Smart contract code is supposed to be immutable once itâs deployed on blockchain, but in practice, you can create smart contracts that âmetamorphoseâ into something else. (Imagine turning a token-staking contract into a token-stealing one, for instance!) Since this could undermine trust in web3 decentralized systems, a16z crypto engineering not only shares how the shape-shifting works, but also built a tool to analyze smart contracts for such âmetamorphicâ properties. While some metamorphic smart contracts may elude detection (or the detector could raise false positives), this tool is a useful first step for builders to understand and build on. learn more about metamorphic contracts / use Detector toolÂ
2. Zero-knowledge information sharing through âzkDocsâ
Sam Ragsdale, Dan Boneh
Most blockchain transactions are public by design, but this can make them less favorable for relaying private information to institutions. For example: Does your mortgage lender getting your pay stubs really need to know all those details⌠or just verify that your salary actually meets their loan requirements? This is where zero-knowledge proofs â which allow us to cryptographically prove facts about information without revealing what the information is â come in. a16z crypto engineering (& research) demonstrates how zero-knowledge-enabled documents could improve on traditional, error-prone, inefficient verification workflows â while preserving both privacy and decentralization. learn more about zkDocs / watch demoÂ
3. What can web3 (& other) organizations learn from the history of democratic governance?
Porter Smith, Andrew Hall
web3 has created a new “laboratoryâ for democratic governance â through widespread experimentation; fast iteration cycles; and unprecedented digital participation and blending of civic and corporate, public and private. To date, however, web3 governance has overly relied on direct democracy, leading to low participation and concerns about weak oversight, interest-group capture, and group decision-making. But these are also the same challenges societies and organizations have experienced for millennia⌠So thereâs lots of room to borrow best practices from the history of governance (drawing on both research, and observations of these systems in practice), to build more effective systems today. read article on âLightspeed Democracyâ hereÂ
4. Decentralized creativity & collaboration
Rob McElhenney, Chris Dixon, Sonal Chokshi
âDecentralized mediaâ and âdecentralized content creationâ are hot topics, but what does this really mean, how would it work in practice⌠and does it even need web3?! In this first live taping of our podcast ‘web3 with a16z’ â featuring special guest and longtime writer, actor, executive producer Rob McElhenney (Itâs Always Sunny in Philadelphia, Mythic Quest; Adim) â we discuss decentralized creativity, collaboration, community; managing writerâs rooms, creator access; IP and NFTs; metaverse, storytelling across mediums; favorite TV shows, nostalgia, and more. listen to the episode here
5. Some books weâre reading this summer
Covering everything from algorithms, cryptography, markets, and system design to time travel, space, food, and philosophy â hereâs a list of readings that members of the a16z crypto team are personally reading and recommending this summer. Whether youâre looking for vacation reads for education or for entertainment, whether you prefer non-fiction or fiction (or science fiction!)⌠thereâs something on this list for everyone. check out the list here
Smart contract code is supposed to be immutable once itâs deployed on blockchain, but in practice, you can create smart contracts that âmetamorphoseâ into something else. (Imagine turning a token-staking contract into a token-stealing one, for instance!) Since this could undermine trust in web3 decentralized systems, a16z crypto engineering not only shares how the shape-shifting works, but also built a tool to analyze smart contracts for such âmetamorphicâ properties. While some metamorphic smart contracts may elude detection (or the detector could raise false positives), this tool is a useful first step for builders to understand and build on. learn more about metamorphic contracts / use Detector toolÂ
2. Zero-knowledge information sharing through âzkDocsâ
Sam Ragsdale, Dan Boneh
Most blockchain transactions are public by design, but this can make them less favorable for relaying private information to institutions. For example: Does your mortgage lender getting your pay stubs really need to know all those details⌠or just verify that your salary actually meets their loan requirements? This is where zero-knowledge proofs â which allow us to cryptographically prove facts about information without revealing what the information is â come in. a16z crypto engineering (& research) demonstrates how zero-knowledge-enabled documents could improve on traditional, error-prone, inefficient verification workflows â while preserving both privacy and decentralization. learn more about zkDocs / watch demoÂ
3. What can web3 (& other) organizations learn from the history of democratic governance?
Porter Smith, Andrew Hall
web3 has created a new “laboratoryâ for democratic governance â through widespread experimentation; fast iteration cycles; and unprecedented digital participation and blending of civic and corporate, public and private. To date, however, web3 governance has overly relied on direct democracy, leading to low participation and concerns about weak oversight, interest-group capture, and group decision-making. But these are also the same challenges societies and organizations have experienced for millennia⌠So thereâs lots of room to borrow best practices from the history of governance (drawing on both research, and observations of these systems in practice), to build more effective systems today. read article on âLightspeed Democracyâ hereÂ
4. Decentralized creativity & collaboration
Rob McElhenney, Chris Dixon, Sonal Chokshi
âDecentralized mediaâ and âdecentralized content creationâ are hot topics, but what does this really mean, how would it work in practice⌠and does it even need web3?! In this first live taping of our podcast ‘web3 with a16z’ â featuring special guest and longtime writer, actor, executive producer Rob McElhenney (Itâs Always Sunny in Philadelphia, Mythic Quest; Adim) â we discuss decentralized creativity, collaboration, community; managing writerâs rooms, creator access; IP and NFTs; metaverse, storytelling across mediums; favorite TV shows, nostalgia, and more. listen to the episode here
5. Some books weâre reading this summer
Covering everything from algorithms, cryptography, markets, and system design to time travel, space, food, and philosophy â hereâs a list of readings that members of the a16z crypto team are personally reading and recommending this summer. Whether youâre looking for vacation reads for education or for entertainment, whether you prefer non-fiction or fiction (or science fiction!)⌠thereâs something on this list for everyone. check out the list here
In the first episode of the new The Quarterly Interview: Provocations to Ponder series, Silicon Valleyâs Marc Andreessen tackles tech trends like artificial intelligence, crypto, and Web3âand why incumbents still have a tough time competing with digital start-ups.
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Marc Andreessen arrived in Silicon Valley 28 years ago, fresh from the University of Illinois, where he and a colleague developed NCSA Mosaic, the graphic web browser that opened the worldâs eyes to the potential of the internet. As an entrepreneur, Andreessen launched Netscape, whose IPO was the bellwether event of the first internet boom, and Opsware, an early cloud and software-as-a-service (SaaS) company. He then cofounded Andreessen Horowitz with Ben Horowitz, building it into one of the worldâs premiere venture capital firms.
Andreessenâs experience gives him a unique perspective on how new technologies develop, disrupt, and create opportunities for business. Itâs a perspective that is of particular interest at a time like this, when so much is unclear about the future of technology. Andreessen recently joined McKinsey senior partner Tracy Francis and the Quarterly editorial director Rick Tetzeli for a wide-ranging discussion. An edited version of the conversation follows.
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Rick Tetzeli:Â This seems like a confusing moment in terms of technology. Itâs been 15 years since the introduction of the iPhone, which defined a new era. But itâs unclear whatâs coming next. Do you think we are in a transition? And if so, what should companies be doing when things seem this undefined?
Marc Andreessen:Â The framework that we use was defined by my partner, Chris Dixon, a while back. We think about it like this: at any given time in the tech industry, there are two primary modes.
One is what we call search mode. You are wandering around through unfamiliar territory, and youâre searching for new hills to climb. Youâre searching for new technologies that will work and that will capture the imagination. People will become interested, and new markets will open up.
The second is hill-climbing mode, which is basically when you exploit the new opportunity or market. As you climb the hill, you refine the products and proliferate them to a mass market. Of course, every market has its âS curveâ of adoption, but it might take a long time to top out, and the plateau might be really big. Smartphones are plateauing, but theyâre plateauing at a run rate of hundreds of millions of units a year and billions of users. Thatâs turned out to be a really big hill. At any point in time, there are companies in both modes.
As context for now, itâs useful to think about where we were around the global financial crisis, around 2007, 2008, 2009. It was a really strange time. It felt like everything might be collapsing. There was a financial crisis, a consumer recession, a giant pullback in funding. People worried that this was 2000 all over again, and the press was tripping all over itself to call this âBubble 2.0.â
But it turned out that this was a point when we had just discovered a bunch of new hills. There were smartphones. There was mobile broadband. Residential broadband hit critical mass. Web 2.0 and social networking hit, with Facebook and Twitter hitting critical mass. And it was also the rise of SAAS. It turns out that five or six of the hills [had been found], and companies started climbing them. It was actually a very magical time, and these giant booms were in the process of forming.
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Tracy Francis:Â So you think hills are being formed right now?
Marc Andreessen:Â I do. Some of the hills that weâve discovered over the past 15 years are still being climbed. But weâre also in search mode. And we think the search has turned up three extremely promising new hills, which, conveniently, line up in the acronym ABC.
Artificial intelligence [AI] is the A. There are all these amazing technologies around deep learning, machine learning, GPT-3 [generative pretrained transformer 3], DALL-E, this new, image-generation thing from open AI, and so forth.
Biotech is the B, with genomics and now the mRNA revolution, and the revolution of bringing together the disciplines of biology and engineering. Thatâs a big hill to climb.
And the third, the C, is crypto and Web3, which is a revolution around distributed consensus, building trusted networks on the internet, and all the things that follow from that.
Now, why are we confident that those are the hills to climb? If you check stock prices on any given day, it sure seems like people are less fired up about these technologies than they were six months ago.
The core thing that we do is track talent flows. And the thing that we know for sure is that the smartest people in the world, the smartest kids graduating from college, and the smartest industry professionals are flooding into those three sectors. Thereâs an incredible wave of talent in the form of top-end engineers, scientists, executives, and founders flooding into those three sectors. In our world, thatâs not completely predictive, but thatâs as predictive as you can get.
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Rick Tetzeli:Â A lot of really, really smart people were moving into web technologies around 1998 and 1999. And a lot of those technologies wound up going nowhere.
Marc Andreessen:Â Funny you mention thatâyouâre exactly right! But I would add a nuance. Maybe we need the famous 2×2 matrix here [laughs].
Whatever the smart engineers work on is going to get better. It may or may not be commercially successful, but it is going to improve.
I would break âsmart peopleâ into two sets. The ones we track primarily are engineers, right? And the nature of engineers, in any given field, is that they just go to work and write software and build gizmos. Even at moments when lots of people are disillusioned about technology, the engineers just keep showing up for work. Theyâre engineers, itâs what they do, right? So whatever the smart engineers work on is going to get better. It may or may not be commercially successful, but it is going to improve.
This is important because when a lot of new technologies come out into the world, commentators subject them to all kinds of criticism: this new technology has all these problems! It canât possibly succeed with all these problems! A classic example was the original laptop computer. The original laptop computer was the size of a briefcase that weighed 40 pounds. And it had, like, a four-inch screen. And an early review in the New York Times said, basically, This is a niche product. Who on Earth is going to carry a 40-pound brick home? The guy actually wrote, âI canât imagine the average user taking one along when going fishing.â They just didnât envision the engineering that would shrink it into what we have today.
We just see that pattern over and over again. Right now, it is happening with crypto, blockchain, Web3 stuff. People have all these criticisms: performance, speed, and so onâwebsites are devoted to listing all the things that are wrong. Engineers view such lists of criticisms as the punch list of things they need to fix. They get to work and do that.
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The other set of people we focus on are the really good entrepreneurs. And yes, entrepreneurs respond to fads like anybody else. But when really good entrepreneurs pair with really good engineers, they start companies, they build products, and they tend to make what theyâre working on a lot better. So they too are predictive.
Thereâs another category of smart person that I think you were referencing in your question. Thatâs the stereotypical example of the Harvard MBA. The newly minted, elite, master of business: super talented, really knows how to tear a spreadsheet apart and rebuild it, really knows how to do brand marketing, right? Those people are complete, 100 percent heat seekers in the very best way. They jump all over whatever they think provides them the biggest opportunity.
But they can be very fad and trend driven. You may remember that back in the â90s, we had these two industry categories: B2C and B2B. B2C was business to consumer, and B2B was business to business. When the crash happened in 2000, we still had those terms, but they got redefined: B2C became back to consulting. B2B became back to banking [laughs].
The Harvard MBAs left for a while, at least until after the new hills were discoveredâsmartphones, social networking, Web 2.0, cloud [computing]. Then those people came back into tech. Thatâs why the nerds are predictive and the MBAs arenât.
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Tracy Francis:Â Let me ask you a follow-up question, Marc. And just to be clear, Iâm a Stanford MBAânot at all like those people you just insulted [laughs]. You have said many times in the past that incumbent companies are at a disadvantage versus digital start-ups. Do you still believe that?
Marc Andreessen:Â There are two parts to this answer. One is a general theory, and the other is something that happens at a time like this, when thereâs a market downdraft.
Thereâs a finite number of super-smart engineers who know what to build. These people go to the companies that take them the most seriously. They go to companies where they think leadership really understands what they do and understands how to build a first-class technology development culture. They go the places where they think theyâll be appropriately rewarded but also where theyâll be taken seriously, listened to, and respected. And they want to be in a place where people like themselves form a critical mass.
The problem that big, classic Fortune 500 companies have is the same problem they had 20 years ago. I thought the problem would shrink over time, but Iâm not sure it has. That problem is that the true technologists inside so many big companies are not the primary people at the company. Theyâre not treated as first-class citizens.
Just look at the org chart. For so long, companies put their technology people in the IT department. The IT department was so famously segregated and isolated that there are entire TV shows, like the great British comedy The IT Crowd, built around the idea of the nerds in the back room. Then, about 20 years ago, big companies got the message that maybe all their technologists should not be in the IT department. So they created whatâs typically known as the digital division, typically led by a vice president of digital. The good news is that the programmers run the digital division and are taken seriously there. But itâs still a division. Itâs still a unit. Thatâs a problem.
Iâll give you an example: at Tesla, the engineers working on self-driving cars are the most important people at Tesla. Elon talks about them all the time, he talks to them all the time, and theyâre basically the leaders in the company. The people working on that stuff at traditional auto OEMs are not. Maybe they should be, but theyâre not. Theyâre still in this kind of âback roomâ thing. The people who have led the business for 40 years are the same kind of people who are now in charge.
Thatâs the pattern. Tesla is run by the technologist who envisioned the entire thing and knows every aspect of how a self-driving electric car works. The big car companies are run by people who have more classical business training, who are not inherently technologists.
The second part of my answer has to do with what happens at a time like right now, when thereâs a market downdraft. The minute tech stocks get hit, a lot of big companies basically say, âOh, thank God, we donât have to take this stuff as seriously.â This happened in a huge way after 2000. One of the reasons why Amazon took off is because all of the traditional retailers, after 2000, said, âOh, thank God, we donât have to worry about this e-commerce thing anymore.â And they just left the field. Borders famously outsourced their online business to Amazon, which, in retrospect, was maybe not the best idea.
This is already happening in this stock down-draft. So, Netflix stock is down 70 percent, 75 percent, 80 percent, whatever. And whereas before, you had all these stories talking about how Netflix was this permanent new, dominant Hollywood force, even a possible monopoly, now you get all these stories saying, âThe Netflix model is broken, itâll never recover,â with big, classic media companies saying, âOh, thank God, this streaming thing is not going to be âthe thingâ after all.â
No matter what big, classic Fortune 500 companies say, they still donât consider themselves technology companies first and foremost.
Big companies tend to come in and out of tech this way, and it disadvantages them over time. They still have such a sense of palpable relief when they think that they donât have to do this stuff anymore. Which goes to show that no matter what they say, they still arenât technology companies first and foremost.
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Rick Tetzeli:Â Letâs talk about Web3 and crypto. Many people find these terms particularly oblique, and many skeptics wish that crypto would just go the heck away. So what place do crypto and Web3 have in business going forward? And what can you say to convince skeptics that this is really, really important and will change the way they do business?
Marc Andreessen:Â There is something about crypto and Web3 that triggers responses that go way beyond, âI wish we didnât have to do this.â I would describe it more as fear and loathing. Something about it triggers an extremely negative response.
Warren Buffett just had his annual meeting in Omaha, and he went on a very extensive condemnation of this entire category of technology. This is a guy whoâs a genius investor and a wonderful guy. He always said heâs the guy who doesnât understand technology. But thereâs something about this technology that he feels he must condemn.
Even in the tech industry, a lot of established tech companies are just full-on, âTalk to the hand. This stuff is stupid, itâs fake.â Itâs way beyond the initial negative reaction to the internet, way beyond the initial negative reaction to almost any other area of technology. This is visceral, and I think there are two possible explanations.
One possibility, of course, is that theyâre right. You always have to concede that the critics may be right. Thereâs a possibility that the future of the economy is Seeâs Candies, not blockchain.
But maybe crypto sets people on edge because it involves money. Itâs so fundamental. When people think, âitâs this new form of money,â or âitâs these new theories about money,â or even, âitâs this new form of technology that involves money,â they get emotional. Thatâs maybe the most obvious observation in the world: money makes people emotional.
As people who invest in contrarian ideas, that reaction gets us all excited, right? We look at the criticism as an incredible gift to our founders and to our firm. If all of these other people are going to rule something out, and if weâre right that itâs a big deal, then entrepreneurs who are focused on this are going to have a magic opportunity.
I think this is a foundational technology change, a new architecture for building an entirely new generation of computing systems. We have become convinced that Web3/blockchain/crypto is foundational. Itâs a big hill. Itâs as foundational an architecture shift as the ones from mainframes to PCs, from PCs to web, from web to mobile, or from traditional software to AI. Itâs a fundamental shift and building this out is a 25- to 30-year process.
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Rick Tetzeli:Â I still donât see how what you just said would convince a really smart skeptic at a traditional company that this is going to be a big hill. Can you convince her that this is a new way of âbuilding out all kinds of software?â Is that primarily what itâs about?
Marc Andreessen:Â This is about the other half of the internet that we didnât know how to build when we built the first half. When we built the first half of the internet, the whole idea was that the internet is an untrusted network, right? As an untrusted network, itâs a permissionless environment where anybody can connect to it, anybody can create a website, anybody can have their computer online.
That unleashed an enormous amount of creative potential. There had been computer networks before the internet, but they had all been highly controlled and contained by the individual companies. AOL and others controlled and contained consumer networks. Your business network was provided by IBM or somebody. The internet was the first network that was untrusted, open, and permissionless, where all kinds of people could create on it. That unleashed all the excitement.
But thereâs a second half to this, which is that you canât rely on an untrusted network environment. If you want to do business, you must establish trust, right? You want to send somebody money, sign a contract with somebody, come together and form a business, have a concept of asset provenance and ownership that can change hands. You want all of these concepts weâre used to in the real world, like identity, contract, money, title, and trust, the mechanics of a trustworthy economy. The internet doesnât have any of that. We always wanted that, but we just didnât have the internet-native technology to do it.
The most concrete example is that there was no internet money. You go to all these websites, and if you want to pay for something, youâre still punching in your credit-card number and your three-digit code, and theyâre still running it through the Visa mainframe, denying you for odd reasons, and charging you fees. You still canât do micropayments. Why is there advertising all over the internet? Because there are still no micropayments for content.
Blockchain/Web3/crypto is that second half of the internet. It layers trust on top of the untrusted network. And as you layer trust on top, you get to pull all of the other economic activity online that you havenât been able to get online. Thatâs the big thing.
People hold onto their ideas like theyâre their children. They get intensely threatened if you tell them that theyâre wrong.
As to the other part of your question: How do you convince somebody? Iâve become convinced that the answer is, you donât. Or, at least, I donât. At this point, I donât think Iâve convinced anybody of anything in my life. I donât think anybody wants to be convinced. People hold onto their ideas like theyâre their children. They get intensely threatened if you tell them that theyâre wrong.
I think there are basically two times when you can get new ideas into peopleâs heads. The classic chance is when theyâre young, right? You get to them before the world convinces them that something new is ânot a good idea.â This is why a lot of these new technology movements attract young people, just like art, culture, and even social movements. The kids are ambitious, they have nothing to lose, and theyâre open to new ideas.
The other moment is later in life, when some people look around and think, âWell, I donât really like the conclusions that Iâve reached. Maybe I was on the wrong track. Maybe thereâs a better way to do things. Maybe Iâm at the wrong company, and I need to jump ship and try this new thing.â You see that a lot right now, people making these midcareer changes. We see it in the [Silicon] Valley, with entrepreneurs who were Web 2.0 entrepreneurs and have decided in the past couple of years to become Web3 entrepreneurs.
The point is that people need to be ready. And this goes back to the big-company thing. I do sessions all the time with big companies where I go through my whole spiel [about crypto and blockchain and Web3]. I see everybody around the conference room with their increasingly skeptical looks. Theyâre all trying to calibrate each other. Are they going to feel like a fool if theyâre the one who expresses excitement when everybody else thinks itâs stupid?
I assumed that by now more big companies would be more open to these new ideas. But thereâs something in their culture, something in the structure of how these companies are constituted. Theyâre still not anywhere near the level that I would have assumed they would be.
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Tracy Francis: What do you say to these big companies, Marc? If you were to tell them how to digitally transform, what would you tell them?
Marc Andreessen:Â Find the smartest technologist in the company and make them CEO.
Iâve had these conversations a thousand times with companies, with the CEO, the board of directors. Theyâre not technologists, and I do my thing. I like people, and I like talking about this stuff. I walk them through the basics.
And I can always tell if thereâs a real technologist in the room. The real technologist is not sitting at the table. Theyâre sitting against the wall. Theyâre never in the main group, and they sit there and nod their head. Theyâre thinking, âFinally, somebody is showing up and actually saying this to these people. Maybe theyâll finally get it.â
But the problem is that itâs like an orchestra conductor trying to teach me how to conduct a symphony. Iâd be, like, âYeah, you wave the stick and then, I guess, the musicians play.â It would take me 30 years of going back to school and learning music theory and composition and all this stuff to actually be able to do anything. But itâs too late, I canât do it. This is why big companies end up with a digital department and why they have one person on the team whoâs a technologist.
Butâand this is importantâthe companies that theyâre up against are not like that. Thatâs not what Netflix is like. Or Amazon or Google. Thatâs not what Tesla is like. The tech companies are run by technologists, right? Theyâre run by the people who know how to do the thing.
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Rick Tetzeli:Â So can the incumbents compete?
Marc Andreessen:Â Do you remember when I wrote that essay, âWhy software is eating the world,â1Â about 11 years ago? The point I made was that thereâs a three-stage process of software eating a sector. Step one is where an existing product becomes a software product. Then comes the step where the company that builds the thing becomes a software company. And then thereâs the final battle, where the best software company wins.
Hereâs an idea that people take much too seriously: the best technology doesnât always win.
Hereâs an idea that people take much too seriously: the best technology doesnât always win. There are all these case studies in business school: Betamax versus VHS, the Qwerty keyboard versus the Dvorak keyboard, Microsoft DOS versus Apple Macintosh, and so on. Example after example of, the best technology doesnât always win. And sometimes that is true. But a lot of companies and a lot of MBAs take that to mean, âWe donât actually have to be good at technology. We can still win. We can market our way through.â
The car companies run infinite numbers of TV commercials. Tesla has still not run its first TV commercial. Tesla has not spent a dollar on advertising. Why? Because itâs got the really-good-technology car. Itâs got the actual, really good product.
So, maybe the best product doesnât always win. But really good tech companies build really good stuff. To compete with them you have to be in the game. You need the worldâs best engineers. You have to have a world-leading technology culture to attract them. You need people who really know what theyâre talking about to make really good decisions around this stuff. So, at some point, yes, you need to put the technologist in charge. But these companies will not do it. They are no closer to doing so than they were 20 years ago. Weâre in some cycle of madness where they keep doing the same thing and expecting different results.
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Tracy Francis:Â Marc, switching gears here, tell us a bit about the institution that youâre building at Andreessen Horowitz. In the past youâve said that J.P. Morgan serves as something of a role model. Talk to us about what you as a leader are trying to accomplish within your own organization.
Marc Andreessen:Â Thereâs a famous story about J.P. Morgan that we always tell. J.P. Morgan, the big, glowering man, was one of [Thomas] Edisonâs investors. His house was the first residential installation of incandescent lighting in the US. They put lightbulbs in his library in New York, with all the priceless manuscripts and artifacts that heâd collected from all over the world. It caught on fire and almost burned the study down.
Then, to his enormous credit, J.P. hired Edison to do the lighting again. And the second time, he got the light without the heat, and it didnât burn the house down.
When people ask, âWho invented the lightbulb?â the answer, of course, is âThomas Edison and his engineers.â But who helped it become a âthing?â Who helped it become a widely adopted thing? Who helped people understand its importance? Who helped Edison set up a company that could scale and really deliver this invention to the world? That was J.P. Morgan. I think of him as the venture capitalist for what was called the Second Industrial Revolution, 100, 120 years ago.
In history, it seems that somebody has to play that role. Somebody has to imbue credibility on a founder before everybody knows who they are. Somebody has to advance them the money when itâs not at all obvious that the idea is good. Somebody has to help them get to the world. Somebody has to help them recruit and build a team before anybody knows who they are.
Ben [Horowitz] and I live in the world of these very special people who build these products, found these companies, and make these things happen. Now that weâre at scaleâwe have on the order of 300 active portfolio companiesâweâre able to work this way with a large number of the best founders, and on many of the best new ideas. Our goal is to be the node in the network that is the best place for the ideas, people, money, and business to come together.
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Rick Tetzeli:Â Is it harder to scale a start-up now than when you did it with Netscape back in the mid-â90s?
Marc Andreessen:Â Itâs easier in that there are a lot more people who are open to the idea of going to a start-up. When I first started, it was still pretty weird to go to a young company that might be some fly-by-night thing. People used to worry about career risk, right? âIf it doesnât work out, can you go back to IBM?â
I get these occasional calls, where one of our companies is trying to hire some high-end engineer, like a Carnegie Mellon grad with a PhD in AI. His parents are worried, Iâm told. So, I get on the phone with them. And heâs got the offer from Microsoft Research, and heâs got the offer from McKinsey, and Goldman Sachs, all these offers from all these blue-chip companies, but heâs telling them he wants to work for Whiz Bang Corporation in Cupertino, California. They say, âHeâs throwing his life away, right?â
But what I can tell them now is that thereâs no longer that same level of career risk. If things donât work out for their son or daughter at Whiz Bang, there are 800 other start-ups within walking distance that would die to hire someone with that skill set.
Itâs easier from that standpoint. But succeeding as a start-up is as hard as itâs ever been, because the same fundamental dynamic is in play. Youâve got some idea of why the world should change, but the world doesnât want to. People are too busy to hear another pitch from another start-up. People are happy in their jobs and donât want to leave for your start-up. People are happy with the tech they use and donât want to buy your new product.
Itâs still this uphill battle, every time, to take an idea from something in a lab to something that actually matters in the world. That process doesnât seem to be getting any easier. And it probably shouldnât. The bar here should be quite high.
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Rick Tetzeli:Â One of the things that always appealed to me about the Valley was its openness to new ideas. With all its big, entrenched companies, is the Valley still as open to new ideas as it was when you arrived?
Marc Andreessen:Â The Valley is much bigger and more sophisticated than it was. The big companies today are much, much bigger, and there are more of them. Technology is key to so many more industries, so the Valley has grown broader and wider. And now, of course, the Valleyâs not even just the Valley anymore. Because of the COVID experience, we finally have the ability to expand outside any single geography. Thereâs people all over the world who are part of the Valley, its mindset and network, without being geographically part of it. Itâs bigger than ever. And with that comes the fact that big areas of the industry, including a lot of the big tech companies, are quite resistant to new ideas.
Every critique I level against big companies and other industries I also level against our own companies. Itâs the same dynamic, the same patterns of human behavior. As things get big and successful, they tend to close down. They donât want to rock the boat. They want to keep the current thing working. So, yes, there is resistance.
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Tracy Francis:Â How do you keep that from seeping into Andreessen Horowitz?
Marc Andreessen:Â Iâve learned that there are two kinds of mistakes in venture capital. Thereâs the mistake of commission, in which you invest in or go work for a company that fails. And then thereâs the mistake of omission, in which you donât invest in Google or donât go to work at Facebook in 2005.
The longer youâre in this industry, the more you learn that the mistakes of omission are much, much worse. You had it. It was in your hand, and you could have done it, yet you didnât do it. You werenât open enough; you found some way to talk yourself out of it. You listened to your parents.
The truth is that reality is trying to beat into us the idea that you need to stop being so skeptical and cynical and instead be open to new things. Because you might actually miss the next big thing walking in the door.
Itâs funny. A lot of times, the criticisms that you paid attention to were correct. But the fact is that they just didnât matter. If you want to find something wrong with a company, you can find something wrong. But if it has enough good things going for it, the bad things donât matter. We use this phrase: invest in strength, not in lack of weakness.
A lot of people have very intelligently and rigorously talked themselves out of really good ideas. That includes us. These mistakes of omission really get to you. With a mistake of commission, the company goes away and you donât have to hear about it anymore. But when you make the mistake of omission, you have to read about that company climbing to new heights of success for the next three decades. Thatâs horrible, right?
The truth is that reality is trying to beat into us the idea that you need to stop being so skeptical and cynical and instead be open to new things. Because you might actually miss the next big thing walking in the door. You experience that a couple of times and it really trains you. âOK,â you say, âI have to open my mind.â I think that keeps the environment here a lot fresher than it might otherwise be.
There has been tremendous reduction of wealth in 2022. A lot of this has to do with the reversal of easy monetary policy. In the U.S. the Federal Reserve is withdrawing liquidity and reducing M2 money supply.
Across asset classes, there has been no safe place to hide in 2022. Most asset have negative returns, with the exception of energy stocks and a few value stocks with strong cash flows. This shows the market sensitivity to discount rates. Some assets with long-maturity cash flows, like tech stocks (NASDAQ) have particularly come under pressure.
There is a clear common factor across markets in 2022, which is monetary policy. The Federal Reserve has been extremely aggressive in tightening. We believe this is due to a fundamental policy error in 2021. The Fed was late to recognize the growing inflation problem.
Capital will be more scarce as financial conditions are tightened. We believe that this will be a severe drag on growth.
Even before the monetary tightening, growth was slowing. This will likely transfer in lower cyclical inflation. However, âsupply sideâ inflation might continue to persist, as monetary policy cannot address these issues.
Our view is that inflation will persist above the Fedâs 2% target. Inflation may have peaked, but will likely remain structurally higher going forward. We expect roughly 4-5% inflation in 2023.
There is a toxic mix emerging for policy makers of high inflation, declining real incomes, and slowing growth. Consumer confidence has crashed.
The employment market has remained relatively strong. Consumption patterns indicate that the consumer is spending their excess savings from the pandemic and adding more debt.
I sometimes get asked what has surprised me about my move from TradFi to crypto. One thing I didnât expect is that I miss sell-side research.
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The research produced by investment banks is easy to dunk on: The price targets usually donât work out, there’s a lot of noisy maintenance notes, and you have to know that hold means sell, and sell means run for your life.
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But Iâve worked with a lot of investment bank analysts, and they were universally smart, ethical and trying their best to be right.
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Sorry, cynics, but there is no conspiracy to inflate markets with bullish analyst reports.
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Nowadays, I get most of my information from Twitter, which is starting to feel like a conspiracy to deflate markets.
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The sentiment on the bird app is so overwhelmingly bearish at the moment, itâs hard to imagine it could get any worse.
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Which means it can only get better?
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I know it doesnât work like that â sentiment was awful in 2008, and markets turned out to be even worse.
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But itâs also unusual for Mr. Market to let everyone be right. So, maybe itâs time to at least consider the radical possibility that markets could, maybe, by some dumb luck, go up?
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I was reminded that there is a non-zero chance of that while listening to a podcast by RBC, whose US strategists have trimmed their year-end target for the S&P all the way down to 4,700.
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Thatâs higher than now!
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Most of you cynics will scoff at the idea that the market could finish the year higher (let alone at a new all-time high), but, with my aforementioned respect for sell-side research, I was happy to hear that there is still a sensible bull case to be made for risk assets.
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I found it relatively convincing, as well.
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In short, the bull case rests on the possibility that the US economy avoids recession, which is what RBC expects: Their economics team sees real GDP growing 2% this year and about 1.5% next.
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That seems a little optimistic, especially if the Fed shifts into full-Volcker mode tomorrow. But itâs not impossible â which is interesting, because the market seems to be putting a zero percent probability on that not-impossible outcome.
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RBC notes when net bullishness on the AAII survey is below 10% (itâs well below now), stocks are usually up more than 9% seven months out and more than 15% 12 months out.
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That may not even be the best case scenario: Coming off of growth-scare lows (2010, 2011 2015/16, 2018) recoveries tend to be âfast and furious,â with the S&P returning to pre-crisis highs within four to five months and finishing 25% higher just seven months out.
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We may be at a growth-scare low!
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Probably not, but imagine if we were back to all-time highs in five months. That would mess some people up â which is generally Mr. Marketâs favorite thing to do.
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Will Crypto Ever Go Up
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What would a surprise rally in equities mean for crypto?
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On the one hand, the price action in crypto looks pretty conventional: BTC has outperformed ETH and DeFi 1.0 has outperformed DeFi 2.0.
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That, to me, looks a lot like the S&P outperforming Nasdaq and old tech (INTC, IBM, ORCL, ADBE, CRM) outperforming spec tech (ARKK).
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On the other hand, I don’t see the current crop of altcoins outperforming in a recovery in the same way youâd expect high-beta equities to outperform low-beta equities.
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The 2022 sell-off in tech equities is not a particularly scary one. Iâm confident that the likes of Apple, Amazon, Alphabet, Microsoft and many more will be great businesses for a long time to come, irrespective of what their stock prices are doing.