Building a16z Growth, Investing Across the AI Stack, and Why Markets Misprice Growth

“Most of the technology markets that we live in end up winner-take-all. That's obvious in network effect-driven businesses, consumer internet companies, Google, Facebook, et cetera. It's less obvious in enterprise companies, but it happens just as often. There's no number 2 to Salesforce. Salesforce is Salesforce. Workday is Workday. ServiceNow is ServiceNow. You'd feel a lot of pain if you did the number 2 or, God forbid, the number 3 in those markets.”— David George

Economics & Markets · Strategy & Decision Making

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Enterprise tech also winner-take-most, not obvious

“It's just so hard for any investor to build a 5 or 10-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%. If you look at consensus estimates for Apple from 2009 for the year 2013 and compared it to actual performance in 2013, consensus estimates were off by 3x.”— David George

Psychology & Behavior · Economics & Markets

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Forecasting failure at scale for best companies

“If you look at the last year of our activity, our portfolio dollar weighted is growing 112%, and we entered at 21 times revenue. If I could invest for the rest of my career in 112% growing companies that are really, really great and good in markets at 21 times revenue, I would do it in a heartbeat. Above 30% growth, the market still doesn't fully value the growth rate. In 2009, if you looked at consensus estimates for Apple for 2013, consensus estimates were off by 3x.”— David George

Strategy & Decision Making · Economics & Markets · Psychology & Behavior

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Markets systematically misprice companies growing 30%+

“There are three things I'm looking for in disrupting incumbents. Business model shift is super powerful and very hard for incumbents to react to. The two simple components are completely reimagined UI and then completely new sources of data. 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. The more dramatic the shift in those, the harder it's going to be for the incumbents.”— David George

Strategy & Decision Making · Business & Entrepreneurship · Technology & Engineering

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Three disruption vectors: model, UI, data

“If you look at the SaaS and cloud wave, basically the whole story was a 7x-ing in the amount of revenue in the market. Who wins, the incumbents versus startups? It basically split 50/50. So 7x more revenue, incumbents grew a bunch. 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.”— David George

Economics & Markets · Strategy & Decision Making · History & Geopolitics

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Platform shifts: 7x market, 50/50 split

“How do we assess AI businesses right now? Three things. One is ease of customer acquisition. We see this with the really special ones, like Cursor, which has been largely viral growth. Second is customer behavior, customer retention, customer engagement. The things that have durable behavior where users really use it and ideally increasingly use it over time. Then there's gross margins.”— David George

Strategy & Decision Making · Business & Entrepreneurship

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Three AI quality signals: CAC, retention, margins

“With Figma, our venture guys were losing their minds in the discussion. They said, you guys are totally missing the point. The ratio of designers to engineers is basically double for modern technology companies. 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.”— David George

Strategy & Decision Making · Economics & Markets

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Designer/engineer ratio = leading market indicator

“One of the elements of people judgment is what is the right founder for the right market? Travis at Uber is the perfect counterexample to the technical terminator. That market was just a pure battle. You fight mayors, you fight competitors. You just needed to be ruthlessly competitive and driven and operationally intense.”— David George

Strategy & Decision Making · Leadership & Management

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Match founder archetype to market battle type

“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. When you find a pull business, especially in consumer, it tends to create the most special companies in the world. One of the things that I say about push businesses, which is you got to go sell it, they don't tend to get easier over time. They tend to get harder.”— David George

Strategy & Decision Making · Business & Entrepreneurship · Economics & Markets

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Market demand = magic; sales effort = friction

“We feel really, really, really strongly about market leadership. There's the scene with Alec Baldwin in Glengarry Glen Ross where he's running a sales contest and he walks in and he's like, okay guys, new contest. First prize gets Cadillac. Second prize gets a set of steak knives. Third prize, you're fired. We've adopted that as a way of describing most of the technology markets that we live in. The vast majority of market cap creation is going to go to the market leader.”— David George

Strategy & Decision Making · Economics & Markets

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First place captures disproportionate value

“I really like a certain archetype of founder. I call them the technical terminator. 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 product.”— David George

Leadership & Management · Psychology & Behavior · Business & Entrepreneurship

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Technical foundation, business skills learned later

“Most growth equity investment firms have an investment committee. What we decided to do was totally differently. We make the decision just like our venture process, which is single trigger puller. The expectation 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. By doing it this way, you encourage people to fully explore the risks of investing and fully explore the rewards.”— David George

Leadership & Management · Strategy & Decision Making · Operations & Execution

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Single trigger removes politicking incentive

“We get these notes after customer introductions we make for portfolio companies. In the case of Cursor, every single time it's like immediately to POC, immediately to POC, proof of concept, immediately to full sale deal. You can see that, that's incremental data for us in making decisions. That's unique product, that's unique distribution. After one of these emails, my partner Martine wrote product fucking market fit. So now PMF is now PFMF.”— David George

Business & Entrepreneurship · Operations & Execution

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Customer intro to POC to deal speed = signal

“We win deals based on years of relationship building. We recently did a deal where we had worked the founder so hard for 2 years that he called us and said, I'm ready to do this. I'll just talk to you. At that point, it's one of the best companies in the market. 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?”— David George

Strategy & Decision Making · Business & Entrepreneurship

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Years of pre-work earn exclusive negotiating position

“Bob Swan gave me really good advice. He and John Donahoe at the end of every year always went through an exercise where they spent 2 hours looking at their calendar from the year, and then they had an objective of cutting 30% of stuff that was on their calendar. It 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.”— David George

Leadership & Management · Operations & Execution

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Annual 30% calendar cut forces delegation

“When we first invested in Dylan at Figma, Peter Levine was apoplectic. He said we need this tomorrow. We got to invest in Figma. We missed it. So from the moment I joined, we had done the full-court press on Dylan. He came to our summit, Mark and Ben bear hugs, we bear hugged him on the crypto side, we did everything we could with him, helping him with a board search, trying to catalyze a deal. COVID strikes and he calls us and says, now's the time.”— David George

Strategy & Decision Making · Business & Entrepreneurship

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Years of courtship, crisis creates opening