Marc Andreessen, Founder, Andreessen Horowitz

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

MARC ANDREESSEN, FOUNDER, ANDREESSEN HOROWITZ, TALKS ABOUT THE INTERNET AND INVESTMENT AT BLOOMBERG TV

FEBRUARY 28, 2011

SPEAKERS: EMILY CHANG, BLOOMBERG NEWS ANCHOR

CORY JOHNSON, BLOOMBERG NEWS ANCHOR

MARC ANDREESSEN, FOUNDER, ANDREESSEN HOROWITZ

18:03

EMILY CHANG, BLOOMBERG NEWS ANCHOR: Now to our first guest ever here on "Bloomberg West," Marc Andreessen, the great Marc Andreessen. He's transformed himself from the investor of the Netscape browser into one of the most prolific investors in Silicon Valley. His venture capital firm, Andreessen Horowitz, has stakes in four of the hottest companies: Facebook, Twitter, Groupon and Zynga. Mark, wow! And welcome to "Bloomberg West."

MARC ANDREESSEN, FOUNDER, ANDREESSEN HOROWITZ: Thanks for having me.

CHANG: So what is it about Twitter that has investors and now investment banks so excited?

ANDREESSEN: Well, I don't want to talk about specific companies, specific investments, as crazy as that will drive you. But in general there are a group of new major global franchise internet companies. And there's a set of them here in the United States. There are some others in China. There are some others emerging around the world. And they're becoming very serious, very important, very big franchises. They're staying private for much longer than companies used to but the businesses are very good in these - a lot of companies have tremendous growth we think ahead of them.

CHANG: So why do you want to put money in these companies at a later stage rather than putting money in earlier companies at an earlier stage?

ANDREESSEN: Yeah, well we do both. We're actually a cross stage fund. So we seed investing, venture investing and growth investing across all three stages. But when we make growth investments we do it because we think that there's tremendous market expansion ahead. And the big thing we're looking at these days is there's now more than 2 billion people on the internet. In five, seven, eight years there's going to be 4 billion smartphones in the world. And so the end market for these companies has just gotten extremely large, and much larger than it used to be.

CORY JOHNSON, BLOOMBERG NEWS ANCHOR: Marc, one of the things that's interesting about your fund is that you guys invest at all levels, not just an angel level, not just a sort of post-angel level, even up to the mezzanine level for these companies. Why do you guys do that with your fund? It's an unusual approach.

ANDREESSEN: Yeah. Well our goal is to be invested in the best companies. So the best companies going after the biggest markets, the best entrepreneurs, the best products. And our experience with that is sometimes you can catch them early, but if you can't catch them early it's still a good idea to try to become involved with them at a later stage. And so we basically have essentially liberated ourselves from a strategic standpoint to invest in all three stages. Where we focus though is we only invest in computer science. We only invest in companies doing or computers or software. And so we really restrict ourselves. We don't do clean tech or biotech or cars or rocket ships or lots of other - lots of other stuff people are doing these days.

CHANG: Are you at all concerned about Wall Street's entrance here? Is this making the deals more expensive for you to get into in the private rounds?

ANDREESSEN: So there is a - there's no question there's a big influx of money into the growth - into the growth stages of the companies that have hit sort of a level of critical mass where I think their success is becoming indisputable. But the attention is focused on a fairly small set of companies. There's really five, six, seven, eight companies that it's focused on. The rest of the landscape is still pretty normal. And so when we're in other growth deals that weren't venture deals the sort of money that you're seeing coming in with some of these big names is not coming into kind of what - sort of one category earlier. So we still think there are a lot of other opportunities.

JOHNSON: So - all right, so you've got the consumer facing internet companies maybe getting all the excitement. Everybody else is left to their own business. Does it change the way your fund works, the exit (ph) happens at different times, the IPOs happen earlier or later because of all this public interest?

ANDREESSEN: Well so in general what's happening right is the IPOs are happening much later. So the IPO market for technology got all but shut down following the reforms after the - after the - sort of collapse of the equity bubble in the late '90s. So as a result of (inaudible) be and so forth, it's become much less appealing for many new technologies to be public. And many of the best new technology companies are deferring IPO for as long as possible. And so what's that really translate into I think is much greater opportunity for firms like ours that can invest privately.

CHANG: We know the SEC is looking into the trading of private shares on these private exchanges. Do you think these deals were - will survive regulatory scrutiny?

ANDREESSEN: Oh, well I think it's - it's a matter of the specifics. I think the securities laws are actually quite clear. I think in general the companies at least that I have experience with pay a tremendous amount of attention to the details of the securities law. It's possible that there's some activity around the edges with third parties that may or may not stand up under scrutiny, but that's for the SEC to figure out.

CHANG: So do you think the SEC could or should change public markets regulations to make them more attractive for some of these large, very successful private companies?

ANDREESSEN: Well so in general - in general I would say the answer is yes. Maybe not for these companies but in general for the health of the economy and the health of the ecosystem. And what I'd really point to is if you adjust for GDP growth the number of public companies in the United States has dropped in half in the last 10 years.

And so essentially the market's become a two-tier system where you have a much smaller number of large public companies that sort of normal people can invest in and then you've got basically - you've got essentially all the growth companies are on the private side where a much smaller group of people can invest. And so it's one of those things if you have special access it's fantastic. But it's as healthy an overall system for the economy as if companies are able to go public and access the public markets. And so I would say the disparity has just gotten - has gotten too extreme. And it would be good to bring things kind of more back to normal.

CHANG: OK, Marc. Stay right there. Definitely want to talk to you even more about this after the break. Al Gore invented the internet. You invented the browser. When we come back, want to get your take on the browser wars. They certainly seem to be heating up.

18:07

(BREAK)

18:09

JOHNSON: This is "Bloomberg West." I'm Cory Johnson. We're back with Marc Andreessen who had this great idea in college for a thing called a browser. You're stuck with that. I've known you for a long time. One of the things that's really interesting to me is that you've taken the browser experience that you went through, the Netscape experience, the anti-trust experience, and turned it into something else. What did you learn from that when you look back on that? Do you look - is there one big takeaway that you have from those golden days?

ANDREESSEN: For me it was sort of hyper-accelerated almost business school. I didn't take any business classes but it was an incredible education on how to build a company. So I've just basically tried to take all the - everything we learned in the process of building Netscape and then apply that both to other companies that I've started and then also working with all the entrepreneurs we work with.

JOHNSON: But second acts are rare. Are there things that you learned about management? Because investing's hard. Inventing is hard. You've done both with some great success already and I wonder what the common theme is.

ANDREESSEN: It's a little early to know the investment track. We're (inaudible).

JOHNSON: So far the valuations look good.

ANDREESSEN: But I appreciate the credit. I think it's a matter of - I guess the big thing I'd say every success in this industry is a special case. It's very, very hard to generalize. It's very hard to make sort of sweeping observations. It's always - it's specific people. It's a specific person or a small team of people against a specific idea at a point in time and then against a big market. And when you can line those things up, magic happens. When you can't line those things up then there's a lot of wasted time and energy. So I guess I really sort of bring sort of a focused view on how to line all these things up.

CHANG: Marc, everyone thought Explorer had kind of won the browser wars but they are certainly heating back up again with Mozilla, Chrome taking more market share. You've got RockMelt. Why are you putting your stake in RockMelt, a more social browser?

ANDREESSEN: Yeah, well we think there's a really big opportunity to basically reinvent the browser. So first is the browser market has really opened up. So in the last basically - I think it in the last four years 500 million people have switched browsers. And you've seen the rise of a whole set of browsers like Chrome and Safari and Firefox and Opera, that all - that each have over 100 million users. And in general there's just tremendous dynamism, tremendous change happening in the browser market.

But the thing that hasn't changed is what the browser actually does, what it actually - the interface, what it actually looks like, how it actually works with the user. And so we're basically - at RockMelt we're basically reinventing the browser around the services on the web that we now know that hundreds of millions of people like to use. And so services like Facebook and Google and Twitter and others to come, and we think we can provide a much better, sort of much more modern experience by doing that.

JOHNSON: What do you make of the cloud? It's this thing that's gotten investors so excited. One of my bosses said if you cough cloud your valuation doubles. But when you look at the cloud what is it and what does it mean in terms of your investments?

ANDREESSEN: Yeah. So it's actually if you look under the covers it's a pretty big architecture in kind of how computing works. And it's basically the idea that computing moves out onto the internet in a much more pervasive way than used to be the case. And so for example virtually all new consumer internet companies we see that come in and pitch us to try to raise money, they're virtually all building on top of cloud services like Amazon web services or like Rackspace. So they're most all doing that.

And it's the same thing with companies who are doing payments. They're using a cloud-based payment system. Or when they're doing - when they're running their sales force they use a cloud application like www.SalesForce.com. Or people are using Gmail and Google Box instead of Microsoft Office or Exchange or Outlook. And so that is just - it's a very, very big architecture change. Our experience in the industry is that when you have a big architecture change you tend to have a new generation of companies that become very successful on the back of that architecture change. And we think that's what's happening right now.

CHANG: What trends out there are you most excited about? And do you think there's anything that's being overhyped?

ANDREESSEN: There are always individual things, specific things that are being overhyped, although I don't want to pick on specific companies. In general I would say what's happened the last five years is sort of perception has caught back up with reality, which is the reality is the internet has advanced tremendously and the technology industry has advanced tremendously over the last 10 years. Technology was so deeply out of favor in the middle part of the last decade but basically what we're seeing now is a snap back where people are realizing hey, the products that are out now from a plot of companies - Apple and many others - are incredibly compelling products. There's more than 2 billion people on the internet. Broadband is fully deployed. The smartphone has arrived. And so I think perception has caught up to reality is kind of where we are right now.

JOHNSON: One of the biggest reasons we've launched this show is the idea that we're in a new set of paradigms in technology that aren't really widely understood. Mobile computing, the cloud, social media. How do you keep up to speed with those companies so much so that you can decide what few companies to invest in in the future?

ANDREESSEN: Yeah. So it's basically - it's one of the reasons we decided to go pro. My partner and I had been angel investing for five years. We started a venture firm in part because it's so incredibly time consuming. There's so much going on. There are so many new companies. There are so many great entrepreneurs running around with all kinds of new ideas. And so for us it's just like - it's an 18-hour a day day job. And so reading everything in sight, talking to everybody we could possibly find, using as many of these things as possible. If I ever have a spare moment I'm on my Android phone. I'm in Google Reader and I'm reading like all the tech blogs, because I'm literally every day trying to keep up with what's happening.

CHANG: You've got a majority stake in Skype. What kind of challenges does Skype need to overcome in order to be ready to go public?

ANDREESSEN: I'm sorry. Unfortunately that's a topic that I can't talk about. Other than to say we love Skype.

JOHNSON: Do you use Skype?

ANDREESSEN: Oh yes. All the time.

JOHNSON: For what?

ANDREESSEN: Oh, everything. For - it's a fantastic - it - audio quality - it's a fantastic voice experience. It's now a fantastic video experience. So we use it all the time for business. We use it all the time. Everybody in the office uses it constantly for personal.

JOHNSON: And it seems like there's a lot of changes within the IP video space, a lot of new companies, a lot of companies trying to find a way through there (ph) professionally. You see Cisco coming with the great guns (ph) with all their new ventures. It seems like every year there's a new sort of IP video thing happening there.

ANDREESSEN: Yeah. Well, so it's representative actually of the cloud discussion we just had. Now that you have high-speed data networks deployed everywhere, right, which we all talked about 10 years ago. We didn't have the networks weren't deployed yet. Now that we have the networks deployed, voice video, which used to be completely independent network - telephone network or whatever, now voice and video are just software. They can just be done as software or on a data network which means they can get better all the time, which means you can have completely programmable voice to video experiences with lots of voice and video based applications. So it's a brave new world for all that stuff.

JOHNSON: Indeed. Marc, thanks. Stay there. We'll get some more valuations and IPO talk (inaudible) lot lately on our minds, the bubble. What are we in the midst of? Is this another big bubble? We're going to talk about that next.

18:16

(BREAK)

18:20

JOHNSON: We're back with Marc Andreeseen of Andreesseen Horowitz with his take on the future of the internet and the best places to invest now. And thank you for wearing a tie. I really appreciate that in Silicon Valley tradition.

ANDREESSEN: Anything for you.

JOHNSON: We've got to impress New Yorkers with the neck ties. So we've got to have a whole different look. When we - there's talk of the bubble and talk of this whole - this valuation - these private - how do we know when we're in a bubble?

ANDREESSEN: Well, I think the main way we know we're in a bubble is when nobody thinks we're in a bubble. So my experience of bubbles is when everybody's completely convinced and completely bought in, that's when it's time to worry. And one of the things that's characteristic about the environment right now is a lot of people think we're in a bubble, which to me means we must not be.

JOHNSON: Now I would say it's when there's follow ons or there's companies that aren't involved in the cloud or in tablets sort of masking themselves as that. It's not when you've got obvious leaders like a Twitter or a Zynga or a Facebook, but it's when there's sort of pretenders to the throne using that as valuations to get out the door.

ANDREESSEN: Yeah. So Warren Buffett talks and he says there's innovators, imitators and idiots. And the stage of any financial sort of period is you go through those three phases. And I think one of the things about the current environment is the companies that have the most heat on them from an investment standpoint as a group are extremely high-quality companies, clearly innovators. I don't even think we've seen the imitators yet, much less the idiots. But we're human. Give us five years, 10 years.

JOHNSON: We'll get idiots.

ANDREESSEN: We'll get there. Yeah.

CHANG: Marc, you've seen the rise and fall of some of the greatest technology companies. Right now Facebook seems to be on top of the world. Is anybody safe?

ANDREESSEN: So I think in general I think every company has the ability to be as inventive and as innovative and as competitive as they can possibly be. I think that this is an industry that rewards ingenuity. It rewards aggressiveness. It rewards innovation. It punishes stagnation. It punishes bad management. It punishes failure to innovate. And so I think it's in every company's control fundamentally over how long it's able to sustain success. And I think the most successful companies in our industry are successful because they're so good at innovation.

JOHNSON: Something you've surely learned with following companies and being at the head of a company is there's a in which the inventor might not be the best person to run the company. But sometimes it is. Bill Gates has done pretty well, albeit with the help of some anti-trust complaints. He might have better (ph) than most. But how do you decide when the inventor's not the person to be the CEO of the company, especially when you've got such an role as an investor?

ANDREESSEN: Yeah. So our preferred model is for the - what we call the founder CEO. So the founder who is capable of then becoming the CEO and ideally running the company for decades in the ideal case. And the reason we believe that so strongly is because if you look at history, from IBM to Hewlett-Packard to Digital Equipment to Microsoft to Intel to Oracle and then more recently companies like Amazon and Facebook and Google, you see these companies being run by their founders for a very long period of time. There are fewer cases of great franchises being built by professional CEOs.

The paradox of course is that not every founder is capable of doing that. And so a big part of our process as an investor is to work through and try to find the founders who can do that. And then if we have to replace the founder with a professional CEO, to get a professional CEO who's willing to act like a founder. And that's really hard.

JOHNSON: But it seems like quite often it's the investors who are pressuring for it. It's we're going to do the IPO so we need an old guy in a suit to run the company. Do you feel like you can bring a different sort of look to that? Is that one of your advantages?

ANDREESSEN: Yeah, I think so. So we've always had a starkly different point of view on that. We've never had the approach you described. We've always had the other approach, which was let's look for the founder CEO. I think one of the really healthy things in the Valley right now is because of the recent success of companies like Google and Facebook and Amazon there are more investors today, including more investors on Wall Street, who understand the founder CEO model than I think has ever been the case. Because you just see - you watch Jeff (inaudible) and you're like of course. If we could - if we ever found a Jeff (inaudible) we want him to run the company. Again, not every company has that. But when you have that you don't want to force these people out. And I think investors are figuring that out.

CHANG: So what kind of situations would you say where the founders are not capable of running the company that they created?

ANDREESSEN: The main the thing is the founder willing to devote himself to the craft of management and really learn how to manage a company, consisting - and any successful technology company is going to end up with thousands or tens of thousand of employees.

And so when you - when you - as you - as you get to know and get exposed to people like Andy Grove and Steve Jobs and Bill Gates and so forth, Jeff (inaudible), what you realize is they've very, very serious about management. They take it very seriously. They're very good at running their companies. But they've chosen to make themselves good at running their companies. The problem generally is with the founder who just simply either won't take it seriously or for some reason can't take it seriously and can't apply himself or herself to it. And that frankly is often a tragic case. Those companies often don't survive.

JOHNSON: And you're on the board of Hewlett-Packard. You're investing in a lot of different companies. You've got some more active roles. How do you figure out when you're spending enough time on a certain thing? And I mention HP - I don't - I know you don't want to talk about that, but I mention that because there has been concern in that company and many others over the years when people on the board aren't paying careful enough attention. How do you know if you're paying attention to the things that you're doing and divide your time up to be most effective?

ANDREESSEN: Well, there's a general answer and a specific answer. So the general answer is you just - you're - I'm just constantly working on time management. So I have an allocation model for how I spend my time. I review it all the time. I try to make sure I'm responsive, especially the projects that I'm mostly closely involved in and people relying on me that I'm incredibly responsive. I try to keep up with everything. Inevitably stuff drops off the plate. One of the advantages of building a venture firm - I now have 26 colleagues who work with me. So that's a big improvement when I was doing this - when my partner and I were doing angel investing on our own two years ago. But still, it's day to day effort.

From a board standpoint, boards are interesting. You actually don't in either big or small companies you don't want boards - board members - actually spending too much time in the company. Because the purpose of management in a company is to run the company. And when boards get too involved it means management is weak. And so you want boards - we believe you want boards to focus on having the right management in place and providing governance and providing supervision of management, not actually running the company.

But one of the failure cases with boards is when they get too hands on. And so you actually want to--

18:26

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