Ben Horowitz: Fueling the tech boom and learning from hip-hop
q&a The combination of mobile, cloud and social has the entrepreneur-turned-venture capitalist more optimistic than ever.
Never mind the slew of economic concerns -- hell, make that catastrophic concerns -- hanging over the world. Silicon Valley is riding high. And no venture firm is leading the charge harder than Andreessen Horowitz.
The company started three years ago this month by longtime business partners Marc Andreessen and Ben Horowitz (first Netscape, then LoudCloud and Opsware). They've since raised $2.7 billion and have backed 150 companies, including newly-public Facebook, Zynga and Groupon, as well as hot private companies such as and . Earlier this month, Andreessen Horowitz made a $100 million bet on GitHub, a cloud/social play for software engineers to share and store their code.
I caught up with Ben Horowitz at the firm's offices on Sand Hill Road in Menlo Park, Calif., to talk about the impact of Facebook's messy IPO, the investing climate overall, and, most importantly, why entrepreneurs really can learn from hip-hop.
Question: Given all that's going on economically -- across Europe, China, and in the U.S. -- are you still optimistic?
Horowitz: There's no question that Europe and China are two of the biggest concerns right now on a macroeconomic level. But technology also has its own cycle and it's not to do with the macroeconomic cycle. Technology is also at an incredibly interesting point.
This is the only time that in my career that we've had three major high-impact platforms all connecting in the market at the same time -- cloud, mobile and social. The set of opportunities that's coming off of that are really profound.
The other thing is that the end market has gotten much bigger, and people don't realize how dramatic this has been. In 1998, Netscape had 90 percent browser share and we had 50 million users. So 55 million people on the Internet and about half of those were on dial up. You compare that to two billion broadband users today, and that makes a lot of businesses much more plausible.
So you don't think about doomsday scenarios in your models?
Horowitz: Our investment horizon is 10 years. Most of the things that people are talking about -- such as more deleveraging having to take place -- could take three to five years, but that's still within our horizon. So it's not a giant concern for us.
What opportunities excite you?
Horowitz: One of the things that we're increasingly excited about is what Marc, in his Wall Street Journal piece, calls 'software eats the world.' We're just seeing a lot of things where software gets into categories where it didn't use to.
Horowitz: There's one we call, 'software eats dirt." Farmers haven't had great tools to sample soil and then once they have that sample, they haven't been able to do much with the data. But in theory, you can really optimize your crop yields by understanding what your dirt looks like and having an analytic program that looks at what happens with various levels of fertilizer and various minerals in the soil. That company is Solum.
How has Facebook's rocky IPO changed the landscape?
Horowitz: I think it's more that the landscape stayed the same. Public multiples for tech companies are low. They're certainly low compared to the '90s and even low compared to the '80s. There was a hope that Facebook might change that with its IPO, like it would trade at a $150 billion valuation or something like that. But it's still trading at a very healthy valuation and a pretty healthy multiple relative to Google or Apple, and it's still a great company.
But won't it hurt some private companies seeking rich valuations?
Horowitz: There were a lot of high-multiple private companies in expectation of Facebook having a high multiple, and some of those subsequent rounds will be trickier than they otherwise would have been.
You've passed on a bunch of them, like Spotify.
Horowitz: We've passed on many, such as and Dropbox.
Because of their valuations?
Horowitz: I don't want to say negative things about stuff that we're not in. They're all great companies. But we have a model of where a valuation needs to be against the progress of the company and what the potential outcome is, and they don't line up with our models. In general, we haven't invested in anything in the billion-plus range since Airbnb. That was over a year ago, and the multiples have just gotten higher since then. Our last , which is a very special company in, we think a relatively invincible position.
That was a $100 million investment, earlier this month. Why is GitHub so special?
Horowitz: Here's a company that's never taken money and they have well over 60 employees and they're making money. They're not disclosing revenue but you can tell they have a lot of revenue if they're doing that. And they did all that with no sales and marketing people. We think they have very fast growth potential.
At the most basic level, GitHub is source-code management. GitHub has kind of changed the world in two respects: it's cloud and it's oriented around people - so it's a social network. That has some pretty profound effects in terms of network effects increasing returns. If you're building software today, it's only partially the code you write. It's mostly the code you collect, and all that code is in GitHub, and as a result, all code wants to be in GitHub.
Plus, I ask everybody, 'What do you use for engineer recruiting?' and everybody uses GitHub -- not LinkedIn. That's a big deal. It means if you're an engineer and you don't use GitHub, you don't exist. Once you have all the engineers and all the code, what could you build? What kind of project tools, collaboration tools? They've got the ultimate advantage because they have every engineer and all the code.
Where do you see more opportunity -- enterprise or consumer?
Horowitz: There's a lot of good opportunities in both. There are over 2 billion people on the Internet. So if you build something they all want, that's a hell of a thing. In the public market, there's no question Groupon and Zynga haven't [done well] and people had higher hopes for them. But they still are at multiple billion dollars and Facebook is well over 60 billion. That used to be a valuable company.
How do you value some of these young, fast-growing businesses, such as Pinterest?
Horowitz: is one we were heavily criticized for at the time. It's one of those things where the numbers were growing very fast but it was early. But when the entrepreneur, Ben Silberman, described what he did and how he thought of it, it was incredibly ingenious. He kind of deciphered this core human behavior that people have that was completely unrepresented on the Internet. And he just painstakingly designed a product that worked for it.
People's feelings about Pinterest are different than anything else. People love Facebook and Twitter, but it's not with the depth of feeling that they have about Pinterest. It's such an emotional product. As design problem, this was one of the hardest out there. Ben completely cracked the code on it, he had the vertical takeoff of the community, and that wasn't going to slow down.
Where does the revenue come from?
Horowitz: When we invested, Martha Stewart was getting more referrals from Pinterest than Google and Twitter combined. There are many models, but if you're driving lots of traffic to products like that, that's worth something. Ben's got a lot of ideas on that.
If you build a primary consumer Internet franchise, it's going to be worth a lot more than $200 million. That's simple math, so we bought an option [by investing $27 million in October 2011] -- at a $200 million valuation -- on Ben figuring it out. And he has made us look very good so far.
You're clearly betting on the person as much as anything. What do you look for?
Horowitz: You kind of have to be brilliant and an original thinker, which is a really important combination. Peter Thiel has that great test that not many people can pass. He asks, 'What do you strongly believe that almost nobody would agree with you on?' That's a great test of original thinking. A breakthrough idea that almost nobody would agree with is what innovation is.
The other two things that are very important are courage and leadership. It takes great courage to build a company in the face of a lot of people doubting you all the time and you doubting yourself. And with leadership -- it's can that person actually run the company? It takes a lot of risk to make it to a big outcome if you have to change out the founder.
How can you tell? Most people wouldn't have thought of Mark Zuckerberg as a leader five or six years ago.
Horowitz: When I met Mark in 2007, he even then was an original thinker. And he had great courage. With leadership, we're kind of looking at whether they can articulate a vision that people will want to follow, where people will want to join the company and connect to that vision. Mark could definitely do that. He had a great vision of where things were going and he could articulate it, even though you had to ask him because he wouldn't just come out and say it. ...Now he's comfortable and outgoing. But he wasn't comfortable then. That was a big change in Mark. But he absolutely had a clear vision.
How do you evaluate this potential when entrepreneurs are pitching you?
Horowitz: In pitch meetings, we always start with the background of the entrepreneur. Because courage is not something you're born with; it's something you develop. We had one entrepreneur come in and I said, 'Tell me about your background?' And he said, 'Well, I was CTO of OutlookSoft and started this company,' and I said, 'No, no, no. Where'd you grow up?' He said, 'Well, I grew up in communist Romania and in 1989 I escaped by swimming across the Danube.' I was like, 'OK, we'll invest.' That was Christian Gheorghe at Tidemark; he's a special guy. He's going to do whatever is required.
When I first met you almost 10 years ago, in the dark days of the Valley, you were quick to say, 'Put all the attention on Marc. Please keep me in the background.' What's changed? Is it useful as a VC to be more public?
Horowitz: I hated being in the spotlight as CEO of a public company. You're very constrained about what you can say and as result, almost no public company CEOs come across as authentic. You're very boxed in between public investors and your employees about what you can say about what's wrong with things.
Venture capital is very un-transparent. I always wanted to know what VC firms thought about building companies. What do they think about layoffs? How do they evaluate a CEO? What do they think about hiring? I didn't know any of that for any of the firms. I just felt that if we had a firm -- I could just lay all that out. I did not expect it would get as much pick up as it has, so I've kind of gotten into more of a spotlight -- it's mostly come off the blog.
And why do you incorporate so much hip-hop into your blogging? Does it all really start with Erik B. & Rakim?
Horowitz: The thing about hip-hop is that the hip-hop guys really do view themselves as entrepreneurs. They're not all good entrepreneurs -- like Jay Z -- but they all think of themselves fundamentally, at a very basic level as an entrepreneur, and it comes through in the lyrics and music.
And you spin the lyrics into blunt management advice.
Horowtiz: It's the emotional part. How to run an organization intellectually is pretty trivial. But emotionally it's very complex and people play on your emotions all the time. If you're not aware of that and connected to it, and understanding how to manage the emotional conflicts, then you're going to have a very dysfunctional organization and people are always going to feel like management lies and is full of shit.
But it's generally not because managers are bad people but because they're dodging the emotional challenge, and the rappers are only talking about the emotional challenge - the emotion of competition, the emotion of someone doing something you didn't like and that sort of thing.
Like about how to minimize politics in your company. I can go through an analysis with somebody and and say, 'Well, if somebody comes in and says this, then if you react like this, then that's going to happen and so forth." But Rick Ross says it better in Hustlin' : 'Who the f@@k you think you f$&kin' with? I'm the f%@king boss.'
And that's how you have to feel about it to actually do it. Because you've got to say to your employees, 'Don't f@%king ask me that question because you know if I answer it you're going to use it to undermine your peers and I'm not having it. But this is how it works. People find it jarring. I get, 'Good god, Ben, I can't believe you put that quote in there?' But I feel it's good -- it's good cultural and life lessons.