If you have a crackerjack idea, one of your stops on Sand Hill Road will be Andreessen Horowitz, often referred to by its alphanumeric URL, a16z. (There are sixteen letters between the “a” in Andreessen and the “z” in Horowitz.) Since the firm was launched, six years ago, it has vaulted into the top echelon of venture concerns. Competing V.C.s, disturbed by its speed and its power and the lavish prices it paid for deals, gave it another nickname: AHo. Each year, three thousand startups approach a16z with a “warm intro” from someone the firm knows. A16z invests in fifteen. Of those, at least ten will fold, three or four will prosper, and one might soar to be worth more than a billion dollars—a “unicorn,” in the local parlance. With great luck, once a decade that unicorn will become a Google or a Facebook and return the V.C.’s money a thousand times over: the storied 1,000x. There are eight hundred and three V.C. firms in the U.S., and last year they spent forty-eight billion dollars chasing that dream. (...)
When a startup is just an idea and a few employees, it looks for seed-round funding. When it has a product that early adopters like—or when it’s run through its seed-round money—it tries to raise an A round. Once the product catches on, it’s time for a B round, and on the rounds go. Most V.C.s contemplating an investment in one of these early rounds consider the same factors. “The bottom seventy per cent of V.C.s just go down a checklist,” Jordan Cooper, a New York entrepreneur and V.C., said. “Monthly recurring revenue? Founder with experience? Good sales pipeline? X per cent of month-over-month growth?” V.C.s also pattern-match. If the kids are into Snapchat, fund things like it: Yik Yak, Streetchat, ooVoo. Or, at a slightly deeper level, if two dropouts from Stanford’s computer-science Ph.D. program created Google, fund more Stanford C.S.P. dropouts, because they blend superior capacity with monetizable dissatisfaction.
Venture capitalists with a knack for the 1,000x know that true innovations don’t follow a pattern. The future is always stranger than we expect: mobile phones and the Internet, not flying cars. Doug Leone, one of the leaders of Sequoia Capital, by consensus Silicon Valley’s top firm, said, “The biggest outcomes come when you break your previous mental model. The black-swan events of the past forty years—the PC, the router, the Internet, the iPhone—nobody had theses around those. So what’s useful to us is having Dumbo ears.”* A great V.C. keeps his ears pricked for a disturbing story with the elements of a fairy tale. This tale begins in another age (which happens to be the future), and features a lowborn hero who knows a secret from his hardscrabble experience. The hero encounters royalty (the V.C.s) who test him, and he harnesses magic (technology) to prevail. The tale ends in heaping treasure chests for all, borne home on the unicorn’s back. (...)
V.C.s give the Valley its continuity—and its ammunition. They are the arms merchants who can turn your crazy idea and your expendable youth into a team of coders with Thunderbolt monitors. Apple and Microsoft got started with venture money; so did Starbucks, the Home Depot, Whole Foods Market, and JetBlue. V.C.s made their key introductions and stole from every page of Sun Tzu to help them penetrate markets. And yet V.C.s maintain a zone of embarrassed privacy around their activities. They tell strangers they’re investors, or work in technology, because, in a Valley that valorizes the entrepreneur, they don’t want to be seen as just the money. “I say I’m in the software industry,” one of the Valley’s best-known V.C.s told me. “I’m ashamed of the truth.”
At a hundred and eleven dollars a square foot, Sand Hill Road is America’s most expensive office-rental market—an oak-and-eucalyptus-lined prospect stippled with bland, two-story ski chalets constrained by an ethos of nonconspicuous consumption (except for the Teslas in the parking lot). It’s a community of paranoid optimists. The top firms coöperate and compete by turns, suspicious of any company whose previous round wasn’t led by another top-five firm even as they’re jealous of that firm for leading it. They call this Schadenfreude-riddled relationship “co-opitition.” Firms trumpet their boldness, yet they often follow one another, lemming-like, pursuing the latest innovation—pen-based computers, biotech, interactive television, superconductors, clean tech—off a cliff.
Venture capital became a profession here when an investor named Arthur Rock bankrolled Intel, in 1968. Intel’s co-founder Gordon Moore coined the phrase “vulture capital,” because V.C.s could pick you clean. Semiretired millionaires who routinely arrived late for pitch meetings, they’d take half your company and replace you with a C.E.O. of their choosing—if you were lucky. But V.C.s can also anoint you. The imprimatur of a top firm’s investment is so powerful that entrepreneurs routinely accept a twenty-five per cent lower valuation to get it. Patrick Collison, a co-founder of the online-payment company Stripe, says that landing Sequoia, Peter Thiel, and a16z as seed investors “was a signal that was not lost on the banks we wanted to work with.” Laughing, he noted that the valuation in the next round of funding—“for a pre-launch company from very untested entrepreneurs who had very few customers”—was a hundred million dollars. Stewart Butterfield, a co-founder of the office-messaging app Slack, told me, “It’s hard to overestimate how much the perception of the quality of the V.C. firm you’re with matters—the signal it sends to other V.C.s, to potential employees, to customers, to the tech press. It’s like where you went to college.” (...)
Corporate culture, civic responsibility, becoming a pillar of society—these are not venture’s concerns. Andy Weissman, a partner at New York’s Union Square Ventures, noted that venture in the Valley is a perfect embodiment of the capitalist dynamic that the economist Joseph Schumpeter called “creative destruction.” Weissman said, “Silicon Valley V.C.s are all techno-optimists. They have the arrogant belief that you can take a geography and remove all obstructions and have nothing but a free flow of capital and ideas, and that it’s good, it’s very good, to creatively destroy everything that has gone before.” Some Silicon Valley V.C.s believe that these values would have greater sway if their community left America behind: Andreessen’s nerd nation with a charter and a geographic locale. Peter Thiel favors “seasteading,” establishing floating cities in the middle of the ocean. Balaji Srinivasan, until recently a general partner at a16z and now the chairman of one of its Bitcoin companies, has called for the “ultimate exit.” Arguing that the United States is as fossilized as Microsoft, and that the Valley has become stronger than Boston, New York, Los Angeles, and Washington, D.C., combined, Srinivasan believes that its denizens should “build an opt-in society, ultimately outside the U.S., run by technology.”
The game in Silicon Valley, while it remains part of California, is not ferocious intelligence or a contrarian investment thesis: everyone has that. It’s not even wealth: anyone can become a billionaire just by rooming with Mark Zuckerberg. It’s prescience. And then it’s removing every obstacle to the ferocious clarity of your vision: incumbents, regulations, folkways, people. Can you not just see the future but summon it?
When a startup is just an idea and a few employees, it looks for seed-round funding. When it has a product that early adopters like—or when it’s run through its seed-round money—it tries to raise an A round. Once the product catches on, it’s time for a B round, and on the rounds go. Most V.C.s contemplating an investment in one of these early rounds consider the same factors. “The bottom seventy per cent of V.C.s just go down a checklist,” Jordan Cooper, a New York entrepreneur and V.C., said. “Monthly recurring revenue? Founder with experience? Good sales pipeline? X per cent of month-over-month growth?” V.C.s also pattern-match. If the kids are into Snapchat, fund things like it: Yik Yak, Streetchat, ooVoo. Or, at a slightly deeper level, if two dropouts from Stanford’s computer-science Ph.D. program created Google, fund more Stanford C.S.P. dropouts, because they blend superior capacity with monetizable dissatisfaction.Venture capitalists with a knack for the 1,000x know that true innovations don’t follow a pattern. The future is always stranger than we expect: mobile phones and the Internet, not flying cars. Doug Leone, one of the leaders of Sequoia Capital, by consensus Silicon Valley’s top firm, said, “The biggest outcomes come when you break your previous mental model. The black-swan events of the past forty years—the PC, the router, the Internet, the iPhone—nobody had theses around those. So what’s useful to us is having Dumbo ears.”* A great V.C. keeps his ears pricked for a disturbing story with the elements of a fairy tale. This tale begins in another age (which happens to be the future), and features a lowborn hero who knows a secret from his hardscrabble experience. The hero encounters royalty (the V.C.s) who test him, and he harnesses magic (technology) to prevail. The tale ends in heaping treasure chests for all, borne home on the unicorn’s back. (...)
V.C.s give the Valley its continuity—and its ammunition. They are the arms merchants who can turn your crazy idea and your expendable youth into a team of coders with Thunderbolt monitors. Apple and Microsoft got started with venture money; so did Starbucks, the Home Depot, Whole Foods Market, and JetBlue. V.C.s made their key introductions and stole from every page of Sun Tzu to help them penetrate markets. And yet V.C.s maintain a zone of embarrassed privacy around their activities. They tell strangers they’re investors, or work in technology, because, in a Valley that valorizes the entrepreneur, they don’t want to be seen as just the money. “I say I’m in the software industry,” one of the Valley’s best-known V.C.s told me. “I’m ashamed of the truth.”
At a hundred and eleven dollars a square foot, Sand Hill Road is America’s most expensive office-rental market—an oak-and-eucalyptus-lined prospect stippled with bland, two-story ski chalets constrained by an ethos of nonconspicuous consumption (except for the Teslas in the parking lot). It’s a community of paranoid optimists. The top firms coöperate and compete by turns, suspicious of any company whose previous round wasn’t led by another top-five firm even as they’re jealous of that firm for leading it. They call this Schadenfreude-riddled relationship “co-opitition.” Firms trumpet their boldness, yet they often follow one another, lemming-like, pursuing the latest innovation—pen-based computers, biotech, interactive television, superconductors, clean tech—off a cliff.
Venture capital became a profession here when an investor named Arthur Rock bankrolled Intel, in 1968. Intel’s co-founder Gordon Moore coined the phrase “vulture capital,” because V.C.s could pick you clean. Semiretired millionaires who routinely arrived late for pitch meetings, they’d take half your company and replace you with a C.E.O. of their choosing—if you were lucky. But V.C.s can also anoint you. The imprimatur of a top firm’s investment is so powerful that entrepreneurs routinely accept a twenty-five per cent lower valuation to get it. Patrick Collison, a co-founder of the online-payment company Stripe, says that landing Sequoia, Peter Thiel, and a16z as seed investors “was a signal that was not lost on the banks we wanted to work with.” Laughing, he noted that the valuation in the next round of funding—“for a pre-launch company from very untested entrepreneurs who had very few customers”—was a hundred million dollars. Stewart Butterfield, a co-founder of the office-messaging app Slack, told me, “It’s hard to overestimate how much the perception of the quality of the V.C. firm you’re with matters—the signal it sends to other V.C.s, to potential employees, to customers, to the tech press. It’s like where you went to college.” (...)
Corporate culture, civic responsibility, becoming a pillar of society—these are not venture’s concerns. Andy Weissman, a partner at New York’s Union Square Ventures, noted that venture in the Valley is a perfect embodiment of the capitalist dynamic that the economist Joseph Schumpeter called “creative destruction.” Weissman said, “Silicon Valley V.C.s are all techno-optimists. They have the arrogant belief that you can take a geography and remove all obstructions and have nothing but a free flow of capital and ideas, and that it’s good, it’s very good, to creatively destroy everything that has gone before.” Some Silicon Valley V.C.s believe that these values would have greater sway if their community left America behind: Andreessen’s nerd nation with a charter and a geographic locale. Peter Thiel favors “seasteading,” establishing floating cities in the middle of the ocean. Balaji Srinivasan, until recently a general partner at a16z and now the chairman of one of its Bitcoin companies, has called for the “ultimate exit.” Arguing that the United States is as fossilized as Microsoft, and that the Valley has become stronger than Boston, New York, Los Angeles, and Washington, D.C., combined, Srinivasan believes that its denizens should “build an opt-in society, ultimately outside the U.S., run by technology.”
The game in Silicon Valley, while it remains part of California, is not ferocious intelligence or a contrarian investment thesis: everyone has that. It’s not even wealth: anyone can become a billionaire just by rooming with Mark Zuckerberg. It’s prescience. And then it’s removing every obstacle to the ferocious clarity of your vision: incumbents, regulations, folkways, people. Can you not just see the future but summon it?
by Tad Friend, New Yorker | Read more:
Image: Joe Pugiliese
