tv The Communicators Scott Kupor CSPAN July 20, 2019 6:30pm-7:04pm EDT
created by cable in 1979, his span was brought to you by your local cable or satellite provider. c-span. your unfiltered view of government. r, whato, scott kupo does a venture capitalist do? scarlet: basically, we provide money to companies that are trying to grow and hopefully likee very big companies google or apple one day. if we are doing our jobs correctly, we are helping them grow the company. hopefully they can provide introductions, navigate new challenges as they go through their business. we like to think of ourselves as a money provider and hopefully a supporter as the business grows. host: why can't a company such as the ones you describe go to a bank or go to traditional avenues? scarlet: it is a good question. most of the businesses we invest
in their portfolio. they are looking for us to generate something like 25% or 35% returns for their business. they have a large portfolio that might have stocks and bonds, and this is a high-risk, high reward portion of the portfolio. host: what is a normal pitch like? scarlet: it is fun. -- scott: it is fun. a few members come in. often they have just a powerpoint presentation. they have not built a product. it is an opportunity for the entrepreneur to tell us about their expansive vision for their company. how big of a market opportunity can it be? and ultimately, why is this team the right team to go after that? so it is a very fun, quite frankly, intellectual process by which we can learn you things and then ultimately make the .ecision
unique to the tech world? scott: many of the companies that take venture capital are tech companies. it does require a type of financing like venture. which is the willingness of somebody to take a chance on something where the odds of success are extremely low. hopefully, if it works, the payoffs are very high. or twobusiness, one companies will drive the lion share of the success we have. the others might not. you have to have that level of risk appetite in this business. host: your new book is called "secrets of sandhill road." road, and whyill is it significant? scott: it is in menlo park, california. you wouldn't know about it
except for the fact that a mile or two east, is a more famous neighbor, stanford university. you can think of it, if you are a music fan, nashville. wall street in new york. it is a bit of a mythical place where it just happens to be the a lot of the venture capitalists congregate. it is in that exciting to write home about, it is just a lot of drab story buildings. it happens to be a place with lots of capital and opportunity. it looks like a bit of an old industrial park. it is land that has been owned since the beginning. host: why is it drab? there are not any high-rises there. a lot of two-story buildings. i think partly there may have been zoning restrictions that caused it, but it is also upstaged that it's much more famous neighbor, stanford university. maybe the university always had the intention to make sure it was left there. host: you are the managing
& horowitz,ndrees which is -- scott: we are a venture capital firm. we invest in early stage startup companies. hope that over time we can help them grow into very large businesses. we are a $10 billion business. that means we have raised about $10 billion in our history from the limited partners would have talked about. again, our job is to be on top of all the things happening in tech and in entrepreneurship, particularly those businesses that have software as a component of them. host: what is the technical or legal explanation of what a limited partner is? scott: a limited partner is someone who is an investor in a fund like ours. they are truly limited in the sense that they don't have the control over the investments we make or when or if we sell those investments.
essentially think of them as a passive investor, which is, they give us money, we have an butgation over that money, to choose which companies we invest in, those things are 100% in our purview. host: what is a typical day for you? scott: usually we will be seeing a couple of different pitches. a couple hour-long meetings with entrepreneurs. if we are working on deals, we will often be doing diligence. someone we may have met earlier, now getting closer to making a deal, so we will be digging into their business, to understand their project in more detail, their financials in more detail. we spend a lot of building relationships. a huge part of this business is being well-connected into the entrepreneurial ecosystem, understanding what professors are doing at different might beies that relevant to our companies. so we spend a lot of time on
what we call outbound relations. host: what is the expertise you bring to this position? scott: i have been in tech for about 25 years. i was a banker in my early days, then i owned a startup company for nine years but ultimately got sold to hewlett-packard. i think what i bring is an appreciation for capital markets and the financial side of businesses, and also an appreciation for what it means to be a startup and go through the company building process. that means that not only does it provide empathy and respect for the process, i think it allows us to be more better and patient investors and recognize and understand that these things don't always go right all the time. starting a company is a series of ups and downs, and i think we bring this up into the process. often there is not a product that is not associated , right?itch
what we are trying to understand from the entrepreneur is not necessarily what is the final product, but tell us about the idea. how did you think of the idea? how does it respond to the market needs? give it, they will change over time as they get products into the market, and we recognize that as part of the company building process. we want somebody capable of this earning the data points from the market and being responsive to the needs of the market as they build their product. host: what is your win-loss record? scott: you know, it is funny. we don't actually think of it that way. the honest answer is it is poor. about, that 40% to 50% of the things we invest in, we have a polite way of calling them impaired capital.
which means we lose our money. 20-30% we make a little money. the difference between success and failure in this business is, what happens to the remaining 10% or 20% of those companies? do they become a google or facebook in which you may make 10 times or 20 times your money? this business is based on total returns. but those small number of returns will be driven by a very small number of companies. >> if you are a $10 billion company, you have had successes. what is one you can tell us about? scott: so we have had some nice successes, i will give you a good example, we have a public , inany today called okta the enterprise security spacep we invested in. it for the first time in 2009. it was one of our very first investments. we put about a half $1 million in two the two founders to build out the idea and your product.
over the years, we invested more money as did other venture capital firms. it went public about a half a year ago. if you look at it today, it is about a $10 billion or $12 billion market cap company. that is an example we have been working with them from inception. the founding team has done an incredible job in building up a sustainable, freestanding, and valuable business. host: i apologize if i missed this. what is it that okta does or makes? is a software company. if you are a business, you might have cloud-based applications you are not running on your premises but you are running in the cloud. you might have gmail for email. you might use salesforce.com to manage your salesforce. another software used for marketing. all of those software, because they run in the cloud, every user has to be able to look into those and they should have
security controls. does is provide a single sign-on for all those applications. so instead of having a different password for each application you log into okta, which officially manages all the applications. it is a tool they will use to manage security. user access and administration. somebody, what applications do we give them access to? when they leave the firm, how do we manage their access? it is a tool used to manage a variety of applications. host: for those of us of a certain age, names like general electric, ibm, ford, those are the names we are used to. where did the name okta come from? scott: it is a good question. i will look that up for you. i will look that up for you. host: is silicon valley successful because of venture capital?
scott: no, silicon valley is successful because of entrepreneurs who are willing to take the kind of risk the business entails in building something that might have a 10% or 20% chance of success. venture capital is really an enabler of that ventur activity. we can add value to the companies, but we shouldn't kid ourselves, at the end of the day, the innovation comes from hard work and efforts put in by entrepreneurs. host: one of the things you talk about in "secrets of sandhill road" is that products of ideas are often "10 years ahead of their time." what do you mean by that? scott: it is funny, you see this recurring theme in venture capital, investors that didn't work out some point in time will work better later time.
there was a company for example, they were trying to do grocery delivery, the company was called web van. they were tilting massive warehouses and then they would use vans literally to deliver that to people. it was a wonderful service for people, but it was just a very opportunity, because the number of people who thought of the idea of home delivery for groceries or willing to use their computers, -- because of course, cell phones did not exist to do that ordering, it was not the time. the company was not successful. now today, we have a company art which isc executing the same idea in the same way. independentng contractors, they are not staffing supermarkets, they are partnering with supermarkets to
get access to the produce. and then of course, there is the iphone revolution. a lot of things people would not have otherwise done on their desktop, they are willing to do on their mobile phone. it is a new technology. bacon expanded market in a way that did not exist in an earlier time frame. host: when it comes to an instacart, do they go to other venture capitalists as well? scott: they raise money in different rounds. often people will raise a first round of financing. that will last them 18-24 months on average. then they will go raise another round of financing. if they are doing well, the evaluation will be higher on that second round of financing. stageeral, at the early there tends to be one major investor. if we are lucky enough to
have that opportunity, we will be the major investor. when they go into subsequent rounds of financing, it is usually the case that another investors will be part of the company. we have an interesting relationship with our other venture capitalists. we are partly competitors. there are certainly deals and rounds that we will compete against, but many times, we are partnering with other venture capital firms because we are investing either in earlier rounds or later rounds in the same company. host: do you have a say so and in how the business operates during the first round of financing? scott: so there we are business works is we have a set of typically rights that are adjust to the financial interest when we invest in the company. often we will sit on the board of a company, we will have their rights and duties that a board member might have make the decisions about whether the ceo is appropriate for the business or the strategy.
we also tend to have stock that allows us to vote for things like, is the company going to raise more money or try to sell themselves? those types of things, we have a say in. we don't govern them completely, obviously, the founders and shareholders have a voice as well, but there is a balance of power that comes from that type of governing structure. host: do you have a say so in a instacartke okta or today now that they are a public company? your they pay back investment and they are gone? own shares in those company. case, our founder, ben horowitz is on the board. is that we stay on the board for a period of
time after the, companies go public and then exit when the companies become more mature. just likeown stocks any other stockholder, and we can vote through a proxy for other corporate activities that would require a vote. , ben horowitzor and mark are legends there is silicon valley. who are they? andreesen originally made his fortune in a company called netscape. the company went public in 1995 and heralded what many people believe as the first real tech revolution for the modern internet era that started in the early 1990's. he has gone on to be involved in other important companies, he is on the board of facebook, ebay and hewlett-packard, a very now went investor, and
are lucky to have him as a partner. then horowitz got to know mark because he worked at netscape and ran a number of products on behalf of mark and they became close friends and colleagues. they eventually started a company in 1999 called loud cloud, which many have not heard of. essentially, think about it as like a compute-on-demand. cart example, insta it is a company that was a few years too early. so then was the cofounder of the business. arcn in 2009, he and m decided to take their skill set and become venture capitalists. netscape exist today?
scott: netscape was sold to aol in 1988, and the netscape browser, their main product, really does not exist. today the main browsers people are using today are google chrome or the apple safari browser. most of those browsers or their progeny to the early netscape days. host: one of the realities and criticisms of silicon valley entrepreneurship today is that investors or entrepreneurs will come in with a product that they are hoping will be sold to a larger company or a larger company will buy the product so there is less competition. least in our experience and how we think about investing, we are actually not interested in backing founders and companies where the goal is to try to sell the company. the reality is that does happen many times, in fact, the about
80% of the excess in our business, when a company is exiting, happen through acquisition. wenta company starts, we to believe at least that they are going after an opportunity big enough, and that their product is enough to support a standalone company. acquisitions do in fact happen. i don't think about those generally as anti-competitive in the sense that we have never, you know, we continue to see new innovations constantly happening in this business. but it is certainly the case that sometimes larger companies will acquire these large businesses, but often, there is another company behind them going after another segment of the market. none of that has actually had an impact on the rate of new company formation. we are privileged to see all kinds of new opportunities still happening. host: is the work culture of silicon valley something you have to get used to? scott: i think so. it is a hardcharging culture, no doubt.
people are working very hard. people have very high dreams and aspirations for what they are trying to build. it does mean that some people probably spend more hours in the office then maybe people would otherwise like to. it is a very competitive labor market, and i mean that in a positive way. there are different opportunities. job mobility is extremely high. it also puts our real premium on culture within a company, which is, if the ceos and the management team doesn't do a good job of setting a right culture and helping people who want to achieve a normal worklife balance due so, there are so many opportunities for mobility, that it does keep a market in check. host: can you pitch an idea on to a venture capitalist on sandhill road if you live in fort wayne, indiana or louisville, kentucky? scott: that is a great question. one of the things we have seen
in the u.s. is that the venture business is still very geographically concentrated. new york, california, boston, makeup something like 70% of venture capital dollars that are invested every year. the answer is certainly, you can't. we are very interested in talking to entrepreneurs. often in those local markets, the early-stage capital called seed capital typically will come from the local markets. then, if they don't have larger firms beyond that, you will see those companies come out to either new york, boston, l.a., other places where there are finesentration of larger for the next round. scott: in your book, you talk about the fact that both microsoft and facebook were vc-funded companies and the differences in return for those companies. scott: this was an interesting phenomena that happened in our business. the average time it takes from founding to going public has
basically doubled over the last 15 years. it used to be the case, they would go public in 6.5 years after the founding. now, those numbers are roughly 10-12 years. there is lots of reasons for that, which are probably beyond the scope of our conversation. the example in the book is microsoft. it went public at a $350 million valuation. today, they are over $1 trillion. in theowth happened public market, so they accrued to the benefit of public market investors. the mental exercise i talked about in the book is that, if facebook were to grow at that same level, it would be worth more than the entire global gdp. so it is probably the case that xe are not going to see 3000 growth in facebook over the life of its history. those are extreme examples, but i think they point out a very important thing happening in the industry, which is a lot of money that used to be happening, and growth that used to happen
in the public markets is now shifting to the private markets. as a policy matter, i think that is a problem. i think less growth in the public markets means that normal investors who invest through their retail or 401(k) accounts are unfortunately missing out on great appreciation opportunities. i would like to see us have more of that growth happening more evenly between both private and public. host: why do you think they are staying private
longer? scott: there are a lot of things. the most significant is the sec , many years ago, if you look at the data, 20 years ago, started to introduce a lot of efficiency mechanisms into the public markets, to do exactly that, make the markets more efficient. they did a great job. this is not alive problem with the sec. if you look at for example the amount of money it costs to trade stocks today, the expenses that retail investors bear, all of those have been going in the right direction the last 20 years, so that is a wonderful
thing. that works very well with large cap and highly liquid stocks. but when you have smaller cap stocks that aren't as liquid, that market has become much more challenging to be in. if you are is sub billion-dollar market capitalization company today in the public markets, you probably don't have research analysts covering your company, a sales or trading desk at banks talking to the investor community
about buying your stock. as a result, their stock doesn't really, trade very well that is what we call not very liquid. so that is an unattractive place to be. therefore, companies are staying private longer. last 15 happened in the years is the money has followed that. public market investors have recognized that. that is what you see sometimes mutual funds like fidelity or t. rowe price actually investing in private companies. they now have to go into heaven markets because of the elongation of the cycle to
get into the public markets. host: are you still the wild west in the sense you are outside of the regulations banks have to face? scott: it depends on the types of venture capital firms. we are what is called a registered investment advisor, so we are regulated the same way that a hedge fund would be regulated or a private equity firm. that means we are subject to the sec coming and visiting us. subject to a variety of rules. a number of investment firms lesser regulatory scrutiny. have lesser regulatory scrutiny. it is a function of the types of investments we are doing. ourselvesto subscribe to a higher regulatory standard. but it is true that for many venture capital firms, they are not regulated that way. they still ultimately are responsible to the sbc if they are doing things like fraud or bad behavior, but you are right, they have much less regulatory scrutiny than a bank or other
institutions. host: what sort of products are catching your eye today, what are you looking for? scott: we have lots of ideas about where things will be. we are spending a lot of time in at the intersection of computer sciences and life-sciences. a whole new set of companies are trying to generate new drugs or create new diagnostic tests for disease, where they are using components of computer science to improve that process. things like machine learning, that can improve the learning ability of computers to detect cancerous cells in a blood sample, for example. that to me is the most interesting areas. the other part of our business is we need to be, quite frankly, open to meeting with all kinds of entrepreneurs and understanding the ideas they have. we don't think we are smart enough to know all the greatest trends. a lot of our business is giving getting ourselves in front of
really smart individuals who are doing cutting-edge work in software and then doing a diligence to determine whether that business has a chance to grow into a very large and self-sustaining company. host: what are the lessons learned from the 1990's and the aughts? scott: the lessons are the lessons of market size. what the staff and i like to use is -- we talked about netscape earlier. when netscape sold itself in 1998, the size of the internet population globally was 150 million people. as you may recall, people were using these horrible, screeching dial-up modems to get internet access. when you think about it like pets.com which has been in the news, because we had another ipo of another pet company
om, which is competition. idea itr how great an was, could never be big enough to acquire enough customers and sustain the economic for the business. i think the big lesson of the 90's, the size of the market matters. it drives how costly it is. how many customers you can get to. a different example, we often live in a world where sometimes you willfully suspend disbelief in order to go along for some dreams that entrepreneurs have about what to do. there is a difference in my mind between what sarah knows appears to be, and we will see as the s.e.c. does their work, there is a difference between fraud and actually misleading people, versus having big dreams and failing to accomplish those dreams. theranosthe big pharao less on for us is that making
sure we vet those dreams and understand the difference between an ambitious plan that might be feasible and one that might have bad behavior. host: scott kupor is the managing partner of andreessen horowitz. author of this book, "secrets of sand hill road: venture capital and how to get it." onnks for being our guest "the communicators." all "communicators" are available as podcasts. ♪ >> the house will be in order. years,er: for 40 c-span has been providing america with unfiltered coverage of congress, the white house, the supreme court, and public role as the events in bc and around the country. in 1979, c-span is brought to you by your cable or satellite provider. he, your unfiltered view of government. ♪ "newsmakers", chair of the
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