The Ledger
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Business model shifts are the primary driver of AI software disruption
“If I were to rank order the level of disruption that is coming for these companies, business model shift is number one. And so, you know, we can talk about examples where that's most in practice today. You know, Sarah and Kimberly from our side led investment,…”
Venture capital kingmaking creates adverse selection by backing fundamentally weaker startups
“We can king make if we just put the capital into the companies and then that will allow them to win. But that's a bit of an adverse selection machine where the companies that opt into that as their winning strategy are the ones that maybe don't have as good of…”
Unscaled mid-tier venture capital firms face high risk of being squeezed out
“Yeah, there's scale players, and then there's specialists. And I think, you know, we're obviously a scale player. I think the risk is, is everything in between, right? Department stores that have general merchandise, but don't have scale, for example. And that…”
Traditional SaaS margins in an AI pitch indicate low AI feature usage
“If we ever see a company that pitches us as an AI company, and they have SaaS gross margins, we ask a lot of questions because it probably means that people aren't actually using the AI features.”
Independent AI apps will thrive despite foundation models building competing products
“It's sort of like how AWS and the cloud, you know, have service offerings for basically everything that, that you could possibly have. And yet there's still tons of infrastructure companies that are independent.”
George: Tech market leaders capture the vast majority of market cap
“We actually think most many or most tech markets play out in market cap in a similar way where the leader captures the vast majority of the market cap creation.”
George: Outsized growth returns come from unexpected volume, not unit economics
“The unit economics end up being sort of table stakes, right? Like you could get it wrong to the downside. It's very rare that the company ends up with, you know, unit economics that are much greater than what you expected. It's much more common that, Hey, the …”
George: Market leaders capture the vast majority of tech sector market cap
“And so we actually think most many or most tech markets play out in market cap in a similar way where the leader captures the vast majority of the market cap creation.”
Law enforcement tech shifted from a terrible category to highly lucrative
“And so it used to be that historically selling into law enforcement was a terrible category. And now it turns out that it's a wonderful category. If you actually have the most compelling products, you can get tremendous amounts of market share.”
Avoiding stock volatility is the primary advantage of staying private longer
“I think the biggest advantage is the avoidance of volatility in your stock price and sort of employee management. And so, you know, I think You know, if you can kind of steadily grow or control your stock price in the private markets, even if it's a slight dis…”
VCs should invest in exceptional strengths rather than a lack of weaknesses
“When we make an investment, we should always be investing in strength of strengths as opposed to lack of weaknesses.”
a16z raised its underwriting bar for AI startups due to hypergrowth
“And so this is the bar has actually gone up significantly for us when we look at AI companies because it grown so fast. And so you can't actually look at years of renewal behavior, but you can look at shorter cycles of retention and you most importantly can lo…”
Return on invested capital is the single best metric for evaluating companies
“The number one way to measure a company is ultimately return on invested capital.”
Using massive capital as a weapon rarely succeeds in consumer tech
“Capital as a weapon in consumer, most of the time it's, it doesn't really work. Like I would say TikTok is maybe the exception, maybe Uber.”
George: Wealthy people overemphasize personal effort and underplay the role of luck
“I think it's overemphasizing their own work and underplaying the role of luck and some circumstances and other people who contribute to their success.”
Overweighting the fear of theoretical competition causes VCs to miss deals
“If you overweight the fear of future theoretical competition, you can always talk yourself out of making an investment.”
Approximately half of SaaS and cloud markets are winner-take-most
“If you look at like SaaS and cloud markets, about half of them are winner take vast majority, like the overwhelming majority. And about half of them, you know, they're sort of a sort of breakup of market share.”
Portfolio companies naturally diverge in product strategy more often than they converge
“The thing that we see that more often happens is companies diverge. More often than they converge. And so, you know, the perception of what a conflict can be in the future, like often doesn't come into play.”
All-partner pitch meetings are not scalable for multi-sector venture capital firms
“I wouldn't change this, but one of the elements about us scaling has been, we've had to decentralize the way we run our business. Right. And so when I first joined the firm, you know, we used to sit around in partner meetings all day on Mondays and hear all th…”
George: Hyper-competitive, sticky markets justify sacrificing unit economics for growth
“There are instances where I'll tell founders that it would make sense to relax their criteria and maybe spend a little bit more in the name of growth. If it's a hyper competitive market and it ends up being a super sticky customer base over time,”
George: Holding larger fund reserves naturally achieves temporal diversification
“Reserves are one way that you achieve temporal diversification. If you have more of your fund in reserves, you know, that stretches the deployment cycle of your fund over, you know, five years instead of two years, or whatever the number is, that naturally pro…”