The Inside Story of Growth Investing at a16z

You have to think long term. So we think in five to seven year terms and try not to worry if we're off by a year or two on the valuation. Like that's a risk that I'm willing to take. We turned it down based on price. When I was at ga, they figured out a huge market hiding in plain sight, a sales model that totally worked, fast product velocity, all the things that we look for, big markets where they're the leader business model that was exceptional at scale, long room to run. So that's a very painful one. The benefit of single trigger puller model as opposed to committee decision making is it's the ultimate measure of conviction. So if that individual has conviction and gets feedback from the partnership and maybe the feedback is constructive or negative and still wants to make the investment, that's conviction. Today we're replaying a conversation from 20 VC with Harry Stebbings featuring a 16Z general partner David George from our growth team. David shares how he thinks about breakout growth investing, why edge comes from non consensus views on market size, how to underwrite upside in competitive markets, and what separates pull companies from push companies. He also dives into unit economics, deciding when to double down and how single trigger decision making shapes investment conviction. They round out the conversation with SPACs, the rise of crossover investors, and how David manages pressure and competition over the long arc of an investing career. Welcome back to 20VC with me, Harry Stebbings, and what an episode we have in store for you today. I just love doing this one. It's one where the chat really completely went off piste and we didn't stick to the schedule at all. But always a sign of a great conversation. So I'm thrilled to welcome David George General part Andreessen Horace, where he leads their growth investing practice. Since joining in 2019, David has invested in the likes of Clubhouse, Coinbase, Databricks, Figma, Instacart, Robinhood and Trip Actions to name a few. David also sits on the board of Current Greenlight and Workrise and prior to Andreessen, David spent seven years growth investing at General Atlantic where he invested in the likes of Airbnb, CrowdStrike, Open Door, Slack and Uber. Again, just naming a few. I'd also want to say huge thank you to Ariel at Trip Actions and Ali at Databricks in particular. Some amazing questions suggestions from them and I so appreciated that. But without further ado, I'm now so excited to hand over to David George, General partner at Andreessen Horowitz. 3210. You have now arrived at your destination. David, it's such a joy to have you on the show today, my friend. I do want to start by saying huge thank you to Angela Strange on your team and Ali at Databricks for some brilliant questions, suggestions. But thank you so much for joining me today, David. Hey, thanks for having me, Harry. I've listened to POD a bunch and love what you've done with it. Well, thank you so much. I still can't believe I actually get paid to talk to people like you. So it's a pretty crazy life, but I do want to start with some contact. So tell me, how did you make your way into the world of venture and come to be leading Andreessen's growth fund today? Yeah, so look, I grew up in Kentucky, very far away from the world of finance and technology. I was very fortunate. I had an awesome upbringing. My parents, I had an older brother, went to college at Notre Dame thinking I was going to be a lawyer. Thankfully, I went into the finance industry out of school instead. Eventually I moved to San Francisco in 2008 where I started to, you know, first encounter the world of tech. And I Jo joined General Atlantic about 10 years ago. At GA, I had the chance to invest in some amazing companies. Spent about seven years there. Companies like Crowdstrike, Uber, Airbnb, Opendoor, Slack, and then some others that are a little bit lesser known but really awesome companies like Benevity and Seismic. I came over to A16Z to start and run our new growth fund about two and a half years ago. Initially got to know some of the folks at the firm just from some overlapping investments that we had. So I think I knew Alex Rampel the best because of an open door. And fast forward to now we're investing. Had the chance to build a great team inside the firm and work with some awesome founders and companies here as well. I mean, it's been an incredible time since joining Andreess. I do have to touch on the GA time there because GA is such a prominent kind of figure in the industry, but it's also a very different one. So I have to ask, you know, what were your biggest takeaways from your time with ga and how do you think it impacted your mentality? Yeah, look, GA is an amazing place. I'm really grateful to the team there. You know, one of the foundational frameworks that I developed coming out of it was what makes a breakout or successful growth investment or pattern recognition of what I look for in almost all cases. For me, that has come down to a great founder and Then a theory on busting through consensus view on total addressable market or tam. The consequence of that is a company that grows faster and or longer than expected. So take my time here. Take Roblox. The prevailing view when we invested was hey, it's just a kid's game. Well, we felt that they had a shot and still do at being something much bigger. A co experience platform, something that's much broader than games, much bigger than kids. One counterintuitive observation from my time at GA and my pattern recognition coming out of it is exceptional. Business models are just table stakes in growth investing. They're not actually in my experience what gives you edge in making great growth investments. So we don't take risk on investing in anything but high quality business models. But in my opinion this is not where you generate outsized returns. You can make mistakes here, but it rarely surprises to the upside. So despite that, I feel like it's where 90% of growth investors spend 90% of their time. So coming back to the TAM point, total addressable market point, I can give you a couple more examples on forming non consensus views and things that made successful investments. For me one of the flavors of this is the consensus view of total addressable market lags. What's actually happening in the market. When I was at ga, the consensus defined the market wrong. At Appdynamics there were be way more applications than historically and you know, the view of the software to support that just lagged. So you could see it actually by looking at individual forward thinking companies but not from looking at market research reports. You know one of the more recent examples is Figma which we're investors in from A16Z. The simplistic way to look at their market is software for designers. But the historical definition of design and designers is actually pretty dated. Our view was that all front end engineers in the future will engage in design and this is 10x plus bigger in terms of market opportunity than just defining what they do in the design space. So you know, in both cases it was a refined view of the addressable market that led to a conclusion that in the future that that will be much bigger than folks recognize today. I have to unpack a couple of elements here before we move on. I just want to dive in and touch base here. It's like you mentioned the element on business model and I do want to touch on that because you know, when you look at some companies say a doordash of the world, it takes a while for the beauty of the business model to mature into what so how do you think about having the mental plasticity to see what the business model can be versus what it is today when investing in growth? Yeah, look, DoorDash is a great example of this. You just led me right into a discussion of mistakes that I've made in the past, which could be like a 90 minute VC episode. But you know, DoorDash is a great example of this. I missed a lot in DoorDash, not just the unit economics, you know, the power of the market size, the localized network effects. But I would say the big piece on the unit economics for Doordash is you could see early signs of it in performance of really mature markets that they were in and you could see the localized network effects in action. So specifically in the South Bay suburbs in the Bay Area, unit economics were very good. And they ran some experiments at the time that we were looking that demonstrated that they could actually get the unit economics much higher. The power of their market position allowed them to maintain strong unit economics on the restaurant side. And then they did some really innovative stuff which there were ideas around this, but it was early to see it on building consumer stickiness like loyalty program. And so you put all that together and at the growth stage you could see this had the potential to have really good unit economics, even though, you know, the trailing data around it didn't show it. You mentioned unit economics quite a lot there. My challenge is like, when do they become important? I'm using this session as an advice and a learning moment for me. But it's like, but at the early stage, sure, your cacs may be super low, but you've got the most aligned customer base that you're marketing towards and they will jet generally get a lot more expensive over time as you saturate that audience. But then also brand and word of mouth can come into play and they can reduce. So I guess my question is like, when do unit economics become central and how central are they to you? Yeah, look at the growth stage, they're very important. The thing that we look for in unit economics is where are they now and then as you scale up much larger, do you have a theory on why they're not going to get worse and hopefully that they get better? And so they're very important at the growth stage. Again though, I go back to the point of what's driven outsized returns. For me, 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 a company ends up with unit economics that are Much greater than what you expected. It's much more common that hey, the growth of the company just exceeded all expectations. So at growth stage when we invest, we look very closely at them. The challenge that I have and sorry, we did have a schedule, I'm just completely going off. Yeah, totally. The challenge is like with the unit econ is like when you have the peripheral of capital that we have into the markets and suddenly founders have these budgets which are just eye watering. Celona has raised a billion dollars. I mean a billion dollar raise like their need to be worried about CAC optimization or unit economic efficiency. It's just less because they've got a billion dollars in some cases. How do you think about and advise founders on how close they should pay attention to unit ecom when they have this proliferation in capital support? Yeah, look, I think it's a great question and it's a function of market conditions, competitive environment. So 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. But you mentioned Celonis, another company a little bit. They're in an incredible market position. I think their business model is fantastic. I would view their future as very elevated levels of high growth and there's not some looming intense competitive threat that makes them think that they should aggressively go burn a bunch of cash just to grow faster in our universe in each of those sectors that makes it sort of the right size for us. I think one for me that I always find striking is that capital concentration on a per company basis. How do you think about bluntly, how to get as much cash into the winners as possible. And what does that reinvest in decision making look like for like, do we really make fucking double down or do we let the capital market support it? And we play a nice role. We've invested multiple times in many of our companies. So Coinbase, we invested three times, Roblox twice, Databricks three times, Stripe four times, Trip actions four times. Every time we assess one of those new investments, we do it with fresh eyes. And so we call it re underwriting. We mentioned the upside there and the multiple expectation or multiple desire. The challenge is there's so much cash, the prices are so high. It's just much harder to do those multiples with the entry prices that we're paying. I had Layla from Capital G on the show. She said the prices are 2x what they were a couple of years ago on average entry price for her. I'm interested. Like, how do you think about your own price sensitivity today, given where we are today? Yeah, look, this is a fantastic question. I wrote a piece about this called When Entry Multiples Don't Matter, talking a little bit. It touched on this and other things. I'll just talk to you about our process and then I can address the valuation point. So we first start, we assess the company, we assess the market, we assess founder, all independent evaluation. And so if those check out, then we spend a lot of time on valuation and scenarios and making sure that we see our way to target return. So the best thing that we can do is invest in great companies that are growing very fast because those afford you more degrees of freedom on valuation. And I talked about the upside scenarios. They're the ones that are more likely to deliver upside scenarios. So one of the frameworks that we use and talk about a lot and this is relevant for valuation because it speaks to, to the flavor of companies that we tend to matchmake with is, you know, we look for what we call Glengarry Glen Ross market structures. So you know, the famous movie, this is like independent evaluation. So what that means is there's a scenario. Have you seen the movie? I haven't. So explain it for me. Okay. All right. It's sort of like a boiler room sales, old school movie. So it's, there's a scene where Alec Baldwin is presenting to his team their monthly sales competition. It's his famous line where he says, okay, here's the prizes. First place gets a Cadillac, second place gets a set of steak knives, and third place gets fired. 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. You know, if you're not the leader, it's going to be a challenge situation. So we look for those kinds of market structures. You know, this is very well known and well covered in, you know, consumer land. Companies like Google and Facebook that have clear network effects. But surprisingly you can see it actually in a lot of industries that don't have network effects but play out in a similar way. So in B2B, you know, Salesforce, Workday, ServiceNow, they command almost all the market cap in their respective markets. So the way we approach the valuation question is, you know, if we can get that point right and the company wants to work with us, you know, more often than not we can reach an agreement on Valuation. Now, you know, the biggest point is, you know, in a market where valuations are higher than they used to be, you have to think long term. So we think in five to seven year terms and try not to worry if we're off by a year or two on the valuation, that's a risk that I'm willing to take. If we underwrite something five years and it takes us seven years, I'm okay with that. The last piece is just tech markets are bigger than ever and there's going to be a lot of market cap creation. And so if we're long term oriented enough, we should be okay. Tech's about a quarter of US market cap and that's just going to grow fast. Can I ask one? There's always a case where everyone's turned down a company based on price. What company have you turned down based on price that keeps you up at night? Oh my goodness. The most painful one is probably Qualtrics, which, I mean, look, it's killer founders and yeah, I remain friends with the guys we turned it down based on price. When I was at ga, they figured out a huge market hiding in plain sight, a sales model that totally worked. Fast product velocity, all the things that we look for, big markets where they're the leader business model that was exceptional at scale, long room to run. So that's a very painful one. I do love Ryan, just never played golf with him. He's an absolute fiend. But I do have to ask, you said there about kind of entry price no longer mattering with that brilliantly kind of provocative title I was taught I'm from the old school of venture. Temporal diversification mattered too, and that was a core part of any portfolio. Today with deployment cycles, doesn't seem to matter either. Do you think temporal diversification matters today or do you think it's about adjusting to the game on the field and being in the moment? Look, I think it's more about adjusting to the game on the field and being in the moment. And then we don't invest in hundreds of companies. And so our goal is not to be an index fund of the overall tech market. We just need to continue to outperform and do our best. And if we can see the path and get confident about the path to achieving our target returns, that's okay. Reserves are one way that you achieve temporal diversification. If you have more of your fund in reserves, that stretches the deployment cycle of your fund over five years instead of two years or whatever the number is, that naturally provides some temporal diversification. I have to ask ma', am, we mentioned the price changes and the increasing price that we've seen over the last especially year but last few years we've seen p hedge funds, crossover funds, I mean everyone and their mother investing in late stage and pre ipo. I've got to ask man, when you look at it, how do you think about this massive proliferation of capital at the late stage, especially with players who seem to be playing a different game in terms of return expectations, willingness to pay 2x what we pay. How do you think about this new landscape and how you win in it? Yeah, look, it's a great question. First, I think there's a little bit of a misperception in the market about some of those firms who have been more aggressive recently. The returns are pretty good. They've done a good job. I think a couple of things that we've done to adjust so one, diligence processes and fundraises, they've gotten faster, to put it lightly. What that causes is it makes investors narrow the focus area of what they can cover in diligence. You have to have a prepared mind coming into things and you have to be really smart about where you spend your time. So we always focus on the three or four things. I talked about business model being a table stakes exercise for us. So that's typically one, maybe two of those things. But the real decision making process will come around that view of future growth. So we have to be prepared to make those judgments faster and assess those questions quicker. It used to, I remember when I started at ga, it would be like okay, a company's raising money and let's take two months and you turn over every single piece of minutiae for a company. It's probably more efficient and better overall for the market that that's not the way it's done anymore because it's just inefficient all around on the competitive of us as playing the end game like relative to some of the newer players. So we move fast, we pay fair market prices, we can write very large checks and follow on into companies many times over the years. That's all what some of the newer players are known for. But because of the way that Mark and Ben have built the firm, we can also do a lot to help founders as they scale. And that is relevant whether the company is at series A or the series D in the growth phase. So. So we tend to matchmake with the companies who see us as being able to deliver more than just dollars. Can I ask you mentioned Mark And Ben there, in terms of investment decision making, how does that look like for you? Yeah, it's a little more on the informal side. We have a single trigger puller model though. We have discussions and deep, robust discussions about investment decisions. But it's ultimately the call of the GP who's sponsoring the investment. I serve as the generalized specialist. I heard Paul Inre, I used this term recently. It works for us. And what that means in this case is I sit across all the industry groups so we can measure the relative excitement of a B2B software company versus a bio company or a crypto opportunity or consumer. And this is really helpful in sort of measuring relative excitement and attractiveness. So the other piece on investment decision making, and it goes back to the matchmaking point, is we try and prioritize companies where there's still some degree of company building that takes place. So, so we can help companies, given what Mark and Ben have built and big part of our decision making process is we have the luxury of partnering with our early stage GPs and deal partners across the firm. So we feel like we'll have unique insights into big trends or themes early from being a part of the early stage business. You mentioned the single trigger element there. I'm really interested because you know, at the end of the day you've just got to have the courage to pull the trigger and go. And it's a big courageous moment to write that check and put your name to it, I guess. How did you approach that? How did you mentally get over that with your first. And would you have any advice? I remember with mine I was shitting myself and mine was for a million dollars, not a hundred million dollars. Well, it's better to be honest. I mean. Yeah, look, it's better to be honest, man. Look, I totally agree and like I first time I did that, I still remember, I mean it's not, it was not a single single tripolar model at ga, but I remember my first investment there and I was panicked, like, am I making the right decision here? I don't know. I've grown to get comfortable with it over time. I think the benefits of the single trigger, and this may be obvious, but the benefit of single trigger puller model as opposed to committee decision making is it's the ultimate measure of conviction. So if that individual has conviction and gets feedback from the partnership and maybe the feedback is constructive or negative and still wants to make the investment, that's conviction. Right. And if there's a committee model, sometimes, you know, one of the negative things that happens is they're selling. And so because often a committee will look to the person and try and measure or gauge conviction. And so they're selling. And so my experience, I think it leads to less intellectually honest conversations and open conversations because, you know, there's some element of convincing that needs to happen as opposed to personal conviction building by challenging and, you know, asking questions and exposing concerns and getting feedback on those. This is a tough one. But do you think there is internal politics? I mean there is at most firms but you know, there is internal politics in Andrew and then there's anything that you or one can do to maybe prevent or minimize them. It's going to sound like I'm bullshitting because it's like the politics are pretty. Look, if you're a single trigger puller model, lots of the politics come from shit like that. Trying to convince people, trying to advocate your own ideas, trying to shit on other people's ideas because, you know, maybe there's a deal that gets done instead of yours. Why would that introduce politics if it's single trigger? Because it's like, I like this deal and I have conviction. So see you later. Rather than like, I have to get you on side. I'll vote for your deal if you vote for my deal. Yeah, no, that's what I'm saying. I'm saying the same thing. I'm saying the single trigger pillar model eliminates the politics. Right, Right, Yeah. And then the other thing that causes politics internally is like promotions path for people. And I think part of the benefit of the way that just the background of most of my partners being founders of companies is they've actually run companies. Like this is a typically a problem with investment firms. It's like superstar investors end up running the firm. Whereas, you know, our firm is run by people who have run companies. Yeah, I do totally agree with you and see that and one of many reasons I work alone. Well that and you know, no one likes me. But other than that it's totally cool. Everybody loves you, man. I was fishing, total fishing. I stepped right into it. Anyway, I do want to ask as well, like final couple, but it's like, you know, everyone's got a SPAC now. I've been tempted by 20 VC SPAC. I think that's so cool. But anyway, everyone's got a SPAC. How do you think about like the rise of SPACs, the SPAC market weather, whether it's good, bad and opportunity. Look, I think SPACs are great for the company side. They provide another form of liquidity. And getting public for companies I counsel. I've talked to some of my company's founders about, you know, going down the spac route. And the thing that I say to them always is it's a totally fine path to go down as long as it's not seen as a milestone and you're just ready to be a public company, you know, after you're done with it. So it's good from the company side. I think on the issuer side, it's valuable to the market if there's some uniqueness comes along with it. So, you know, if there's a value proposition that's unique, great. It will be appealing to the right founders. If it's just a financial vehicle, I think the proliferation of so many SPACs will make it a little more challenging to generate really attractive returns in that market. Final one, you mentioned some of your companies. I spoke to some of your companies before the show, and one Ali, who I love, by the way, but Ali said to me, you got to ask this guy. He's been super successful, and he's achieved so much. What drives you today and how do you think about your relationship with money? On a plane last night, and I was texting with Ali about something similar. It's not. Money is not what drives me. I love learning new things every day. I get the chance to work with the best founders in the world, building awesome companies just like you. You know, I love my job. I work all the time. I do have a deep fear, personally, and paranoia of failure. And I'm extremely competitive. And so returns and generating returns are one element of the scoreboard for me. Like, and I love that competition, and I want to be the best. There's a mission, you know, mission side of our business, too, which is generating great returns for our limited partners. So these, you know, universities, nonprofits, it's the same as you. They've entrusted us with their investments. And I want to make sure I work as hard as I can to give them the best outcomes in the market so that they can use those dollars to good calls. How do you prevent that fear paralyzing you? Because I, too, have this kind of relationship with fear. The way I channel my fear, I channel it into working hard. So if I have a fear at any moment that I, you know, I'm not doing the right things or, like, the way I try and compensate for that is I dive in, I work harder, I do something different. I reach in. And the beauty of our business, you know, same as yours, is there's an endless amount of work that you can do. You can always get smarter about a company. You can always get smarter about a trend or a theme. You can always try and form a differentiated point of view on something. You can reach out to people who you learn from. There's just an endless way that you can, you know, expend work time. And so when I feel like I'm not doing well or failing, I tend to go deeper into that stuff. I do want to move into my favorite though, David, which is a quick fire round. So I say a short statement and then you give me your immediate thoughts. Does that sound okay? Let's do it. Okay, so what's the favorite book and why? David? Okay, I'm going to give you two One is like a business book that I think is the most important one, which is for the business that I'm in, which is Increasing Returns to Scale by Brian Arthur. The second one is my fun favorite book is Count of Monte Cristo Calm. Have you read Seven Powers by Hamilton Helmer? I have not, but it is downloaded on my Kindle. Honestly, for what we do, it is amazing. Tell me, what lie do rich people tell themselves most often? I think it's overemphasizing their own work and underplaying the role of luck in some circumstances and other people who contribute to their success. It's like form of like just world fallacy. What is the single biggest challenge of your role with Andreessen? Stay. It's constantly evolving to changes in the competitive market. So I mentioned this earlier. Mark and Ben turned the industry on its head 12 years ago and people are constantly trying to figure out the next thing to turn on its head. So our strategy and how we work with companies always has to change with that. What do you do now that you wish you'd known when you started at Andreessen a couple of years ago? I mean, Andreessen is still pretty fresh for me. I wish I had known earlier in my career and growth to spend more time thinking about what can go right as opposed to modeling or trying to predict what may go wrong. This is a tough one. What advice do you often give that you find hard to follow yourself? It goes a little bit back to our fear point, but there are going to be ups and downs over the life of an investment in a partnership with a founder. Don't get too high from the highs, don't get too low from the lows. It's one thing on the investing side. The same could be said for building a company, but probably times 100 in magnitude. Final one. David, what's the most recent publicly announced investment and why did you say yes and get so excited? So it was loom. So the frameworks that I love is I try and invest in companies that are pull companies, not push companies. What that means is the market is pulling their product from them as opposed to they're trying to push their product out to the market. So they're an asynchronous video company, it's viral, it's spreading Organically, it's growing 10x year over year at scale. You know, they're building enterprise top down sales onto bottom up traction and run by founders who are passionate, they're domain experts, they know the product, they're building a brand and they're building a great business. I've got to ask this one final question. With pull and push businesses, often it's pull in the beginning and then it goes to push. Do you get worried when it goes to push? And how do you determine how long you have to run on the push? Yeah, this goes into the market work that we do. I think you can form a pretty sophisticated point of view on this. Like one, if it's something that's very unique and they are the market leader, the pull will probably last much longer. Secondly, as part of our diligence, like we talk to non customers probably more than we talk to customers of companies and you can get a pretty good sense for how they're going to behave in the future based on those conversations to try and predict it. And then back to my table stakes business model comment. You know, you just got to make sure that as pushing that comes along with pulling that the economics of that are going to make sense. David, listen, I've absolutely loved this discussion. Thank you so much for putting up with my completely wayward questions. But it was amazing and I so appreciate it. Thanks for having me man. I mean if you couldn't tell, I absolutely love that discussion. I want to say huge thank you to David for being so patient with my completely off schedule questions. He was just fantastic there and as I said, just loved it. Shows like that made me really appreciate what I do as as always, I so so appreciate your support and I can't wait to bring you a fantastic episode this coming Thursday. Thanks for listening to this episode of the A16Z podcast. If you liked this episode, be sure to like, comment, subscribe, leave us a rating or review and share it with your friends and family. For more episodes go to YouTube, Apple Podcasts and Spotify. Follow us on X16Z and subscribe to our substack at a16Z substack. Thanks again for listening, and I'll see you in the next episode. This information is for educational purposes only and is not a recommendation to buy, hold, or sell any investment or financial product. This podcast has been produced by a third party and may include paid promotional advertisements, other company references, and individuals unaffiliated with A16Z. Such advertisements, companies and individuals are not endorsed by AH Capital Management, LLC. A16Z or any of its affiliate information is from sources deemed reliable on the date of publication, but A16Z does not guarantee its accuracy.