The transcript from this week’s MIB: Scott Kupor, Andreessen Horowitz, is below.
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FEMALE VOICEOVER: The Master in Business Podcast is brought to you by Invesco. Every day, we bring together ideas with technology. Data with inspiration, investors with solutions. Let’s invest in greater possibilities together. Find out more at invesco.com/together. Invesco Distributors, Inc.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Scott Kupor and he is the Managing Partner in Andreessen Horowitz, one of the most storied venture capital firms in Silicon Valley. You know all the companies they have invested in. You’re not going — I’m not going to give you a list here.
Scott is an unusual guy because not only did he go Stanford Undergrad and Law School, so he has that legal background. He understands the — both the deal side, the finance side, and the tech side. He’s really a triple threat and he discusses the things that any entrepreneur or, theoretically, anybody who wants to be a limited partner in a venture capital firm should know.
If you are at all interested in technology startups, VC funding, you are going to find this conversation to be absolutely delightful.
So, with no further ado, my conversation with Andreessen Horowitz’s Scott Kupor.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest today is Scott Kupor. He graduated from Stanford Undergrad and Law School. He was employee number one at Andreessen Horowitz, the famed venture capital firm where he is currently Managing Partner.
The fund runs $7 billion and has been early investors in such startups as Facebook, Groupon, Twitter, Airbnb, Slack, Stripe, Skype, and many others. His new book is the “Secrets of Sand Hill Road.” Scott Kupor, welcome to Bloomberg.
SCOTT KUPOR, ANDREESSEN HOROWITZ, MANAGING PARTNER: Thank you for having me.
RITHOLTZ: So, I’ve been looking forward to having this conversation. You are the third Andreessen Horowitz veteran willing to suffer my slings and arrows.
KUPOR: I was going to say — right. What does that say about us? Right.
RITHOLTZ: Well, it says that you’re pretty hip, you get podcast. And you understand having people ask you interesting questions and coming up with interesting answers.
So, let’s start with a little bit about your background. Professionally, you’re kind of born right into the bubble. That’s how you describe yourself in the book. You led the IPO for Opsware in ’01. What was it like going public right in the middle of the collapse?
KUPOR: It was an amazing, amazing time. So, you’re right. I was actually an investment banker before I went to Opsware. And by the way, Opsware is actually — it was loud cloud at that time which was the predecessor in 2001.
RITHOLTZ: Right. So, just a little background, loud cloud was set up to be original …
KUPOR: Amazon web services.
RITHOLTZ: Apps (ph) in the cloud. Right.
KUPOR: Yes. Basically, that’s what we were trying to do.
RITHOLTZ: Ten years earlier.
KUPOR: Yes.
RITHOLTZ: And then in a certain point, that pivoted to — you had developed your own software, operational software and that’s …
KUPOR: Right.
RITHOLTZ: … the other companies are going to need this. So, you took an inhouse technology similar to what Amazon is doing with AWS and you spun it out as a separate, fully separate entity.
KUPOR: That’s exactly right. So, loud cloud started in 1999. So, it was, as you recall …
RITHOLTZ: Perfect timing.
KUPOR: Perfect timing, right. We raised a ton of money. We hired a bunch of people. And then, of course, the market turned in a different direction.
So, we took it public in 2001. Actually, for the very honest reason which was that was the best source of capital at the time.
RITHOLTZ: Right.
KUPOR: So, there was no other viable source of attractive source of capital and I think we were one of actually two IPOs that happened that year.
RITHOLTZ: In ’01. Yes. Not — what was it? Five hundred in 2000 or ’99…
KUPOR: Yes. So, there was about 750 or so between the two years of ’99 and 2000.
RITHOLTZ: Wow.
KUPOR: And then, basically, I think there were two in 2001, us and a company called Storage Networks, I think, was the other one that went out that year.
RITHOLTZ: So, eventually, the company gets bought by Hewlett Packard.
KUPOR: That’s right.
RITHOLTZ: And what was that — so, the people who are still there as employees, what was that transition like. What was your role — you’re an attorney.
KUPOR: Yes.
RITHOLTZ: What was your role in the acquisition?
KUPOR: It was fun. So, my main role was actually to run the integration between the two companies. So, we kind of have — I had an — there was an executive on our side. It was me and then there was an executive on the HP side.
And basically, our job was, Okay, we’re doing this deal. What is this going to look like as a combined entity? Who’s going to have jobs in what places, how do we get everything from IT systems integrated? How do we talk to customers?
And it was fun. It was actually a really fun opportunity and it was just a different — it was just different from anything I’d even been through, right? So, I’d always been in the startup community and then we go into this behemoth HP.
And they’ve got these playbooks, basically, about how you do this integration and what we tried to help them understand was look, all that stuff’s important. The most important thing, though, is what are you going to tell the employees about who has jobs, what those jobs are going to be, where they’re going to show up on day one to go to work.
And so, there was kind of a human element of it that was a little bit underserved in the HP side, not withstanding the fact that they were really good at the systems integration piece.
RITHOLTZ: So, the assumption is, the Opsware employees who may have seen their jobs cut, they still had pretty nice stock options …
KUPOR: Exactly. Yes.
RITHOLTZ: … got a nice bump. So, it wasn’t, Okay, I’m cut lose, now I can go do my next gig.
KUPOR: That’s right. And for most people, most people have a job opportunity to go to HP because HP was really buying this as a growth opportunity. It wasn’t like an acquisition where they’re like, look, let’s just chop 50 percent of the people. And create some cash.
So, most people, maybe there are probably some people in, like, organizations like finance where, obviously, it’s hard sometimes to have roles that are duplicate between organizations.
RITHOLTZ: Right.
KUPOR: But anybody who’s in a product or engineering or sales facing role, all those people had the opportunity to stay and most of them did.
RITHOLTZ: So, you come from a legal background. You’re running operations at a technology company, how did the transition to venture capital come about? Was it just lucky coincidence you’re working with two guys named Andreessen Horowitz?
KUPOR: Well, there were certainly — there are certainly an element of that, for sure. So, I’ve been working with these guys now for almost 10 years when we started the firm. Because this year, actually, it will be my 20th year working with them.
RITHOLTZ: Really? That’s pretty good.
KUPOR: Which is probably just makes me a glutton for punishment.
RITHOLTZ: Right.
KUPOR: I’m not quite sure what to make of that.
RITHOLTZ: I’ve been to your office and I have to say, that looks like a fun place to work.
KUPOR: It is a fun place to work. Yes. No, it’s been a great place and we’ve grown it from — there were literally three of us when we started 10 years ago. We’ve now got 170 employees.
RITHOLTZ: Wow.
KUPOR: It’s been a fun place.
But, yes, look. I think the answer to your question is, yes, it was a little bit of — Marc and Ben and I had always just as I’d had career discussions with them when we were at LoudCloud and Opsware, I’d always said, hey, look, doing something like this someday would be fun. I didn’t think about us starting a firm. But I said, gee, that’s a kind of a business that I think could be fun.
And what happened was after we sold the business, the two of them started doing angel investing with their own money, so they were just investing out of their own checkbooks …
RITHOLTZ: Meaning, there’s a windfall when the company is sold. They weren’t billionaires but they certainly made …
KUPOR: Yes.
RITHOLTZ: … tons of money.
KUPOR: Yes. They were — they did fine. Yes. And …
RITHOLTZ: So, the idea of taking I’m going to pull $50 million aside and find 100 companies that could use half a million dollars each?
KUPOR: Yes. It was actually — it was even smaller than that. There was literally — they were running 50,000 — excuse me, $100,000 checks. So, it was very — it was very kind of small stuff. And it did …
RITHOLTZ: And you, by the way, you as a lawyer and an operations guy, I could see you looking at this and gnashing your teeth and saying where are the capital controls? How is it structured? Where’s the paperwork? Like, I barely know you and I could tell that set up made you crazy.
KUPOR: I feel like you’re unfairly typecasting me.
RITHOLTZ: But am I right?
KUPOR: A little bit. A little bit. They did — truth be told, they did the angel investing on their own. I kind of came into the picture later as we started talking about the fund and the firm itself.
RITHOLTZ: Right.
KUPOR: But I inherited a lot of that paperwork, of course.
RITHOLTZ: Why did you write this book and who is it for?
KUPOR: Yes. So, as we talked about, I’ve been doing tech stuff for about 25 years now. I was a banker, actually. We never got them. I was a banker even before …
RITHOLTZ: Tech stuff. Is that a technical term?
KUPOR: Exactly. Tech — things in the tech industry. Sorry. Maybe I can be more eloquent …
RITHOLTZ: Got you.
KUPOR: And but, now having been in this business for 10 years, I continue to get a series of questions from entrepreneurs all the time.
RITHOLTZ: Same question.
KUPOR: Yes. Most of which I thought were answered, kind of — stuff like, look, should I even raise venture capital, like, how does the business work and a lot of them have this undertone of to a certain extent, how do I avoid getting screwed by the venture capitalist? I mean, I hate to say it that way, but that’s kind of — that’s kind of the way it was.
RITHOLTZ: Are you implying your brethren are rapacious out there? Is that the implication?
KUPOR: No. I think the implication is there’s just not a level playing field from an information perspective, right?
RITHOLTZ: Information asymmetry is a problem.
KUPOR: Yes. That’s right.
So, look, we’ll do — we’ve been doing this for 10 years. We’ve done thousands of deals and repeat entrepreneur, maybe it does this five, six, seven times, right, over the course of their life and so, there’s just stuff that we know and we know and we see because we see it on every day basis.
And so, the purpose of the book in my mind was, look, if we could demystify that and hopefully level the playing field, then maybe it helps have a better relationship between entrepreneurs and VCs and maybe it even helps people who wouldn’t have otherwise thought about entrepreneurship coming to the business.
RITHOLTZ: Interesting. And I have to ask, for the uninitiated, what is Sand Hill Road? I’ve been there. I understand it as a concept.
KUPOR: Yes. The concept is — the concept at a high-level is like what Wall Street is to financial services or what Music Road is to Nashville country music, right?
It’s basically — it literally is a road. It is a street. It is very unexciting as you’d probably seen when you’d been there. It’s a bunch of kind of fairly drab two-story buildings.
RITHOLTZ: You have a very nice waterfall that …
KUPOR: We do have …
RITHOLTZ: … circumnavigates your building.
KUPOR: We are lucky to have kind of water effect outside our building. But it just happens to be the locus where all the venture capitalists have established themselves and I think it’s really — the answer for that is because of its proximity to Stanford.
So, the more important part of Sand Hill Road is when you go down Sand Hill Road east about a mile and a half. You end up on the Stanford Campus. And it really does, I think, illustrate the kind of tight connectedness that’s always happened between Stanford and the venture in the startup communities.
RITHOLTZ: Right. You see it in Boston between MIT and …
KUPOR: That’s exactly right. It’s like going to Kendall Square.
(CROSSTALK)
KUPOR: Yes. You go to Kendall Square in Cambridge, it’s the same kind of thing. Right.
RITHOLTZ: Really interesting concept. So, one of your chapters is titled “The Art of the Pitch.” Explain what that is.
KUPOR: Yes. So, we see lots of pitches. As you can imagine, probably about 22,500 a year.
RITHOLTZ: Really?
KUPOR: Yes.
RITHOLTZ: That’s a lot.
KUPOR: It’s a lot. Yes.
So, the “The Art of the Pitch” is really about kind of making sure the pitch resonates is going to resonate with the audience and I think key to that is to understanding what is it that venture capitalists care about, what is that they are incented to do and therefore, how are they going to evaluate you.
And so, I think the first thing to think about is the most important thing to think about in this business is we are wrong more often than we’re right which I know is a terrible thing to say. And if your kids came home and got 50 percent on their test, you’d be pretty unhappy. If you’re doing that in venture capital, you’re still in the game, at least.
RITHOLTZ: And as long as you bring up that batting average …
KUPOR: Yes.
RITHOLTZ: … why does the hit-miss ratio not matters much in venture capital as it does elsewhere?
KUPOR: Because if we do it right, then the reason it doesn’t matter is because 10 to 20 percent of the companies, hopefully, if we do it right, you’re going to earn 25, 50, a hundred times your money. And so, basically, think of it as the significant winners will basically make up for kind of that 50 percent of things where you won’t get your money back and then probably the 20-30 percent where you get a little bit of money back but not enough to make the math work.
And so, if you think about that, then what that means is if I’m going to invest in a company today, I’ve got to at least believe it has a chance to be one of those 10 or 20 percent winners. Now, we wish we were smart enough to know exactly which ones they were and of course, we just invest in those companies.
But we have to at least believe the kind of — the ground rules and the opportunity exists and if — and so that really kind of leads into “The Art of the Pitch” about how to frame the pitch in that context.
RITHOLTZ: So, from your perspective, what becomes more important to cast a wide net or to be able to do a deeper job into a narrower nitch where you feel like you have some expertise and some ability to separate the good from the great?
KUPOR: Yes. I think it’s probably somewhere in between which is you got to have some number of deals just because you’re building a portfolio. So, unless you think you’re going to bat a much higher batting average, you’d at least have need some diversification. But that diversification needs to be in domains that you understand.
So, the way we run our business is we’ve got vertical domains. So, we’ve got kind of consumer enterprise, financial services, life sciences. We got a bunch of domains and we stuff them with people who are super deep in those domains.
And so, within those areas, they will go very deep but then collectively, as part of a portfolio, you get the diversification associated with the multidimensions.
RITHOLTZ: So, here’s a datapoint from the book that blew my mind. Quote, “Venture capital is not an especially good investment. As of 2017, 10-year returns for venture capital as of in the aggregate, not specific funds, but in the aggregate, it was 160 basis points below the NASDAQ.
So, for eight bucks, I could have gone out and bought the QQQs and outperformed the average of VCs?
KUPOR: Yes.
RITHOLTZ: That’s amazing.
KUPOR: It is amazing and it’s a weird asset class in that regard which is the variance between good performance and bad performance is really high. Like sometimes as much as almost 3,500 or 4,000 basis points. Right. So, 35 to 40 percent …
RITHOLTZ: Amazing.
KUPOR: … return difference.
And I think it’s a function of the fact that most of this business is largely a zero-sum game in each round of financing. And what I mean by that is if we do the A round which is kind of the first institutional round for a deal, generally, that means we’re the only ones who do that. There might be some other people, but usually, one venture firm will be the major, major investor there.
And once that opportunity’s done, there will never be another A round in Facebook, for example, right? So, Accel, who’s a very good firm, invested in the A round of Facebook. The next opportunity that somebody had to invest was at some multiple evaluations much higher than that.
RITHOLTZ: Sure.
KUPOR: So, those still turned out to be, obviously, very good investments but there is this kind of nature that when a round happens, it often accrues to one individual or one firm and then kind of things — fund raise every 18 or 24 months. And so, the next investor, obviously, always comes in at a higher price.
RITHOLTZ: So, when I look at the world of stocks or mutual funds, it’s a sort of Gaussian, bell curve distribution …
KUPOR: Exactly. Right. Yes.
RITHOLTZ: Where the extremes on either end, get rid of them. There’s a big fat distribution in the middle. What you’re describing doesn’t sound like that.
KUPOR: That’s exactly right.
So, you know the term that you may hear people use is kind of called a power law curve, right? And what a power law curve is is you got a very small number of …
RITHOLTZ: That headlong bell (ph).
KUPOR: Thanks (ph). That’s exactly right. You got a few things that drive all the return and then you got this long tail of a bunch of stuff that, quite frankly, doesn’t amounted much from a returns perspective.
RITHOLTZ: And we see the same thing in private equity and hedge funds as well.
KUPOR: Yes. It is funny, though. Actually, you mentioned kind of the public markets. It’s actually anything. There’s been a bunch of studies to avoid on the public markets where just it turns out they actually are more power law than I think people understand.
RITHOLTZ: I think the number is four percent of stocks …
KUPOR: Yes. Yes.
RITHOLTZ: … drive pretty much.
KUPOR: I think that’s exactly right.
RITHOLTZ: All the 90 percent of the returns out there. It’s — so, good luck picking those four.
KUPOR: Exactly.
RITHOLTZ: If you have a time machine, it’s really easy.
KUPOR: Exactly right. Yes.
RITHOLTZ: Let’s talk a little bit about some of the changes that you’ve witnessed in the industry. In the book, you talk about Y Combinator and why that was so influential and really changed the game for the VC world. Explain to the layperson what Y Combinator is and why — why did it matter so much?
KUPOR: Yes. So, Y Combinator is what we would call an incubator which means they basically kind of take. Usually a cohort of companies. They can be anywhere from 30, 50, sometimes as big as a hundred companies.
And they kind of — they basically start their business inside of Y combinator. That’s where they go to work. They work on a project. They build a product, they get tutorials and kind of tutelage from other people and then they kind of pop out the other end and hopefully they’re ready to go raise money as a result of that. So, it’s kind of — almost a finishing school to a certain extent to kind of get these startups ready and kind of be in the regular financing world.
RITHOLTZ: Now, Andreessen was an investor in Y Combinator or an investor in Y Combinator’s funds?
KUPOR: In Y Combinator, companies directly, actually. So, a couple years ago, when we first started, kind of, I think from 2010 to 201,2 when companies would go into Y Combinator, they would get some money. We were one of the few firms that you should give them some money, so we would invest small amounts, $25,000, $50,000 in …
RITHOLTZ: But in lots of different companies?
KUPOR: Yes. We just kind of — we don’t have discretion at that point in time. It’s like, look, everybody who comes in, you’re entitled. Take this money if you want it.
And then, obviously, look, if we really were interested in the company, we could put more money in later in a normal financing round.
RITHOLTZ: So, why did they change the entire — what is that set of — you mentioned earlier, there’s an information asymmetry between the seasoned VCs and the young kids running the startups, how did this level the playing field?
KUPOR: Yes.
RITHOLTZ: Did they just kind of learned the ropes?
(CROSSTALK)
KUPOR: It’s really interesting what happened. So, I think the way to think about VC is the first 35, 40 years of VC, call it kind of early 1970s to about 2005 which is Y Combinator started, you can think about it as capital was a scarce resource. The VCs had it.
And therefore, if you look at the power dynamic kind of the VCs have the power and the entrepreneurs have less power.
RITHOLTZ: They were the gatekeeper, if you wanted to go …
KUPOR: That’s exactly right.
RITHOLTZ: If you wanted to go …
KUPOR: If you want to money …
RITHOLTZ: Yes. It goes through them.
KUPOR: … you had to go to Sand Hill Road and you had to go get the money, right?
RITHOLTZ: Right.
KUPOR: And two big things happened. One is YC which will come back. Sorry. That’s short for Y Combinator.
RITHOLTZ: Yes.
KUPOR: And then the second is, the amount of money that it required to start a business continue to fall pretty precipitously starting in kind of late ’90s and still continuing to today, right?
RITHOLTZ: So, fiber optics, cloud, all that stuff meant …
KUPOR: Bandwidth, storage, servers …
RITHOLTZ: You didn’t need a whole team and giant server farm. You needed two guys and a laptop, pretty much is what it’d look like.
KUPOR: Yes. And you could — now, you can go to Amazon Web Services, of course, and get stuff that used to cause you $5 million or $10 million of capital expenditures years ago. I mean, when we’re in loud cloud, that’s basically what we did. We raised money from the venture capitalist and we basically then handed it over to companies that nobody remembers anymore, Sun Microsystems …
(CROSSTALK)
KUPOR: … from Oracle databases. All that stuff.
Now, you basically get in a box, on demand, from Amazon for $10 a gig or whatever the price is.
RITHOLTZ: It’s amazing, the changes that have taken.
KUPOR: So, what happened was right — that started to happen which meant you could now start companies for a lot less money, and therefore, a lot of seed firms that we’re now seeing kind of came in to the mix.
So, we’ve seen a lot of new seeds. In fact, something like 500 new firms over the last 10 years have come in to the seed market.
RITHOLTZ: As company seeding startups?
KUPOR: Exactly right. So, in kind of firms like us, firms like Andreessen Horowitz, but just kind of smaller versions of it, right? So, $100 million funds instead of $700 billion funds.
RITHOLTZ: Right.
KUPOR: So, you have kind of — that phenomenon, right, which is the amount of capital goes down. And then you have the second phenomenon which is Y Combinator comes along and says, hey, we’re going to try to actually really, quite frankly, educate a lot of entrepreneurs about the startup process.
And so, take a little bit what was a very black box process, and hopefully, open the kimono a little bit. And …
RITHOLTZ: And that changed that information …
KUPOR: That changed …
RITHOLTZ: … asymmetry.
KUPOR: That start to change that information symmetry. And so, that really changed the competitive dynamics in this business because it used to be that if you were a traditional $250 million venture capital firm in this business, you were the first money in, right?
RITHOLTZ: Right.
KUPOR: So, you kind of control the access to that.
Now, you’re living in an environment where capital is plentiful. You’re no longer the gatekeeper of capital. And, by the way, there’s these 500 new firms that are being started that are kind of upstream of you right there, building a relationship with the entrepreneur before you and then there’s kind of behemoth called Y Combinator that’s also kind of effectively now becoming a gatekeeper, right, because they are kind of a funnel-through which a lot of these companies flow,
And so, the net of both of those is it really just started to dramatically change the environment for venture capital and that was the opportunity that we saw when we started Andreessen Horowitz in 2009 was to take advantage of that kind of changing of the guard.
RITHOLTZ: So, are these seed funds and YC, is this changing the quantity of new startups? Is it impacting the quality? Are we diluting the talents? Or is it just, nope, it’s a firehose and the more the merrier.
KUPOR: Yes. It’s — so, I think for right now, it’s a fire hose and the more the merrier. So, what it does mean is you can have a lot of experimentation happening for very little amount of money. And, look, I think that’s a great thing. It’s a great thing for entrepreneurship. It’s a great thing for the industry.
What’s interesting though is the funnel does narrow which is if you look at kind of seed deals, right, we’re talking about there’s been a — there’s a lot of those, the monies, there’s a lot of money there, the number of deals has grown a lot. I don’t know that what the exact numbers are. It’s something like four or five times over the last 10 years in terms of kind of if you looked at it from Point A to Point B.
RITHOLTZ: So, there’s this vision of VCs as kind of a glamorous lifestyle. When we watch movies like the “Social Network” or my favorite show on HBO, “Silicon Valley… ”
KUPOR: “Silicon Valley.”
RITHOLTZ: … which full disclosure, one of your partners was consulting with them early on.
KUPOR: I’m aware of that.
RITHOLTZ: There’s a certain degree of glamour, wealth, riches and just cutting-edge technology in making decisions that affects how technology develops. I get the sense from your book, it’s a little grittier than that. It’s a little more hard work in long days and late nights and not all fun and games.
KUPOR: Well, like, I think like any job, it’s not all fun and games. And let me make sure — let me be very clear, though, which is nobody should take out their little violence for the venture capitalist, Okay, right?
I mean, all their kids have shoes. They all go to school. They all get fed, right?
RITHOLTZ: They do have shoes. Okay. That’s good to know.
KUPOR: Right. It is — I certainly it either is not right as glamorous as depicted on TV. We should be very clear.
RITHOLTZ: It’s still not bad.
KUPOR: It’s still a pretty place to be.
RITHOLTZ: Right.
KUPOR: I mean, look, the reality is the real heavy lifting gets down on the entrepreneur side, right? So, we shouldn’t kid ourselves in our business and we certainly try not to which is as much we want to be kind of finance partners and hopefully add value to other ways of these companies, the heavy lifting is all being done by the entrepreneurs.
But I think the part maybe that you’re talking about that’s — the less glamour part is, look, like any other job, it’s competitive, right? And you got to go work hard. It’s a question of — the real question at the end of the day is why is an entrepreneur going to pick you versus any of the other firms that they can pick and that’s a big sea change in the business that just didn’t exist in the same way in the first 30, 35 years.
When the VCs had all the capital, they had a lot more control and a lot more power. And now, we’re dealing with what I think is a very healthy kind of changing of the guard in some respects. But VCs don’t control boards anymore like they used to which …
RITHOLTZ: Right.
(CROSSTALK)
RITHOLTZ: You still get a seat on the board if you’re — if you’re going to a A round and make …
KUPOR: That’s right. That’s right.
RITHOLTZ: … invest, I would imagine, you want some input into the management and some ability to watch how the money is being spent.
KUPOR: That’s exactly right. So, yes, typically, we will have a board seat and then typically, we will have kind of a set of rights that go along with our stock that’s says, hey, if you’re going to raise money, you have to let us vote to say yay or nay or if you’re going to sell the company, we have some ability to kind of have a say.
In the old days, and I was doing air quotes there, the venture capitalist, in addition to that, used to kind of control the board. Meaning that there used to be more venture capital board seats on the board than there were founder seats. And that’s, in some ways, why I think, some of the reputation of the industry had was some of these guys get trigger happy sometimes on kicking CEOs out of the business and kicking founders out.
That dynamic has really dramatically changed over the last 10 years and we had seen more and more boards where the founder’s kind of controlled them in the sense that they have more board seats and it does change the dynamic of the working relationship between them.
RITHOLTZ: So, you mentioned that capital used to be scarce.
KUPOR: Yes.
RITHOLTZ: And now it seems pretty plentiful.
KUPOR: It is. Yes.
RITHOLTZ: So, I want to explore that and try and figure out how that has impacted markets and startups. What are they now about 500 unicorns? Private companies that are a billion-dollar valuation? Is that reflecting plentiful capital?
Some people have called it a bubble. I’m not sure that’s the right description.
KUPOR: Yes. We have not, by the way. We’ve been on record at this that I do think if you’re talk about this compared to the ’99-2000 bubble, it’s very different.
RITHOLTZ: Right.
KUPOR: You and I were talking about this before we start. And so, to give you a perspective, right ’99, 2000, 700 plus IPOs in the tech industry in those two years.
RITHOLTZ: Right.
KUPOR: The median revenue which I didn’t realize until I look this up to confirm it, $17 million, right? So, you’re talking about companies going public.
RITHOLTZ: With 17 million?
KUPOR: Yes. With $17 million of revenue. Right now, we haven’t done 700, we haven’t even done 400 IPOs over the last 10 years, in the last decade.
RITHOLTZ: Right.
KUPOR: I mean, we’ve doing about 30, maybe 50 a year or so. We got a long way to go.
RITHOLTZ: And we look at the revenue of WeWork or Uber …
KUPOR: Yes. Yes.
RITHOLTZ: … or Airbnb. It’s pretty …
KUPOR: It’s huge.
(CROSSTALK)
KUPOR: And the median number, I think, the last I looked for the last 10 years is about 170 million, but that’s …
RITHOLTZ: Ten X.
KUPOR: Yes. It’s 10 X, right. But I think that even really understates it, right? I mean, you’ve got companies, right, like Lyft and Uber and others right there. Yes, they’re going to public with billions of dollars of revenue. So, it’s a very, very different world.
But to your question, though, about kind of how much capital is out there, it is true, there’s a lot of capital and it’s kind of a little bit of a tale of two cities which is you have a lot of capital at the seed stage, right, and we talked about that a little bit.
Now, it’s not a lot in the total scheme of things in the sense that it’s about six, five — six percent of capital total in the venture capital world of seed. So, it’s grown a lot over the years but it’s not — we’re not talking 20-30 percent of the capital.
RITHOLTZ: Right.
And then you have kind of the A and B rounds of kind of not moved that much. They moved a little bit, but there’s a little bit more capital. And then you have this big influx of capital in the kind of, call it the C plus round.
(CROSSTALK)
RITHOLTZ: … like late stage, pre-IPO rounds ….
KUPOR: That’s exactly right.
RITHOLTZ: That maybe 20 years ago would have been public instead of a private round.
KUPOR: That’s exactly right. So, the best way to see this is it used to be the case that from funding of a company to IPO, it was about six, six and a half years. It’s typically what used to be.
RITHOLTZ: Right.
KUPOR: Today, that’s about 10-12 years. So, you’ve pretty much basically doubled in the last decade the time it’s taken for companies to go public.
And your exactly right. So, what’s happening is you got all these capital that used to be in the public markets that’s now saying, hey, we want some that growth rate, right? We want these growth companies because we’re not getting them in the public markets and that capital now is coming in to the private markets and that’s what’s driving these very, very large round you see in the private markets.
RITHOLTZ: So, here’s another interesting stat from the book. I thought it was fascinating. Fifteen of the biggest 25 IPOs in 2018 were from companies that had no profits. So, how should we be thinking about young companies that basically are losing a little money. The joke is Uber loses little money on each ride but they make it up in volume.
KUPOR: Right.
RITHOLTZ: So, how do we think about these companies that are growing rapidly and have nice revenue but are far away from profitability?
KUPOR: So, I think the way you have to think about it, and look, the way you have — if you’re getting comfortable investing it, the way you have to think about it is you have to look at kind of what we call the unit economics, right? So, in other words, show me kind at a unit level, so at a geographic market level or at kind of a per ride level, does the business work? And are we losing money in aggregate because we are now focused on growth in other markets and when those markets are at a level of maturity, you will see profitability.
So, we a shareholder in Lyft, right?
RITHOLTZ: Competitive rule, right. So, and if you look at Lyft, right, my impression is when they went on the road, what they probably did is they said, hey, look at our mature markets. Look at the San Francisco or look at Boston or whatever they might be, these are markers that are mature and we can demonstrably show you kind of the profits that we actually make in those mature markets.
And by the way, we got a bunch of these immature markets. But if you believe the story right then, those immature markets over time, we’ll get to the same levels of profitability and then therefore the companies themselves are profitable.
I think that’s the way to think about it and that’s what the investors are trying to do. It will be incumbent, obviously, if one of these companies to actually prove that and demonstrate that kind of the story, actually, matches reality.
RITHOLTZ: Here’s the question. So, we have these big, fast, growing well-funded companies that aren’t profitable, what happens in the next downside cycle?
KUPOR: Yes. Yes. Well, look, I think that’s a real question and I think this is why, actually, you see in the IPO market right now that the IPOs of companies are trading differently. I think based upon kind of whether they are profitable and/or how much cash, ultimately, they are consuming.
So, if you look at kind of the companies that have performed the best, they tend to be enterprise software companies like Zoom, for example, or we saw …
RITHOLTZ: Lots of scale, lots of leverage
KUPOR: Right. So, they’ve got, they’re growing fast. They’re also profitable businesses. And so, look, in a downturn, you could say, look, maybe they don’t grow as fast, but they’re not — they’re just not an essential threat to that business, right?
RITHOLTZ: Right.
KUPOR: So, people are — if you’re crowd strike investor, look, people are going to buy security software at some point in time even at downturn. And so, if it slows a little bit or if they lose a little bit of money, that’s Okay. Not a big deal.
And then, you do see like the Ubers of the world where people say, hey, look, you’re telling us profitability in 2023 which means you may be reliant on the capital markets to raise more capital over that time period and I think that’s why you tend see more volatility in those kinds of stocks that have this big cash consumption.
RITHOLTZ: So, we can — I keep coming back to the issue of how much capital is sloshing around.
KUPOR: Yes.
RITHOLTZ: Let’s talk a little bit about the Vision Funds. What’s the Vision Funds and how is this impacting the landscape out there?
KUPOR: Yes. So, the Vision Fund is a fund that was raised by SoftBank which is, obviously, a big Japanese conglomerate.
RITHOLTZ: And it’s huge.
KUPOR: It’s huge. It’s $100 billion, right? And it’s — as far as I know, at least, it’s certainly the biggest fund that I’ve heard of that’s effectively a fund structure investing in private equity and venture (ph) companies.
RITHOLTZ: Now, I know you’d probably don’t want to bash a competitor in your space, but I imagine that much money in the hands of humans and they’re just doling it out willy-nilly and overpaying for stuff and saying, hey, you got $100 billion to deploy, go out and find some more companies.
KUPOR: Right.
RITHOLTZ: I’m exaggerating a little bit, but is there any truth to that?
KUPOR: Well, it’s interesting. So, a couple years ago, Softbank was kind of a class of one, right? They were the 800-pound gorilla, right?
RITHOLTZ: Right.
KUPOR: There was nobody else of that scale. And, look, they had — look, people all do what their incentives are, right, which is so, if you looked at the SoftBank Vision Fund, clearly, you’re incentive was to go invest money.
Now, whether they were overpaying or doing out, look, I mean, time will tell, obviously. And they did — they do have a different kind of cost of capital, right? In other words, they’re not trying to necessarily get a 3x or a 5x return on a company, they have a lower kind of return hurdle.
So, in theory, they could theory to pay more than maybe somebody like us could pay for the same business …
RITHOLTZ: Right.
KUPOR: … because we have to deliver a higher rate of return.
RITHOLTZ: You have to be more efficient. They have the luxury of not caring about that …
KUPOR: Yes. It’s not that we had to be more efficient, it’s that we are — our investors say, look, for you to stay in business, we want to see three times our money being returned in every fund cycle basically.
RITHOLTZ: Over seven years.
KUPOR: Ten years. Right.
RITHOLTZ: Ten years. Yes.
KUPOR: So, give us three times your money which probably means somewhere between 25% and 30%, kind of IRRs, right, annualized returns …
RITHOLTZ: Not too shabby.
KUPOR: Yes. If you do that, look, we’ll keep giving you the money. You get to play the game again.
RITHOLTZ: But I mentioned earlier, you are my third victim from Andreessen Horowitz. Not only did I have a nice time talking to Benedict Evans who has a wonderful newsletter that comes up …
KUPOR: He does. He does.
RITHOLTZ: … of your shop as well as — is it one or two podcasts?
KUPOR: I think it’s probably two at this point. Yes.
RITHOLTZ: But I had a great time speaking with Marc Andreessen in your — in the pitch conference room …
KUPOR: That’s awesome.
RITHOLTZ: Which was fun and if you listen to that interview, you could hear me bang the table.
KUPOR: Yes. All right. I’m going to go back see if I can find that.
RITHOLTZ: And it’s pretty hilarious because it was just one of those like surreal locations to how to do a podcast and I had a number of people email me and say I normally listen at two times regular speed, but this guy’s talk so fast I couldn’t keep up with them.
KUPOR: That’s funny.
RITHOLTZ: I’m like, have you not heard Marc Andreessen speak before? He just — he’s like the New Yorker. He’s like …
KUPOR: He is. He is a fast speaker. Right. Right.
RITHOLTZ: And a lot of interesting then stuff. So, I take that as a compliment when someone says I had to listen at regular speed.
KUPOR: They don’t want to miss a word. That’s good.
RITHOLTZ: We mentioned earlier you were employee number one.
KUPOR: Yes.
RITHOLTZ: After Andreessen and Horowitz. What is your role today? You’re managing partner, what does that mean? What’s your day job like?
KUPOR: So, it’s a lot of things. Actually, my nickname inside the firm is actually called Slash. Like kind of the …
RITHOLTZ: Cut the cost (ph).
KUPOR: Right. Well, no. Actually, not slash like cut cost. Slash as in I have a lot of jobs, right …
RITHOLTZ: I got you.
KUPOR: So, some days, it’s like …
RITHOLTZ: Like hyphen. Mr. Hyphen.
KUPOR: Hyphen. Exactly right.
So, some days, it’s go raise money. So, we just finished a fundraise not too long ago. So …
RITHOLTZ: How much did you guys raise?
KUPOR: We just raised about $3 billion, actually.
(CROSSTALK)
RITHOLTZ: So, wait, I’ve been coding 7 billion …
KUPOR: I know. Seven actually, believe it or not, it’s even — it’s out of date as of literally about 30 days ago. So, I apologize for …
RITHOLTZ: No, not at all. It’s in the book and it’s in the …
KUPOR: I know. Yes. Yes.
RITHOLTZ: Go fix Wikipedia. It’s wrong. Right. Go figure — who would have ever guessed something in Wikipedia was …
KUPOR: I know. I know.
(CROSSTALK)
RITHOLTZ: Is it closer to 10 billion?
KUPOR: Yes. We’re over — we’re just about over 10 now. Yes.
RITHOLTZ: That’s fantastic.
KUPOR: Yes. IT’s been a lot of fun. So, yes. So, what’s (ph) most of my job …
RITHOLTZ: By the way, how many people get to say, yes, I raised $3 billion. It’s been a lot of fun.
KUPOR: It’s the ..
RITHOLTZ: You must really love your job.
KUPOR: I do love my job. It’s great. I mean, I love the capital raising part of it. We have a great limited partner base, and so, it’s a lot of fund to do that.
RITHOLTZ: And a lot of pensions and endowments?
KUPOR: We do. Yes.
RITHOLTZ: And universities …
KUPOR: Pensions, endowments, universities. We do have some summer wealth funds, too, so we talked about those kinds of in one of our segments. We — some family office, not that many. And then we’ve got — we’re starting to build that more of international base now, so we kind of — most of it was North America, really basically U.S.
RITHOLTZ: Right.
KUPOR: And we’re thinking — now, we’re kind of expanded into Europe and in some parts of the Middle East and some parts of Asia. So, it’s been a fun opportunity just to kind of learn that side of the business.
RITHOLTZ: Can a VC scale significantly above where you are? I mean, if you are a software company, we didn’t talk about software, I hear, is eating the world.
KUPOR: Yes.
(Crosstalk)
RITHOLTZ: But if you were — if you’re a software company, you can scale up infinitely. Google Docs, nothing’s going to prevent every person in the world from having a 100 sheets and docs on Google Docs. It just scales infinitely.
You literally have partners who have to sign off on stuff, associates who have to do some of the grunt work. There’s a lot of decisions to be made. Where do you tap out?
KUPOR: Yes. This is the real conundrum with his businesses is so that the limiter in scale is basically the number of board seats that the general partner can sit on, right? And it varies. Some people tap out at 10. We’ve got some of our folks who were doing like 15 and 16 who think they can go to a 25.
RITHOLTZ: Really?
KUPOR: We’ll see if they get there. But you’re right. So, the kind of limiters are, at some point in time, you tap at your board seats and then at some point in time, the room get so big where you just have too many people trying to express an opinion.
RITHOLTZ: Right.
KUPOR: So, the way we’re trying to solve that is we do a little bit more kind of verticalization, basically. So, I mentioned earlier that we have …
RITHOLTZ: You can create different sleeves and different areas of expertise.
KUPOR: That’s right. Yes. So, we’ve got a consumer team, right? And so, we can grow that team more because right now, there are probably what, four people on our consumer team. And so, you could probably continue to grow that as long as the deal opportunity set is there and you don’t have too many people in the room to make a decision, right?
Our financial services team is too strong today. You could certainly grow that more. So, we’re trying to say, look let’s push the decision making down at the vertical level to the teams that have the right domain expertise and then above a certain dollar threshold, hey, if someone wants to write a $50 million or $100 nine dollar check, let’s kind of get everybody in the room and make sure that nobody’s going to blow hole inside of the ship, right?
RITHOLTZ: Right.
RITHOLTZ: So, 170 employees, how many partners out of the group?
KUPOR: So, we have 15 partners today.
RITHOLTZ: All right. That 90-10 relationship, like a law firm or similar, right?
KUPOR: Yes.
RITHOLTZ: Some of the big firms, it was seven to one sort of ratio?
KUPOR: Yes. The other big difference that with our firm, right, is 100 of those, 170 people actually work with our company’s post investment. So, we’re kind of an odd beast in the venture capital world.
RITHOLTZ: Meaning that they’re not going to your office each day, they’re going to the entrepreneurs …
KUPOR: No. No. So, they actually — they’re at our office. They work for us. But they do things like, hey, can we help you go get introduced to Bloomberg, to the CIO or the CEO …
RITHOLTZ: So, more of what I would traditionally imagine as a partner’s job description, you are pushing that down to mid-level staff.
KUPOR: That’s exactly right. That’s exactly right.
So, the whole idea behind the firm was kind of this concept of, look, can we disaggregate the general partner job and say what are things that we really need the general partners do, right? So …
RITHOLTZ: I love these buzzwords. It’s so good. You’re going to disaggregate the partner.
KUPOR: Disaggregate, right? How about that.
RITHOLTZ: But you know what? That’s an accurate description.
KUPOR: Yes. So, we want a general partner to look for great deals, build relationships, make investment decisions, and sit on boards and be valuable to those companies, right? But we don’t necessarily need a general partner who’s not an expert in recruiting CFOs to know how to do that. So, instead we have a whole talent team that’s their job is let’s know all the top CFOs in the business, let’s build relationships with them and then where appropriate, let’s connect them in to our portfolio companies, right?
And so, we do that on talents, on both executives as well as engineers. We do that on sales and business development prospects. So, we cover companies like Bloomberg and others and say who are decisionmakers that might buy software here or that might know buy ad time for some of our ad-based companies. And we ought to know all those people and then figure out when can we connect them in to our companies to help them accelerate their sales.
RITHOLTZ: Really intriguing.
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RITHOLTZ: So, what are your vertical specialties? What are the different groups?
KUPOR: Yes. So, right now, there’s a couple. So, basically, kind of consumer is one and think of that as that’s a Facebook and Instacart …
RITHOLTZ: Anything that the end user …
KUPOR: Essentially where the end user …
RITHOLTZ: We used to call that B2C …
KUPOR: Yes.
RITHOLTZ: Back in the day.
KUPOR: Yes. Exactly right.
RITHOLTZ: I’m old. So …
KUPOR: That’s exactly right. Yes. That’s a good way to think about it.
Financial services. So, fintech is one.
RITHOLTZ: Right.
KUPOR: And that kind of has some B2C and some B2B elements of it, right? So, it could be we have a company called a Affirm which basically is, point-of-sale lending, I don’t know if you know this.
But so, if you buy a Casper mattress and when you’re …
RITHOLTZ: They do the financing. Right.
KUPOR: Right. Right. They do the financing. Right. So, that’s an industry …
(CROSSTALK)
RITHOLTZ: And they have the ability to make it fairly instantaneous …
KUPOR: That’s exactly right.
RITHOLTZ: … extension of credit.
KUPOR: That’s exactly right.
RITHOLTZ: Above and beyond credit card or — somewhere between a credit card and a bank loan is where they sit.
KUPOR: That’s exactly right.
And then on completely other end of the spectrum, we’ve got a company Branch which basically does lending to sub-Saharan African countries, basically people in those countries. So, literally, think of it as a taxi driver or a local store owner …
RITHOLTZ: Microlending …
KUPOR: Yes. Microlending. Right. So, who doesn’t have credit, right? Basically, in a lot of these countries, we have these credit bureaus, right? So, you have to kind of — you get your credit score and then you take that to lender …
RITHOLTZ: Right.
KUPOR: And a lot of these other countries, there is no concept of credit bureau. So, a company like Branch literally is building people’s individual credit files by giving them small microloans and that as they pay it back, obviously, they started …
RITHOLTZ: They get a higher …
KUPOR: … track record. Yes.
RITHOLTZ: A higher credit limit.
KUPOR: Yes. So, that’s fintech.
Enterprise. So, enterprise could be anything from like an application company like a Slack, for example, would be in that, to something more esoteric like a security company or a company that’s doing a database are things of that sort.
We do crypto which is an interesting area which we can talk about.
RITHOLTZ: Sure. Let’s talk a little bit about crypto.
KUPOR: Good.
RITHOLTZ: So, this crazy Facebook Libra thing. So …
KUPOR: I walked right into that one.
RITHOLTZ: Right? Let’s just talk about this. So, Facebook who has helped undermine democracy as they worked hand-in-hand with the Russians to spread fake news, decided that they want to replace money. So, how could that ever go wrong?
KUPOR: Yes. So, they don’t want to replace money. They want to create Internet money.
RITHOLTZ: Right.
KUPOR: Right. So, that’s the way to think about it. That’s, at least, how we think about …
RITHOLTZ: Internet money. So, not a ACH, not credit, not Venmo …
KUPOR: That’s right.
RITHOLTZ: … which — I use Venmo as a verb inappropriately to young guys in my office tell me. So, when I owed someone money, they bought tickets for something, I said just Venmo me. And he’s like, dude, that’s just — and I’m like, just Venmo.
KUPOR: I think that’s pretty forward …
RITHOLTZ: So, he said, no, no. Venmo — he goes I’m going to invoice you. You’re going to Venmo me. Do I really — Okay. I’ll be more formal.
So, send me your request and I will pay you. Is that better?
KUPOR: Yes.
RITHOLTZ: But anyways, we were …
KUPOR: We digress. We digress.
RITHOLTZ: That’s a really interesting technology.
KUPOR: Yes. So, the concept, right, so the concept is, again, we’ve been using this term Internet money, right? So, if you think about it, there are things, like of course, there are things like PayPal and stuff like that today. But they all depend on, you’re right. They depend on ACH …
RITHOLTZ: Either banks or credit cards or …
KUPOR: … or banks or other or stuff like that.
RITHOLTZ: Right.
KUPOR: And it’s expensive, not everybody has access to that. And particularly, in countries like a Venezuela, for example, right, where you’ve got these hyperinflation countries, people want a stable currency that they actually don’t have to worry about, putting in wheelbarrows everyday.
And so, what basically the Facebook consortium, they put together is intending to do is just say, look, could we create this concept of Internet money so that you can procure things on the Internet, you can even do like micropayments which is very hard to do because of transaction costs.
RITHOLTZ: Right.
KUPOR: So, if you wanted to charge people 10 cents an episode to listen to your podcast, maybe that’s a good way to monetize a podcast instead of advertising, for example.
RITHOLTZ: Ten cents. I’m doing the math.
KUPOR: I don’t know if that’s the right math.
(CROSSTALK)
RITHOLTZ: No, when we sign off …
(CROSSTALK)
RITHOLTZ: You’ve converted me to Libra.
KUPOR: Right. But you couldn’t do that today, right, because by the time you took transaction fees and stuff, you would be losing, you’d be basically paying the credit card company to charge somebody 10 cents.
So, that’s the kind of big idea what they’re trying to do now. Look, it’s brand new, it’s a consortium, it’s going to be developed in a crypto framework which means it will be decentralized and governed by all these different kind of groups that are being part of it, so it’s not to be Facebook actually central — centralizing it and owning it.
RITHOLTZ: Right.
KUPOR: And it will be an interesting experiment to see if they can make it work.
RITHOLTZ: So, let me ask you a disclosure question. So, you guys famously were an early, early investor in Facebook. It worked out fabulously for that investment. Are you still a Facebook holder or is that long since been worked out?
KUPOR: So, as a fund, we don’t hold Facebook shares anymore. A lot of us individually do and I will personally disclose, I do have — I do have Facebook shares and I don’t know if Marc or other people still do. I assume Marc does because he’s on the board.
RITHOLTZ: Right.
KUPOR: I imagine he gets some kind of grant …
RITHOLTZ: Sure. Every quarter or every year.
KUPOR: Yes. But in general kind of the way our business works is our LPs pay us to manage private assets, right? And so …
RITHOLTZ: Once it’s public …
KUPOR: Once it’s public, look, they have a …
RITHOLTZ: So, you guys …
KUPOR: … manager, they can go hire you. If they want to …
(CROSSTALK)
RITHOLTZ: So, here’s the question. Do you sell their Facebook shares or do you dole that out to the LPs and let them sell it?
KUPOR: Usually, what we do is we distribute the shares …
RITHOLTZ: That’s really interesting.
KUPOR: … LPs. Yes. And then different LPs do different things. Some of them actually say, look, every time I get a distribution from a venture capitalist, I’m just going to automatically sell and I’m not going to make an independent judgment.
RITHOLTZ: Right.
KUPOR: Some of them are — and particularly the ones who are more sophisticated, say, wait a second. I like Facebook stock. And, by the way, my — one of my public managers has it but I want an overweight position on Facebook stocks. So, you know what, I’m just going to hold on to this.
RITHOLTZ: And this has such a low cost basis, I can hold on …
KUPOR: That’s exactly right. Yes.
RITHOLTZ: … to it for — although, they’re really …
KUPOR: They’re …
RITHOLTZ: I’m going to say most of them are pretty …
KUPOR: Most of them are nonprofits.
RITHOLTZ: Right.
(CROSSTALK)
KUPOR: Right. They have the luxury of not having to worry about that.
RITHOLTZ: I immediately think of cost basis …
KUPOR: Trust me, you and I are thinking of the same thing.
(CROSSTALK)
RITHOLTZ: It makes a big difference.
KUPOR: Yes.
RITHOLTZ: And then this whole — there’s where you’re going to locate the assets, you’re going to put in …
KUPOR: Exactly.
RITHOLTZ: These guys, they’re all completely taxes …
KUPOR: These guys are all taxes and freight (ph) . Yes.
RITHOLTZ: It shouldn’t make any difference.
KUPOR: But that’s basically how we think about the business. So, look, in general, yes, like if they want to buy Facebook stock, they can buy Facebook stock. They don’t need to pay us to do that.
RITHOLTZ: That makes perfect sense.
I didn’t ask you during our broadcast portion, the venture capital lifecycle.
KUPOR: Yes.
RITHOLTZ: What you talked about in the book. Let’s get a little wonky and talk about lifecycles and then I want to talk to you about persistency and …
KUPOR: Okay. Awesome.
RITHOLTZ: So, we’re really going to walk out.
(CROSSTALK)
RITHOLTZ: So, what’s the VC lifecycle?
KUPOR: Yes. So, basically, we raise funds. And those funds typically have a 10-year life. Now, if you talk to any LP …
RITHOLTZ: Ten years? I’m going to interrupt you.
KUPOR: Yes.
RITHOLTZ: Is 10 years standard? I kind of remember it being a little shorter years ago, seven, eight years.
KUPOR: I don’t know …
RITHOLTZ: Or is this — 10 years is pretty …
KUPOR: Since I’ve been in the business. It’s been 10.
RITHOLTZ: I’ll defer to you.
KUPOR: It’s actually — in the opposite, it’s actually true which is — but any LP will tell you, there’s no such thing a 10-year fund. These funds go 12, 13, 14, 15 years.
RITHOLTZ: Of course, you’re always left with stubs that haven’t done anything.
KUPOR: Yes. And hopefully, they have some value.
RITHOLTZ: But the bulk of it, the assumption is, hey, if it’s not done by 10 years, just write it down to zero and whatever comes out later, is a bonus.
KUPOR: That’s exactly — yes. Yes.
RITHOLTZ: So, and I don’t know (ph) stub is the right technical term …
KUPOR: I think it is a technical term, stub, yes.
RITHOLTZ: But I’m under the impression that after a certain point, it either works or it doesn’t and it’s not going to catch fire on the 11th year.
So, all right, we just needed to go …
KUPOR: Maybe.
RITHOLTZ: … one more year …
KUPOR: But remember, right, it’s taking 10, 11, 12 years where companies go public now, so it’s possible that it could catch fire. So, it depends on whether it’s on that path or not.
RITHOLTZ: I guess. And at that point, it’s certainly easy enough to find somebody who’s …
KUPOR: That’s exactly right. Yes.
RITHOLTZ: … come in and just take it off your hands.
KUPOR: Yes. So, anyway, you got 10 years, basically, you do most of your investing, typically, in the first three or four years, is what’s more typical. And then kind of in those later years, you’re doing what’s called follow-on investing, right? You’re kind of maybe adding to positions that you’ve …
RITHOLTZ: A second round or …
KUPOR: Do the second round or third round or stuff like that.
RITHOLTZ: How does the capital calls work? Is it like a hedge fund where all the money shows up or is it like private equity where you make a commitment, give a small amount of money upfront and then they call it as needed?
KUPOR: Yes. It’s the latter. So, basically, when an LP invest in our fund, what they’re doing is they’re saying, Okay, like I’m committing to $10 million over the life of your fund and we’ll call it kind of we typically quarterly because we kind of generally know what the cadence is.
RITHOLTZ: Right.
KUPOR: So, yes, think about it as probably 70 percent of your money gets called in that first three or four years when you’re doing primary investing and then the remainder gets called over years four through eight or nine or something for that follow-on investing.
RITHOLTZ: That’s pretty interesting. And so, that’s the lifecycle over of a typical fund …
KUPOR: That’s right.
And then, we’ll go raise a new fund, hopefully. So, hopefully, after three or four years, if we’ve exhausted that front, if we’re are doing well enough, then our LPs will say great. Like, we’ll give you another shot at, you go raise a new fund.
RITHOLTZ: And each new fund is a new legal entity …
KUPOR: That’s correct.
RITHOLTZ: I don’t want to to call it A16Z…
KUPOR: You can call it A16Z.
RITHOLTZ: But people are not going to understand what that is. So, I have this great blue hat that sits in my car and it literally says A16Z.com.
KUPOR: Hey, I like that.
RITHOLTZ: And there are 16 letters between the A and Andreessen and the Z of Horowitz.
KUPOR: Wow. You got it. You got it.
RITHOLTZ: I mean, it wasn’t — hey, I cracked that code. It wasn’t too difficult.
But it’s really a very interesting idea and it allows you guys to come up with an almost random web URL.
KUPOR: Absolutely.
RITHOLTZ: You go and get a website, they’re all taken. It’s kind of crazy.
KUPOR: And it allows people to actually find it because if you had to spell andreessenhorowitz.com …
RITHOLTZ: Right. Impossible.
KUPOR: … every time — we’d be out of business.
RITHOLTZ: Two Es, two S’s, I always get that wrong.
KUPOR: Yes. Exactly.
RITHOLTZ: I always get that wrong.
KUPOR: So, persistence was what you mentioned. We didn’t talk about …
RITHOLTZ: All right. So, true. Let’s talk about — so each of these are separate funds.
KUPOR: Yes.
RITHOLTZ: You’re the — the firm is the GP and it may or may not be the same LPs …
KUPOR: Yes. That’s right.
RITHOLTZ: And so, you just did Fund VI.
KUPOR: That’s right.
RITHOLTZ: If you’re just raising money for Fund VI and that was put to bed, Fund VII is a couple years down the road?
KUPOR: That’s probably right. Yes. We tell our LPs to kind of think about it as two and a half, three, three and a half year cycle is probably the right way to think about it.
RITHOLTZ: So, let’s talk about persistence which is kind of interesting. And again, at risk of I don’t want to put words in your mouth and slug a competitor.
KUPOR: No.
RITHOLTZ: But let me just talk about some of the talk of the town.
So, Kleiner Perkins, one of the most storied John Doerr and that whole collection of folks. Incredible. Cisco and Apple Microsoft. I mean, go down those, it was insane. Intel. They did fabulously in the ’80s and the ’90s. The latter funds seem to have — not had the same track record.
So, the question is was it luck or did the environment changed so much that they failed to adapt? Did that whole sex discrimination case throw them off their game? These are my words, not yours. I don’t want to put …
KUPOR: I was going to say …
RITHOLTZ: You have to see these people …
KUPOR: I’m listening at what you’re saying …
RITHOLTZ: … and I don’t want anybody saying, hey, Scott, what the hell, man?
KUPOR: Yes. Yes.
RITHOLTZ: So, this is — I apologize to John Doerr and everybody. I’m repeating what I read. I don’t know this for a fact. I’ve never met these folks. You certainly have never said any of this, so I’m giving you …
KUPOR: Right. Good. I appreciate you. I’ve got …
RITHOLTZ: I’m giving you some plausible deniability.
KUPOR: Yes.
(CROSSTALK)
KUPOR: So, look, first of all, you have to — Kleiner is an icon in the industry. There’s no question, right?
RITHOLTZ: And they’re early track record was just eye-popping, right?
KUPOR: Yes. And then, they also had a whole life sciences part of their business.
RITHOLTZ: Sure.
KUPOR: People like Byers, right, one of the name partners, there had been great things.
And actually, right now, they have a whole new set of — a whole new team. So, they’ve kind of brought on some new people to kind of build out — really kind of build out their software business.
And look, they’ve successfully raised new funds and stuff. So, I wouldn’t — I certainly wouldn’t count anybody out of this business. I mean, they’re an iconic name with an iconic brand and …
RITHOLTZ: But that brings us back to the issue of persistency.
KUPOR: Yes. The persistence issue. Yes. So …
RITHOLTZ: So, the whole concept the fat head, long tail is there’s a handful of winners, it’s a winner-take-all distribution and those winners tend to stay winners.
KUPOR: Yes.
RITHOLTZ: So, explain …
KUPOR: Yes. It’s really interesting, right? So, if you look at the all the academic literature around VC, basically, you have a firm that performs in the top quartile of returns in one cycle is likely to then continue to be in the top quartile in the next cycle, the next one.
And I think the theory behind it, it goes back to a little bit of this kind of idea that we talked earlier about kind of a zero sum and signaling which is if you’re a firm like Kleiner Perkins, let’s just use them as an example, you have a brand and you’ve invested some these fantastic companies like Cisco and Apple.
And so, I’m an entrepreneur who is looking to kind get that brand affiliation to help me with my business, right? So, I want your money because you’ve invested in smart people before and therefore you must think I’m smart.
RITHOLTZ: Their money is more than just money.
KUPOR: That’s right. Right. it goes with the brand and what success they build overtime, right. And so, if I’m trying to recruit employees, I’d say, hey, well, I’ve got money from these Kleiner Perkins folks in this case. They’re smart, therefore you should come work for me, right, do something crazy like quit your job and tell your spouse that you’re going to take a 50 percent cut in pay and come work for me.
Or if you’re a customer, you have kind of the customer kind of gets the brand connotation of Kleiner Perkins, they may not know you but they’ve heard of John Doerr, they’ve heard of that organization. So, you get that kind of brand affiliation.
So, I think that’s why there is this persistence and then therefore, also as we talked about, because these deals are often zero-sum, if you’ve got the brand, that gives you an unfair advantage in competing for the new deals and when you win that A round of the deal, that means nobody else in the industry got to win that deal either, right? So, you kind of allow that persistence to kind of take effect and give you a competitive advantage.
RITHOLTZ: Now, this is the same thing we see in where do you want to go with his hedge fund …
KUPOR: Exactly right.
RITHOLTZ: … Ivy League schools. Is Harvard really Harvard or are they just coasting on the reputation …
KUPOR: Yes. No, look, you’re right.
RITHOLTZ: … 400 years.
KUPOR: Yes, look. We use signaling all the time, right, and it’s — you’re right. It’s not necessarily fair. Look, there’s plenty of smart students at other places that don’t go to Stanford or Harvard, but an employer looks at that and they say, hey, like it’s probably the case that they’ve screen the student, they’ve done something and so I accept that as kind of you know brand affiliation for that student.
But you’re absolutely right. It’s not fair, but it is, unfortunately, part of the way the world works.
RITHOLTZ: So, we’re not talking about fair, we’re talking about if you’re a pension fund or if you’re an allocator and you have to decide, hey, I’m going to budget 5% of my assets to venture capital, in the world of hedge funds, if you’re not in the that top 10 percent, you’re paying a lot for not great performance.
It sounds like the VC world is very, very similar ..
KUPOR: It is.
RITHOLTZ: It’s similar if you’re not in the top firms, well, then you really, as you pointed out, in on aggregate, you’re going to underperform the public market.
KUPOR: Yes. This is where, I think, a lot of the LPs sometimes have kind of made mistakes in their venture portfolio is, they …
RITHOLTZ: Diversify.
KUPOR: Yes. They diversify. Right. Diversification turns out to be a bad strategy in venture, right, which is, look, if you’ve got — if you are with a great firm who’s in the top quartile, obviously, things change and, of course, maybe all the partners leave or something catastrophic happens.
But in general, you want to probably double down your money on those folks as opposed to actually kind of diversifying the …
RITHOLTZ: So, the names I know, like, flat iron ventures or benchmark …
KUPOR: Sure.
RITHOLTZ: In addition to Kleiner Perkins, Andreessen — and I know there are dozens and dozens of others, the well-known top tier firms really are well known and top tier for a reason.
KUPOR: That’s right. Yes.
And, look, those are great firms. And so, what happens, right, is the LPs want to allocate to those firms and then what often happens, I think, where sometimes, the LPs make mistakes is they say, look, I can’t get access because …
(CROSSTALK)
KUPOR: Right. Benchmarks, it’s very hard to be a new LP and get access to a benchmark. They’re so good that, right, they haven’t really added to their LP base.
And so, then people sometimes say, Okay, well, let me go down to the next tier or the next tier, and then unfortunately, and a lot of times this business, that means that you now start to get those returns we talked about which converge to the median as opposed to the top returns.
RITHOLTZ: Mean reversion is a …
KUPOR: Exactly. Right.
RITHOLTZ: … is quite a mean …
KUPOR: It’s alive and well.
RITHOLTZ: A cruel mistress. So, I made a reference but we really didn’t get in to. Andreessen’s piece, “Software is Eating the World.”
KUPOR: Yes.
RITHOLTZ: That was 2011 and that turned out to be a fabulous call.
KUPOR: Yes.
RITHOLTZ: So, really the question is, is software still eating the world and when does this get replaced by whatever’s going to replace software? Or does that just never end? It just keeps going?
KUPOR: Yes. I think — so, I think software is still eating the world. At least, where we sit, we think it will continue to eat the world for, I don’t know what the time period is, but I don’t know …
RITHOLTZ: Till Fund XLVII.
KUPOR: Exactly right. I don’t see an end to it at this point, though. I mean, actually, what’s interesting now is it’s starting to touch a lot of industries that historically it never got to. So, now, we’re starting to see software eating a little bit of education, a little bit of healthcare, government services, oil and gas markets, energy market.
So, there’s these very, very lead (ph) markets that for a long time, kind of, were largely untouched. And I think we’re still at the very, very beginning phases of it.
So, it’s been our investment thesis for a long time. I think it’s going to be our investment thesis for the foreseeable future.
RITHOLTZ: So, I’m going to throw a curveball at you only because you brought it up. So, healthcare, is such a fascinating area. You guys have looked at biological sciences, not really — where you really focus.
KUPOR: We do actually have a bio fund.
RITHOLTZ: Right. But the whole — there’s a huge amount of genomics and going down the whole list of stuff, you’re really more hard-core tech, not life sciences, but you do — as you said, you do …
But when you brought it up, I immediately thought of the Berkshire Hathaway, Amazon, JPMorgan Chase …
KUPOR: Right. Right. That’s right.
RITHOLTZ: … concept of, hey, healthcare and the United States is broken and we want to explore fixing it. When you you see something like that, that does your VC Pavlovian response start to go off and say, yes, it’s broken and technology can fix it. And here’s a $1 billion.
Like, how do you hear — like when I heard that story, I’m like, damn, that’s some serious firepower there.
KUPOR: Yes. Yes.
RITHOLTZ: How is this perceived at a shop where you’re looking for the next great disruptive technology?
KUPOR: Yes. Yes. Look, we all take notice when things like that happen, obviously, particularly with those companies because they’re obviously all iconic companies and have tremendous resources. In general, though, funding something like that is not really — that’s just not really our MO, right?
So, our — we may like that idea and we say, great, now, is there a set of entrepreneurs who are starting from scratch with a completely blank slate and we can invest $2 million, $3 million, $5 million in them to go try to build something that could be equivalent in terms of the results that those three companies might deliver but can do it where it’s a tech-first company and is really driven if we kind of bottoms up from the tech side.
So, it’s certainly kind of picks our interest but it’s not — it’s just not in the scope of what we tend to do from a funding perspective.
RITHOLTZ: And really, the last — I have a couple more questions but I don’t want to — I don’t want to torture you with this.
One is debt versus equity and the other is valuations.
KUPOR: Sure.
RITHOLTZ: You write about debt versus equity is a question that all entrepreneurs should think about.
KUPOR: Yes.
RITHOLTZ: What — explain why that’s significant and how they should conceptualize that?
KUPOR: Yes. So, I think there’s a couple issues to think about on debt versus equity. So, one is — and let’s assume we’re talking about really debt here, not convertible debt, right? So, debt that actually is going to stay there.
The problem with debt is at some point, you have to pay it back. Right? And it’s not that we want to be …
RITHOLTZ: Wait, what?
(CROSSTALK)
KUPOR: But, so if you think about it from a starter perspective, right, for you take debt and then say, Okay, three years from now, when hopefully, my business if finally starting to hum, now, I got to take money out of — that I could be plowing in to R&D or other stuff, we got to go pay it back, like, it’s what we call, it’s not permanent capital, right?
So, it conserve a purpose but, I think for a startup business, it’s a dangerous kind of, path to get on because you want the permanency of capital that allows you to kind of make the investments into the company that you hopefully want to invest in.
So, a lot of our companies do what’s called convertible debt sometimes where kind of that debt — will start off as debt but then it turns into equity at some point in time.
And people …
RITHOLTZ: Why do that as opposed to straight equity?
KUPOR: Look, personally, from our perspective and we’ve been public on this, we would rather people do straight equity.
Convertible, that started, largely I think, because people said it’s cheaper, it’s just faster. You don’t have to have hours and hours of lawyers doing the stuff. And it kind of punts the valuation question, right?
We don’t have to decide all the valuation today. We say, hey, look, in the future, when there’s equity round, we’ll just convert it at that price or some discount, but we don’t need to go fight about valuation.
RITHOLTZ: That’s interesting.
KUPOR: It’s grown a lot. It’s problematic for a lot of reasons. I think the most place we see problems is founders will kind of do many debt rounds and then …
RITHOLTZ: Right.
KUPOR: … they don’t really realize until they finally go to raise an equity round, when all that debt converts in equity, they realize, my gosh, I’ve sold a lot more of the company than you realized, right? Because you don’t have that tangible, hey, I got $5 million and I gave up 25% of my company or something like that.
RITHOLTZ: The math is easy to track once …
(CROSSTALK)
RITHOLTZ: And then, the last question I have to ask you about is valuation.
KUPOR: Yes.
RITHOLTZ: And I still have in my head Marc’s comment that, hey, look at all the companies that blew up in 2000, 2001, 2002. They’ve all since — the ideas were fine, they were just a little ahead of themselves.
KUPOR: Yes. Yes.
RITHOLTZ: The perfect example back then was pets.com and now …
KUPOR: Chewy.com.
RITHOLTZ: And now Chewy is just …
KUPOR: Webvan and Instacart.
RITHOLTZ: Right.
KUPOR: Mirror images of one another, basically.
RITHOLTZ: So, and his take was — when we’re looking for a 50 or a 100 baggers (ph), stop and think about it. If he over — he’s the — example, he was this — I think he was in Facebook at, like, a $20 million valuation.
KUPOR: I can’t remember (ph). Yes.
RITHOLTZ: Because what would — what happens if I paid a 100 million?
KUPOR: Right, right, right, right.
RITHOLTZ: Does it make any difference when it’s 50 billion or 100 billion?
KUPOR: Right. So, this is …
RITHOLTZ: Like, it’s almost a irrelevant at that point. And for an equity, for a public equity guy, I’m aghast at that. But intellectually, his math makes sense.
KUPOR: Yes. So, it’s funny. I’ll give you a little bit inside baseball.
So, this is the number one thing that Marc and I fight about all the time inside the firm.
RITHOLTZ: Really?
KUPOR: Yes. So, I think his principle is right and I’ve told him this before. So, hopefully, he won’t fire me when he hears this. His principle is right …
RITHOLTZ: Bad news, Scott.
KUPOR: His principle is absolutely right which is like, you’re right, if you’re going to invest in Facebook, look, the different between the 30 million or a 40 million or a 50 million valuation, who cares, right? It’s 100 billion. Went to 500 billion, we can all …
RITHOLTZ: But that’s a one winner. Look at in aggregate against, maybe the companies that weren’t $100 million.
KUPOR: I think that’s right. I think the problem is, it’s very — it’s very hard then to know what is the price which you would actually make that investment. In other words, so if I would make it at 50 or 100, would you pay 500 for a Facebook at that point in time?
RITHOLTZ: Right.
KUPOR: And look, in retrospect, it was Facebook. So, again …
RITHOLTZ: Sure.
KUPOR: … you would pay anything.
RITHOLTZ: But back at the hindsight bias, a company that we don’t know. XYZ, we don’t know what it’s going to be.
KUPOR: Right.
RITHOLTZ: Where do you draw a line?
KUPOR: Yes. So, what we try to do, right, is we try to say, Okay, let’s assume everything works out, Okay? So, what could this company be at scale, right? So, how big can it get, what’s the market size? Right? All those things.
And then we said, Okay, look. If you believe that it can actually get to a $10 billion, $20 billion company and you’re right, you’re trying to optimize for a 10, 25, 5o times your money, there’s at least a range of prices and it’s, you’re right, if you loved it at 30 million, you probably are still loving it at 40 million. But maybe the answer is, look, you don’t love it at 100 million.
RITHOLTZ: Right.
KUPOR: The other piece to think about is it’s not just the entry valuation that matters for that purpose …
RITHOLTZ: It’s the next round.
KUPOR: It’s the next round. That’s exactly — that was what I was going to say which is at some point in time …
RITHOLTZ: You got to leave yourself a little upside.
KUPOR: That’s exactly right. And so, that’s the other risk, I think, that you can get into if you don’t at least think critically about valuation is you may be happy, but then, look, these guys are going to go raise another two, three, four rounds and if every round, every investor feels like they’re getting pushed, it doesn’t work.
RITHOLTZ: It’s a little too much.
KUPOR: Now, there are examples where that works. We famously did invest and Square which …
RITHOLTZ: Worked out …
KUPOR: It turned out to be great. And every round, it always felt like you were paying ahead of what the — what the actual intrinsic value of the business was. But the reality is that’s the way a lot of these things look.
So, I think his principle is right and — but I think you just have to say, Okay, look there is some limit in which we say, Okay, the risk of the next round financing and kind of the real upside opportunity is somewhat constrained by valuation.
RITHOLTZ: So, let’s take an example. Uber …
KUPOR: Yes.
RITHOLTZ: … a giant by any measure of successful startup company, I think if you weren’t — if you are a private investor, 80% of the private investors are under water based on where the …
KUPOR: Based on where …
(CROSSTALK)
KUPOR: Pay right, yes. That may be right but, most of the — look, there are also people like benchmark and lots of other firms who are certainly not underwater.
RITHOLTZ: Independent. Sure.
KUPOR: Right. Yes. Exactly.
Yes. Look. I mean, I would say, I guess a couple things about Uber. We’re Lyft investor, so you can take this with a big grain of salt.
RITHOLTZ: You always — I disagree with my friend Scott Galloway and then …
KUPOR: Okay. Right. Yes.
RITHOLTZ: … who thinks Lyft is toast. There’s only could be one winner here. Hey, what — name a field where there isn’t a Pepsi to the Coke?
KUPOR: Yes. I think that’s right
RITHOLTZ: And that’s what this is.
KUPOR: Yes. I don’t think — I don’t think thats the case. I mean, obviously, look, we bet that way and we believe that. The only other thing I’d say about Uber, and I’d say this about Lyft, too, which is, look, yes, they’re underwater today. Judging these companies, so I think based on three, four, five weeks of stock price, it’s a little bit unfair.
RITHOLTZ: That’s totally unfair.
KUPOR: Yes, look, Facebook, right, Facebook, went to $14 a share.
RITHOLTZ: Right. They had a crappy IPO before, it all turned around.
KUPOR: And so, look, at some point in time, yes, these companies will all trade on some like multiple of cash flow at some point in time. And then we’re really be able to judge, quite frankly, whether they’re overvalued or not.
RITHOLTZ: And my last before I get to my favorite speed round questions, WeWork seems to be just off the charts where a floor in a WeWork’s building is worth more than the building itself.
KUPOR: Yes.
RITHOLTZ: Does any of these make any sense?
KUPOR: Yes. So, we’re non-investors in WeWork.
RITHOLTZ: Right. So, you can tell us the straight …
KUPOR: Well, look, and I — so, I don’t know the numbers but I do think there is this big question which is, fundamentally, is it a technology company or is it a very successful real estate business, right.
And, look, if it’s the latter, we know that those things will trade on some cap rate at some point in time. And so …
RITHOLTZ: It’s all about IRR.
KUPOR: Yes.
RITHOLTZ: Relative to the cost …
KUPOR: Yes. I think that’s the question.
Look, and I don’t know, since I’m not an investor. Look, maybe they have some story which is, look, maybe there’s technology or something else which means that they should trade at a premium to a REIT, basically, because better margins or something like that. I don’t know.
But I think, look, that is the fundamental question for them and I think that’s what — if they go public, as at least it’s rumored that they might go soon, I think we’ll have the public markets ability to weigh in on that pretty soon.
RITHOLTZ: So, I only have you here for a finite time, they’re telling me. So, let’s jump to our favorite questions that I ask all my guests. Feel free to go as long or short with these as you like.
KUPOR: Okay. Great. Yes.
RITHOLTZ: You’re first car, make, year, and model?
KUPOR: My first car was actually a Peugeot 505 STI.
RITHOLTZ: Wow.
KUPOR: It was an old one. And actually, I’ll tell you, though, I loved it for the time it wasn’t in the shop, basically.
RITHOLTZ: Right.
KUPOR: It was literally in the shop every other day. But, boy, when it wasn’t, it was a fun car to drive.
RITHOLTZ: To say the least. That is a fun car.
What’s the most important thing that people don’t know about Scott Kupor?
KUPOR: Well, I tell a little bit about the book, but I am — well, maybe the most important thing is, look, I’m a — I’m the most introverted person probably you’ll ever meet which I know sounds funny.
RITHOLTZ: No, I can relate to that.
KUPOR: Because I can …
RITHOLTZ: You’re vastly overcompensating.
KUPOR: Right. I play an extrovert on TV, but …
RITHOLTZ: Know what, you are not the only person who …
KUPOR: What I’d like to do is I like to go home and read a book and sit on my couch and watch Netflix and …
RITHOLTZ: What could be better?
KUPOR: Right.
RITHOLTZ: Right. I am right there with you.
Who is some of your early mentors?
KUPOR: I was actually mentored by a family friend, a guy named Arman Armand Weinberg (ph) is his name. I grew up in Houston. And he ran at the MD Anderson Hospital which is a very famous kind of cancer hospital.
He ran a bunch of studies around kind of early cancer prevention. And so, we did some research on how do you detect and prevent breast cancer, prostate cancer, things of that sort. And it kind of got me into my initial love was kind of health policy and things of that sort. And he gave me jobs over the summer and did all kinds of stuff that helped kind of get into that field. It was a lot of fun.
RITHOLTZ: Lett’s talk about your favorite books. What are some of your favorite books? Be they fiction, nonfiction, investment related. Whatever you enjoy reading. You mentioned books.
KUPOR: Yes. I love — I only read nonfiction now.
RITHOLTZ: Isn’t that terrible? I’m the same way and I miss fiction from my childhood.
KUPOR: You know, it’s funny, I never was a big fiction reader growing up.
RITHOLTZ: Really?
KUPOR: I never liked …
RITHOLTZ: Science fiction and …
KUPOR: Yes.
RITHOLTZ: Never got into that?
KUPOR: Not really. I mean, I read a few of them here and there but …
RITHOLTZ: Tolkien?
KUPOR: Yes.
RITHOLTZ: Nothing?
KUPOR: No. I — look, truth be told, this is terrible to say publicly but I was not a reader growing up at all. I hated reading. And in fact, I’ll never forget this, hopefully, my college teachers aren’t listening, but when I was applying to college after my junior year of high school, I got the applications and I was applying — actually, Harvard is one of the schools I applied to, I did not get in by the way, and it said, tell us about the last three books you read and …
RITHOLTZ: I’m out.
KUPOR: … so that’s one of the essay questions. Well, no, it wasn’t. I said, my God, I’ve got to go read three books. So, I read three books that summer, those are the only three books I read …
RITHOLTZ: Right.
KUPOR: … and I wrote about …
RITHOLTZ: Really?
KUPOR: Yes.
RITHOLTZ: God, between Vonnegut and books were great in high school.
KUPOR: Yes.
RITHOLTZ: And then college, the problem with college is they want you to read books that for a purpose as opposed for pleasures.
KUPOR: Right. Right. Right. Right. Yes.
RITHOLTZ: So …
KUPOR: But I love nonfiction stuff. So, like one of my favorite books is “Master of the Senate” which is the book about Lyndon Johnson. I think that’s really cool.
RITHOLTZ: Is that Robert Caro?
KUPOR: Yes, it is Robert Caro.
RITHOLTZ: Okay.
KUPOR: He’s got that whole series. I think I’ve read all of them. Apparently …
RITHOLTZ: Immense. They are immense.
KUPOR: Apparently, he’s got one more coming out …
RITHOLTZ: About how he does his work process.
KUPOR: That’s right. Right.
RITHOLTZ: It’s supposed to be fabulous but like 900 pages.
KUPOR: I was going to say that. I mean, 900 pages and obviously, he’s not a young chicken anymore and so he’s got to get it done before …
RITHOLTZ: Right. And he’s — but his work is quite brilliant.
KUPOR: He’s great. Yes. I’m reading a book right now, I’m going to blank on the title about financial bubbles and speculation which is really interesting. It’s called “Devil Take the Hindmost” is what I’m …
RITHOLTZ: Sure.
KUPOR: Yes. It’s an older book. It’s actually — I had — I couldn’t believe I hadn’t read it and I ran across it somewhere and that’s interesting. And I’ll pick up some lighter stuff every now and then but I generally tend to try to …
RITHOLTZ: Edward Chancellor.
KUPOR: Yes.
RITHOLTZ: Right. Yes. This is pretty famous book.
KUPOR: Yes. It’s a good book. It’s very good book.
RITHOLTZ: Give us one more.
KUPOR: One more that is exciting right now, what am I reading, the guy who runs the AE Institute, I’m forgetting his name, he has a book out, it’s actually called Love or Love Yourself or something like that.
It’s a very interesting book about kind of — it’s a book about modern politics and about how you kind of bifurcated, obviously, we all become and this concept of — his general view is, look, it’s — a lot of this is breakdown of human relationships …
RITHOLTZ: So, I got a copy — have you read it yet or it’s queued up?
KUPOR: I’m kind of like 25 pages there.
RITHOLTZ: All right. So, I got a review copy of it …
KUPOR: You did? Okay.
RITHOLTZ: … and I recognize his name and the pitches, we need to love each other more and we need to be more involved, and I’m thinking, wait a second, AEI, you’re the guy who said, the poors causedthe crisis.
This was all the fault of — first, we did anti-redlining and that …
KUPOR: Right.
RITHOLTZ: And this whole thing about it was the black and brown people’s fault.
KUPOR: Right.
RITHOLTZ: Wait, now you’re pivoting to maybe …
(CROSSTALK)
KUPOR: …the story as you know right as he’s quitting AEI after …
RITHOLTZ: That I didn’t know.
KUPOR: So, yes, he’s been there 10 years — it’s terrible I can’t remember his name, I apologize.
RITHOLTZ: I’ll find it.
KUPOR: You’d probably find it. So, he is leaving AEI after 10 years that gets really interesting …
RITHOLTZ: Arthur Brooks.
KUPOR: Arthur Brooks. Exactly.
RITHOLTZ: Right. So, when I got this from my editor here …
KUPOR: Okay. Yes.
RITHOLTZ: … I said, you don’t mind if I remove this guy’s intestines and jump rope with it because that’s after how divisive. So, there’s a whole another thing that in the old days think tanks used to be think tanks.
KUPOR: Right. Right. Right. Right.
RITHOLTZ: And now they’ve become these partisan idea shops.
KUPOR: Right.
RITHOLTZ: Policy shops. So, like, wait, after two decades of sheer partisan rancor, you’re going to tell me you now want everybody to hold hands and sing Kumbaya.
KUPOR: Right.
RITHOLTZ: Right. And I can’t say what I want to say on the radio but — so, I have not read it.
KUPOR: So, anyway …
RITHOLTZ: But, wait, if you read it and you like it …
(CROSSTALK)
RITHOLTZ: So, I’m glad somebody I know is reading it …
KUPOR: I’ll give you the review.
RITHOLTZ: … because …
KUPOR: Truth be told, the reason I have it is because it was a freebie at a conference I was at. So, I might not have seen it otherwise but …
RITHOLTZ: That’s kind of interesting. See, I’m more concerned about the cost of the book than my time commitment to read it because it’s 10 or 12 hours that you’ll …
KUPOR: Yes.
RITHOLTZ: And I’ve learned — I’m going to share one thing with you, I’ve learned that when you start a book and you don’t like it, just put it away and …
KUPOR: I was just going to say that. That is — somebody …
RITHOLTZ: It took a long time to get …
KUPOR: One of my partners told me that and, boy, that’s the most liberating thing I’ve ever heard. I agree. I never would do that. I would do the forced march through the woods (ph).
RITHOLTZ: Right. The Bataan Death March through that last hundreds of pages.
KUPOR: And it’s so liberating to say Okay, look, like I think I got it and I think I understand the point and let me skip a couple of pages.
RITHOLTZ: Right.
KUPOR: Nobody should skip my book of course. You got to go in every word.
RITHOLTZ: Right. So, from start to finish, you got to plow your way right through it. So, what VC influenced your approach to venture investment?
KUPOR: Yes. So, we have — probably one of the most interesting ones was a guy named Andy Rachleff who was actually one of the founders of Benchmark.
RITHOLTZ: I know that name.
KUPOR: You know Andy? Okay. Sure.
RITHOLTZ: I don’t know him …
KUPOR: Yes. So, Andy …
RITHOLTZ: … but the name is familiar.
KUPOR: … was a long-time venture guy. He was at a firm called Merrill, Pickard actually which is where a bunch of the Benchmark teams spun out and Andy was a little bit more on the enterprise side. So, he did a bunch of their enterprise investing.
But he was actually — he was the original investor in LoudCloud and Opsware and so I just got to know him through that process and I have a few references to him …
RITHOLTZ: In the book.
KUPOR: … in the book there. But his famous thing that he talked about at Benchmark was this concept of markets versus teams and basically he’s got — his view is, look — which I think is true is good markets always beat good teams or let’s just say bad markets — sorry. Bad markets always beat good teams. But, obviously, good teams can — they can survive in a bad market but will never likely going to get there.
RITHOLTZ: Now, we’re going to do the speed round because they need to take you to where you’re going next.
KUPOR: Okay.
RITHOLTZ: Tell us about a time you failed and what you learned from the experience.
KUPOR: Yes. Probably my most high-profile failure was actually when I was applying to schools, I desperately wanted to go to Stanford coming out of school and was flatly rejected as I wasn’t Harvard as I mentioned.
RITHOLTZ: Really?
KUPOR: Yes.
RITHOLTZ: But you end up going to Stanford.
KUPOR: I did end up going. So, I went to Penn actually for one year out here on the East Coast …
RITHOLTZ: And then you transferred.
KUPOR: … then I transferred. Yes. But it was …
(CROSSTALK)
KUPOR: Exactly. There’s some persistence. Right.
RITHOLTZ: What do you do for fun when you’re not in the office or home reading books?
KUPOR: Yes. I like to run, I’ve always like to run. I used to be a marathoner but kind of had to hang up that low shoes before but I still …
RITHOLTZ: Knees, hips, ankles, what is it?
KUPOR: You name it. All those things.
RITHOLTZ: Okay.
KUPOR: And then I like guitar, playing guitar, I’m not very good at it but I’m most — I’ve been a country music fa for a long time.
RITHOLTZ: Interesting. Our final two questions, a young millennial comes to you and says they’re interested in a career in either venture capital or technology, what sort of advice would you give them?
KUPOR: Yes. My best advice is go into a startup company. You don’t have to start your own company but learn the company building process. Don’t go to venture — you will be a much better venture capitalist having understood the company building process.
RITHOLTZ: And my final question, what is it that you know about the world of investing today that you wish you knew 20 plus years ago?
KUPOR: Yes. The biggest thing for me is I would have thought that most of the failure cases will be product of market failures and, look, that happens sometimes. Look, sometimes, the product just doesn’t take or the market changes.
The biggest thing that I found over the years we’ve been doing this is it’s all about the team and I know that sounds almost kind of comical to say but …
RITHOLTZ: I thought you’re going to say execution. You’ll say …
KUPOR: Well, I mean, so embedded in that is execution, right? Are you hiring people at the right time? Are you thinking about your go to market the right way? Could you have the right cultural dynamic in the company?
Those are the things — when we look at the companies that go awry in a good market, it’s almost always something like that.
RITHOLTZ: Quite, quite fascinating. We have been speaking with Scott Kupor. He is the Managing Partner at Andreessen Horowitz now running $10 billion.
If you enjoy this conversation, well, be sure and come back and check out all our previous such conversations. You can look up an inch or down an inch on Apple iTunes or wherever you find our podcasts are sold and see any of our previous 250 such conversations.
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I would be remiss if I did not thank the correct staff that helps put this together each week, Michael Boyle is my producer/booker, Atika Valbrun is our project manager, Michael Batnick is my head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
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