Jan 2, 2019 · 35m · a16z
a16z Podcast | Good Bubbles, Bad Bubbles -- and Where Unicorns Come from
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of the a16z podcast, economist and venture capitalist Bill Janeway analyzes the structural forces driving the tech startup ecosystem, from low-cost software architecture and private liquidity to IPO market shifts and bubble dynamics. He explores how venture capital functions as distributed R&D, arguing that productive trial and error is essential for long-term technological and economic progress.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 6.2% of the talking time here. How this is scored →
The host as informed peer 3.9 Guest teaching 5.6 Guest disagreement 1.6 The host pushing back 2.4
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 16:07 Bill invoking survivor's bias against host's counterexample
When Sonal points out that premier venture returns come from first-time founders in brand-new categories, Bill immediately interrupts to reject her premise, warning that her argument relies on survivor's bias.
Hardest push from the host ▶ 15:43 Sonal challenging Bill's founder evaluation frameworkSonal actively resists Bill's framework of evaluating teams based on prior track record and cash flow metrics, presenting concrete counterevidence about major tech outliers like Salesforce and first-time founders.
Biggest teaching moment ▶ 7:10 Bill detailing post-1980 quarterly IPO statistical trendsBill educates the hosts using empirical research data, showing how quarterly venture-backed IPO rates plummeted post-2005 relative to the 25-year historical average of 30 per quarter.
The host holds their own ▶ 9:30 Sonal highlighting median over mean IPO valuationsSonal demonstrates analytical authority by pointing out that median valuations are necessary to exclude distortions from massive outlier IPOs like Facebook, earning direct validation from Bill.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| How IT Architecture and Liquidity Created Unicorns | 2 | 6 | 1 | 1 | Michael and Sonal prompt Bill to share his perspective on cloud architecture and liquidity dynamics. Bill provides a lengthy historical framing comparing web services to 1920s electricity while the hosts simply listen and validate. | |
| Institutional Shifts in the IPO Market | 4 | 6 | 1 | 2 | Bill lectures on institutional shifts in investment banking and historical IPO volume data since 1980. Sonal exhibits domain knowledge by pointing out that tracking median values rather than means prevents outlier skew from massive deals like Facebook. | |
| Evaluating Startup Quality and Navigating Radical Uncertainty | 6 | 6 | 4 | 6 | Sonal directly challenges Bill's focus on team track records and cash flow discipline by pointing out that major venture hits like Salesforce were founded by first-timers in unfamiliar categories. Bill counters by warning Sonal against survivor's bias and clarifying his own personal risk profile. | |
| Strategic M&A, Cash and Control, and Acquirer Capacity | 4 | 5 | 1 | 1 | Bill outlines the necessity of cash and strategic control when public markets are closed. Michael demonstrates familiarity with corporate strategy by citing Andreessen Horowitz partner Scott Cooper's writings on M&A trends. | |
| VC as Distributed R&D vs. Funding Fundamental Science | 5 | 5 | 1 | 3 | Bill argues that venture capital functions as distributed R&D and shouldn't fund fundamental science. Sonal sharpens his argument by explicitly framing funding pure science through VC as a category error. | |
| Economic Philosophy of Trial, Error, and Infrastructure Experimentation | 2 | 5 | 1 | 0 | Sonal invites Bill to share his economic philosophy on trial and error. Bill reflects monologue-style on leaving academia due to flawed general equilibrium models and explaining how waste drives innovation. | |
| Good Bubbles, Bad Bubbles, and the Tech Micro-Bubble | 4 | 6 | 2 | 4 | Bill categorizes historical bubbles into productive and destructive types. Sonal pushes back on why he labels the 2015 tech environment a micro-bubble given the widespread enthusiasm, which Bill resolves by citing its narrow, non-systemic private market scope. |
Statements from this episode (23)
Janeway: Cloud and open source drop software launch costs to near zero
“Open source software, web services from the cloud, which means that the cost in terms of time and money of launching a new service Has declined asymptotically to zero. Not building it out into a full business, but launching it.”
Janeway: Low launch costs make spray-and-pray seed investing rational
“This means, on the one hand, a step function increase in the number of startups, in the number of Darwinian hopeful monsters. Most of which will fail. Most of which will fail Pretty fast, and without costing an enormous amount of money, so that at the front en…”
Janeway: Positive cash flow frees founders from capital market dependence
“Positive cash flow from operations means that you, the entrepreneur, the venture capitalist, Own options. You own the options about whether to sell or not sell, whether to raise more money or not raise more money. You're not a prisoner of the capital markets.”
Janeway: Non-traditional late-stage tech investments will end in painful correction
“Now, when you see investors, hedge funds, mutual funds, paying premium prices, To buy illiquidity, to buy securities with no liquidity and with no governance rights. In the private market. The only thing you know is when it ends, it will end painfully.”
Janeway: Venture-backed IPOs averaged 30 per quarter from 1980 to 2005
“From 1980, this is my own data, this data published in peer-reviewed journals, from 1980 to 2005, The average number of venture-backed IPOs per quarter was about 30, with a standard deviation of 10.”
Janeway: Only four quarters between 2005 and 2019 saw 20+ venture IPOs
“Since then, we've had all of about four quarters in 15 years when there have been as many as 20 venture capital backed IPOs.”
Janeway: Real mean and median IPO valuations tripled post-dot-com
“One clue is that the mean and median value of an IPO has more than tripled since the dot com, in real terms.”
Janeway: Major investment banks require $100M+ IPOs to hit fee minimums
“To get the attention of the global major dealer banks, you've got to be offering them a transaction on which they can make at least five million dollars, and you start doing the arithmetic on the economics of an IPO, and you're up in the nine figures to do an …”
Janeway: Liquidity is the single most crucial concept in finance
“There is no more important world in the world of finance, word in the world of finance, than liquidity. Because again, it's the flip side of positive cash flow from operations. It's your control over your situation.”
Janeway: Startup Quality Inevitably Declines When Cheap Capital Is Plentiful
“Again, the people on the other side of the market aren't morons, so the quality inevitably will decline. Inevitably.”
Janeway: I Prefer Founders Who Survived Failed Startups or Corporate Crisis
“Well, the first way I actually begin is by looking at the biographies, of course. I have a heavy propensity for people who have survived failed startups, near-death experiences of big companies, and along the way have demonstrated some degree of creative disci…”
Chokshi: The Biggest Startup Hits Come From First-Time Founders
“If you really think about the biggest outlier hits and successes of the past 10 years, they're actually first-time entrepreneurs with no track record.”
Janeway: Cash and control are the only hedge against startup uncertainty
“The central theme of the whole first half of my book is that there's only one way to hedge against uncertainty in venture startups. You don't have credit default swaps. You know, you don't have instruments that you can buy to hedge your position. It's two word…”
Janeway: NVCA data shows M&A rising as venture IPOs remain suppressed
“If you look at the data, look at the NVCA data, the proportion and the value per transaction of M&A has kind of gone up as the number of IPOs for venture-backed companies has gone down and stayed down.”
Janeway: Google stands out for its exceptional culture of integrating acquisitions
“I'm very, I have to say, I'm extraordinarily impressed by Google's style of being able to acquire and support and create space. Now, if you're as rich as Google is, you can afford to do that, but it's a cultural phenomenon.”
Janeway: Venture capital functions as distributed R&D for incumbent corporations
“Well, what I'm saying is that because getting public is so difficult and so rare for venture-backed tech companies that, practically speaking, we should be thinking about that what we're doing is funding distributed research and development for big companies.”
Janeway: VC funding fundamental science instead of technology commercialization is dangerous
“I mean funding science. Rather than funding, funding the commercialization of technology and finding commercially valuable new innovative applications of technology.”
Janeway: Billions wasted in mid-2000s VC nanotech and cleantech investments
“Back in the mid-aughties some billions of dollars were wasted in venture guys investing in nanotechnology. Venture guys investing in science for ultimately Clean tech opportunities, but that were way upstream, that took much too long, much too much money, and …”
Janeway: VCs have 3 to 5 years to prove startup success
“You know, we only have Three to five years to demonstrate that we've done something smart when we've made a startup investment.”
Janeway: Speculative tech bubbles are necessary to finance major new infrastructure
“Bubbles are banal, but every once in a while, they're not only necessary, they're productive, because they bring together the magnitude of capital you need to build out the new network infrastructure and to finance the exploration of the new economic space tha…”
Janeway: Private tech bubble collapse won't threaten the broader economic system
“Now the good news about that is that when it bursts, the, some of these companies that have learned nothing about business discipline will disappear, and the people who have invested in them will lose their money, maybe their jobs, that usually happens as well…”