20VC a16z's Scott Kupor on The Biggest Learnings From Scaling a16z from $300m to $7Bn AUM, The Biggest Mistakes Entrepreneurs Make When Pitching VCs & Why VC Is Simply A Customer Service Business

In this episode of "20 Minutes VC," host Harry Stebbings interviews Scott Kupor, managing partner at Andreessen Horowitz, about his journey from investment banker to VC and his insights on venture capital dynamics. Kupor shares his experiences from the firm's early days, including the importance of network effects and the challenges of scaling a VC firm. He emphasizes the critical role of team evaluation in early-stage investing, given the lack of quantitative data, and discusses the art of storytelling in successful pitches. Kupor also touches on the significance of market size for fund investments and advises founders on fundraising strategies, including the nuances of bridge rounds and the value of transparent communication with potential investors. The conversation also explores the evolution of Andreessen Horowitz and Kupor's vision for the firm's future, maintaining its focus on supporting innovative entrepreneurs and expanding its fund specialization.

• Scott Kupor is the managing partner at Andreessen Horowitz, a top venture fund.
• He has witnessed the firm's growth from 3 employees and $300 million in AUM to over 150 employees and more than $7 billion AUM.
• Previously, Scott was a VP at HP and before that at Opsware, which was acquired by HP.
• "Secrets of Sandhill Road" is Scott's book on venture capital.

"But there is a new great to add to the bookshelf and it's called Secrets of Sandhill Road by the one and only Scott Kupor."

This quote introduces Scott Kupor's book, emphasizing its significance in the venture capital literature.

• Scott started as an investment banker during the tech bubble.
• He transitioned to operations after taking a company public and being introduced to Loudcloud by a former colleague.
• His journey with Andreessen Horowitz began in the early 2000s and spans over 19 years.

"And that really is what brought me here to this opportunity today."

Scott explains how his past experiences led him to his current role at Andreessen Horowitz.

• Scott believes that experiencing boom and bust cycles is valuable for investors.
• He emphasizes the importance of understanding unit economics and distinguishing viable business models.
• Scott disagrees with the idea that these cycles necessarily make investors more conservative.

"I think it's been enormously valuable."

Scott reflects on the importance of having lived through economic cycles in shaping his investment approach.

• Investors at the early stage work with limited data.
• Key factors include customer acquisition costs, potential for organic growth, and the scalability of deal sizes.
• Foundational analysis and pressure testing assumptions are crucial.

"Most of what we're doing at that early stage is saying, okay, let's at least lay out those assumptions and pressure test them."

Scott discusses the process of evaluating the potential of early-stage investments with limited data.

• Scott and his firm do not believe the current state of the venture ecosystem is comparable to the 1999-2000 bubble.
• He provides data on IPOs to illustrate the difference in market conditions between now and the bubble period.

"We don't think that comparisons, particularly to 99, 2000, are that relevant for today."

Scott expresses his view that the current venture capital climate is not akin to the tech bubble of the late '90s.## Companies Staying Private Longer

• The trend in the industry is that companies are staying private for more extended periods before going public.
• There has been a significant increase in the average revenue of companies at the time of their IPO compared to the past.
• Companies now tend to have roughly ten times the scale in terms of size at the time of IPO compared to the 1999-2000 class.

"Today, those numbers are roughly about 170. So almost ten x scale from a size perspective."

This quote highlights the growth in the average revenue of companies at the time of their IPO, indicating a larger scale of business operations before going public.

• Market sizing has changed dramatically due to the increased internet population and the introduction of smartphones.
• The potential market size has grown from under 100 million to multiple billions, indicating a much larger opportunity set for growth.
• The importance of unit economics is emphasized in the context of the expanded market size.

"That number, of course, is kind of in the multibillions and probably going to plus 7 billion with the introduction of smartphones."

This quote underscores the exponential growth in the potential market size due to the widespread adoption of the internet and smartphones, setting the stage for unprecedented company growth.

• Entrepreneurs often misallocate their time during pitches, not focusing on what VCs are most interested in evaluating.
• VCs are particularly interested in the team behind the startup in the early stages due to the lack of quantitative data.
• The team's ability to create a vision, lead people, and navigate the product idea maze is crucial.

"So what we're really trying to figure out is... do I want to invest in this team?"

This quote emphasizes the importance of the startup team in the investment decision-making process for VCs, particularly in the early stages where other quantitative metrics may be lacking.

• Market size is considered a qualifying metric for investment opportunities.
• The challenge of accurately sizing a market can impact investment decisions.
• The perceived importance of market, team, and product can vary, with some placing more emphasis on the team once the market is deemed attractive.

"I would say once you get to market being attractive, then I think most of the evaluation shifts to team."

This quote reflects the speaker's belief that once a market has been qualified as attractive, the majority of the investment evaluation should focus on the team behind the startup.

• The size of the venture fund affects the evaluation of market size due to the need for significant returns to "move the needle."
• Larger funds require investments in companies with the potential to become multibillion-dollar opportunities.

"Which means that probably implies winners need to be multibillion dollar companies, not just kind of billion dollar opportunities to really move the needle."

The quote clarifies that for larger funds, only investments in companies with the potential to reach multibillion-dollar valuations will significantly impact the fund's performance.

• The compression of fundraising timelines is concerning due to the relationship-oriented nature of venture capital.
• VCs must develop relationships with entrepreneurs well before the fundraising process begins to mitigate the effects of compressed timelines.

"So I think the biggest thing that we've got to do to kind of try and address that problem is we need to be talking to entrepreneurs 1218 months ahead of around having meaningful interactions with them..."

This quote suggests a proactive approach to relationship building with entrepreneurs, highlighting the need for early and meaningful interactions well before fundraising begins.

• There is a distinction between actively raising capital and developing relationships with potential investors.
• Founders should be transparent about their capital-raising timelines while still engaging in relationship development with VCs.

"So I don't think those are necessarily incompatible."

The quote indicates that relationship development and capital raising are not mutually exclusive and can be pursued simultaneously with clear communication about timelines.

• The speaker equates the difficulty of choosing a memorable pitch to the challenge of a parent selecting a favorite child, suggesting an equal appreciation for all pitches.

"And of course, I love the ball equally."

This quote uses a metaphor to express the speaker's equal appreciation for all pitches, similar to a parent's love for all their children, avoiding singling out any particular pitch as the most memorable.## Storytelling in Pitches

• Storytelling is crucial for compelling pitches, especially in competitive markets.
• A good story can inspire people to make seemingly irrational decisions, such as leaving a comfortable job for a startup.
• Storytelling is about creating a vision and distilling it in a way that motivates others.

"The most compelling pitches that we see are those individuals who can really create a vision and distill that vision and tell it in a way that will cause people, as I said, to do maybe even irrational things."

The quote emphasizes the power of storytelling in a pitch to create a compelling vision that can motivate people to take significant risks.

• The right amount to raise should enable a startup to meet or exceed objectives and prepare for the next financing round with a higher stock price.
• Founders should work backwards from their future pitch to determine the necessary funding and margin of error.
• It's important to avoid both overraising and underraising to prevent stalling at the next financing round.

"So the best advice we always give is, when you're raising your a round of financing, what's the pitch that you're going to give at the b round? And work backwards and say, okay, based on that, if I'm raising a today and I'm targeting 18 to 24 months to raise my b, what is that pitch going to look like?"

This quote advises founders to plan their fundraising strategically by considering their future pitch and what they need to achieve before the next funding round.

• It's acceptable to present a range in fundraising if different objectives are attached to the different amounts within the range.
• Each number in the range should be accompanied by clear objectives that justify the funds.

"So I think it's okay with ranges as long as you can articulate, if I have eight, this is what I'm going to do with that money. But if we're lucky enough to be able to raise twelve, this is the incremental set of financials or company objectives we're going to achieve."

The quote suggests that providing a range in fundraising is fine as long as there are specific plans for how different amounts of funding will be used to achieve company objectives.

• Founders should find a balance between being transparent and protecting competitive information.
• It's fair for founders to be clear about what they are looking for in a partner, without necessarily disclosing all potential investors they are speaking with.

"I think it's probably unfair for us as VCs to expect them to tell us, hey, these are the five firms I'm talking to, so you know exactly who your competitive set."

The quote acknowledges that while VCs may want to know who they are competing with, it's not reasonable to expect founders to disclose all the details of their fundraising discussions.

• Bridge rounds are often a "bridge to nowhere" and should be approached with caution.
• Founders should assess whether a bridge round will genuinely lead to a sale or help achieve milestones that make the company financeable.
• It's important to be realistic about whether a bridge round will improve the company's situation or simply delay the inevitable.

"It's pretty clear, though, whether that's the case or whether you are bridging to something."

This quote suggests that it is usually evident whether a bridge round has a legitimate purpose or if it's merely delaying an inevitable outcome.

• Recognizing when a company is not succeeding is difficult but necessary.
• Honest conversations about the company's future can be a relief for founders.
• There is nobility in acknowledging failure and winding down respectfully rather than continuing fruitlessly.

"And again, there's nobility sometimes in recognizing that. And we realizing that the next best use of time for the next three or five years is probably to go find a way to kind of wind things down in a professional and respectful way, but not force people to continue to kind of work for something that may never actually achieve what they had hoped it would."

The quote addresses the importance of acknowledging when a company is not viable and the value in making the tough decision to wind down operations professionally.

• The VC business is fundamentally a network effects business.
• Professionalism and respect for the entrepreneurial process yield significant benefits.
• The firm's success is tied to maintaining a strong network and reputation.

"Yeah, I think the biggest one has been that this is fundamentally a network fx business."

This quote summarizes the key learning that success in venture capital is heavily reliant on the strength and quality of one's network and professional relationships.## Importance of Attention to Detail in Business

• Maintaining a good reputation requires attention to the day-to-day details of the business.
• A firm's reputation can unravel quickly if these details are neglected.
• The essence of the business is customer service, which must be delivered consistently.

"If you don't pay attention to the day to day details of the business, your reputation can unravel probably as quickly as it rose."

This quote emphasizes the fragility of a firm's reputation and the importance of meticulous attention to the operational details to maintain customer service standards.

• Success in the first fund was a significant inflection point for Andreessen Horowitz (a16z).
• Early success allowed for earlier than planned fundraising for the second fund.
• Financial flexibility from early success enabled a16z to build post-investment teams, a key part of their value proposition.

"I think the most important thing we had was we were kind of lucky to have very good early success in our first fund."

Scott Kupor attributes the early success of a16z's first fund as a pivotal moment that allowed the firm to differentiate its service and build a competitive edge.

• Distinguishing between process errors and unsuccessful but sound venture bets is crucial.
• The biggest challenge in scaling is managing the people who carry the brand.
• Ensuring that the company's culture and values are reflected in daily operations is vital for success.

"It's always about people. As with any business, we're only as good as the people who carry the brand for the business."

Scott Kupor identifies the management of human resources as both an opportunity and a challenge, highlighting the importance of hiring, training, and maintaining a strong company culture.

• Scott Kupor's favorite book is "Lyndon Johnson, Master of the Senate," for its depiction of political navigation.
• He believes the tech industry in Silicon Valley needs to recognize the perspectives of people living outside the tech hubs.
• The phrase "make new mistakes" resonates with Kupor, emphasizing the importance of learning from errors and not repeating them.
• Kupor advises his younger self to focus more on external relationship development than on working extra hours.
• His self-identified superpower is multitasking and making people feel valued, while his weakness is difficulty in receiving feedback.

"Make new mistakes, because to me, it implies exactly what you need to do in a startup."

This quote conveys Scott Kupor's philosophy on the necessity of taking risks and learning from mistakes in the startup world.

• Kupor is optimistic about a16z's competitive position and value proposition to entrepreneurs.
• The next five years will likely involve a continuation of current strategies, including verticalization of funds and deep domain expertise.
• a16z aims to be a long-lasting partner for companies and maintain their focus on supporting great entrepreneurs and opportunities.

"I think the next five years, quite frankly, is a lot of the same of what we've been doing."

Scott Kupor suggests that a16z will persist with its proven strategies and continue building on its current foundations to achieve long-term success.

• Scott Kupor is recognized as a valuable contributor to the ecosystem.
• The importance of customer-centric platforms like mParticle is highlighted.
• The benefits of using apps like Calm for sleep improvement are discussed.
• The advantages of automated bookkeeping services like Botkeeper are mentioned.

"Scott's been so kind to me since the episode and really is such a wonderful player in our ecosystem."

Harry Stebbings expresses gratitude towards Scott Kupor for his kindness and contributions, reflecting the mutual respect and support within the tech community.