions of the workforce and its impact on company operations.
• The debate on whether AI will lead to mass unemployment or simply change the nature of work.
• The role of AI in enhancing efficiency and the implications for venture capital investments.

"Half of these knowledge workers are going to be gone in 24 months. And can software capture 10% of that, 5% of that?"

• AI is expected to replace a substantial portion of the workforce, potentially creating new opportunities for software solutions.

"It's not just efficiency, Rory. It's better. And two, they don't complain about the job."

• AI offers not only efficiency improvements but also enhances the quality of work without the typical human challenges.

• The historical perspective on technological advancements and their impact on economic growth.
• The skepticism regarding AI's potential to cause rapid macroeconomic changes.
• The gradual nature of technological adoption and its implications for productivity growth.

"GDP growth and productivity growth have been roughly 2% since the dawn of the industrial revolution."

• Economic growth has historically been stable, and significant changes are unlikely despite technological advancements.

"If everyone went in the space of 12 or 24 months from, you know, pre-AI to top of the range all it can do AI, then maybe you'd be right."

• Rapid adoption of AI across industries would be necessary for it to cause significant economic changes, which is unlikely.

• The adoption of AI in deep enterprise is expected to be slow, but the early adopter phase is significant.
• The tech sector, now a substantial part of the economy, is likely to adopt AI more rapidly than other sectors.
• AI adoption may lead to accelerated returns to scale and massive human disruption, particularly affecting middle management roles.

"The overall adoption curve for AI in deep enterprise is going to be slow, but the early adopter phase is so large in AI."

• The initial phase of AI adoption is substantial, indicating a significant shift in how enterprises will integrate AI.

"If these old manufacturing guys take six years but all of tech fires half their team... how you repurpose 6,000 people from AI?"

• The tech sector's rapid adoption of AI will lead to job displacement, particularly in roles that can be automated or streamlined by AI technologies.

• AI could lead to massive productivity gains in tech but may not translate to sectors like healthcare and education.
• There is a potential for increased unemployment in certain sectors due to AI, necessitating changes in tax and income support systems.
• The disparity in skill production, with an overproduction of non-vocational skills, poses challenges for the labor market.

"You might have massive productivity gains at Salesforce and utterly no productivity gains at healthcare."

• AI's impact will vary across sectors, with tech experiencing significant gains while others may lag.

"There will be no jobs for them... we will build AGI or whatever you call it. They will have income, and in the end, there will be no jobs for them."

• The advancement of AI could lead to job losses, necessitating new economic measures to support displaced workers.

• The potential loss of tax-exempt status for endowments like Harvard's could impact funding for venture capital.
• A strong higher education sector is crucial for maintaining the US's competitive advantage in high-IP industries.
• The debate on the value of college education continues, with a focus on the return on investment for students.

"If it turns out that there is pressure on endowments... it's going to reinforce the big will get bigger and it'll be harder to be new."

• Changes in funding for higher education could consolidate power among larger venture funds, making it difficult for new entrants.

"One of the non-negotiable ingredients is a strong and vibrant technology university system that generates graduates and research."

• The higher education system is vital for generating the talent and research necessary for innovation and venture success.

• The acquisition of promising startups at lower valuations reflects changing market conditions.
• There is a preference for investing in new ventures with high growth potential over established companies with stable growth.
• The dynamics of venture capital require balancing innovation with risk management.

"Somewhere between 800 and a thousand unicorns... a couple hundred are going to get public, and the rest are going to have to be squedched into other companies."

• The market is experiencing a consolidation phase where many startups will be absorbed rather than going public.

"Venture guys love new with option value over old with intrinsic value. We are junky upside junkies."

• Venture capitalists prioritize potential high returns from new ventures over stable but limited returns from established companies.

• AI's application in customer service is expected to significantly increase efficiency and reduce the need for human intervention.
• The market for AI in customer service is large, but it remains to be seen whether it will be a winner-take-most scenario.
• The high valuation of AI companies is driven by the potential for rapid growth and market dominance.

"With genai, you can get that resolution rate to 60 to 70%. In other words, you can handle most calls without humans."

• AI can substantially improve customer service efficiency, reducing the need for human involvement in call resolution.

"If you could get, you know, you're leaning into growth, you've got a lot more runway ahead of you than many of the 21 companies."

• AI companies have significant growth potential, which justifies their high valuations despite the risks involved.

• Discussion on the complexity of defensibility in AI, particularly in enterprise deployments.
• Emphasis on momentum over moats; momentum can create its own market barriers.
• Speculation on the future of customer service markets with AI integration and competition.
• Concerns about the durability of revenue and increased competition in the AI sector.
• The potential of AI to disrupt established companies and markets every few weeks.

"Momentum begets its own moat."

• Momentum can serve as a protective barrier in the market, similar to a moat.

"In enterprises, the truth is once you're installed, it's hard to take out."

• Once a product is integrated into enterprise systems, it becomes difficult to replace.

"The world is in flux... for the next two or three years in enterprise land."

• The enterprise market is experiencing significant changes and instability.

• AI as a driver for verticalization, with companies focusing on niche markets.
• Increased competition and pricing pressures due to new AI entrants.
• The importance of being core to a workflow to resist competition.

"AI is the greatest friend for verticalization."

• AI enables companies to specialize in niche markets effectively.

"Deals are more competitive and there's more pressure on pricing at downgrades."

• The competitive landscape is becoming more intense with AI advancements.

"AI can maim leaders even if it doesn't kill them."

• AI can significantly impact market leaders, affecting their growth and market position.

• Concerns about the lack of stability in AI-driven markets.
• The potential for rapid changes and disruptions in AI technologies and products.
• The risk of increased churn and downgrades in AI markets.

"This lack of stability is where I think that the decadag revenue growth justifies 100x."

• The instability in AI markets raises concerns about sustainable growth.

"There's going to be so many shiny pennies in AI and so much change."

• The AI market is characterized by constant innovation and change.

"If you have a stable state in your 50 person startup right or that you can rest at 50 million ARR."

• Companies cannot rely on stability in the rapidly evolving AI landscape.

• Discussion on the importance of taking offers in uncertain markets.
• The disparity in market valuations between different regions and companies.
• The role of venture capital in supporting companies through market changes.

"Take the effing offer."

• In uncertain markets, accepting acquisition offers can be a prudent decision.

"A $1.4 billion delta between how Door Dash valued it and how UK public markets valued it."

• Significant differences in valuations highlight regional market discrepancies.

"Once you have the US domestic market, tech market as your core starting point."

• The US market provides a strong foundation for tech companies to expand globally.

• Analysis of venture capital strategies in the context of market dynamics.
• The importance of market share and deal activity in maintaining relevance.
• The role of content in venture capital strategy to stay relevant.

"Is there enough market share for me to execute my business model?"

• Assessing market share is crucial for venture capital strategy.

"Content is the most effective way to stay relevant without having to put dollars out the door."

• Content creation can maintain relevance without financial investment in deals.

"This is the game on the field right now."

• Current market dynamics require active participation and adaptation from venture capitalists.