Venture winners now build whole industries, not just tools

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 3:02

   market will figure this out. I think the big thing, responding to your general point, I think the big thing is the world has really changed um and so you know modern venture capital uh in the form that we understand it is basically um you know there were examples of venture capital going back to like the 15th century or something like you know queen queen isabella and christopher columbus and whalers off the coast of maine in the 1600s and so forth but modern venture capital was basically a product of the 50s and 60s originally this guy jock whitney from the whitney family sort of created the model george dorio who's a mit professor created a version of it and then you know then the great you know the great heyday of the 1960s vcs arthur rock and those guys and everybody that followed, Don Valentine and Pierre Lamont and Tom Perkins and so forth,

2. 3:41

   Gene Kleiner, you know, all those guys. Basically, from that period, it's called the 1960s, through, call it 2010, there was a venture playbook and it became a very well-established playbook. And it sort of consisted in two parts. One was a sense of what the companies were going to be like, right? And then the other was what the venture firm should be like. And so, The playbook was the companies are basically tool companies, right?

3. 4:03

   Basically all successful technology companies that were venture funded in that 50 year stretch were basically tool companies, right? Picks and shovel companies. So mainframe computers, desktop computers, smartphones, laptops, internet access, software, SAS, databases, routers, switches, you know, disk drives, all these things. Word processors, tools, right? And so, you know, you buy the tool, the customer buys the tool, they use the tool.

4. 4:27

   But it's a general purpose technology sold to lots of people. Basically, around 2010, I think the industry permanently changed. And the change was the big winners in tech more and more are companies that go directly into an incumbent industry, right? Like insert directly. And I think the big turning point on this was like Uber and Airbnb, right? Where Uber could have been, like Uber in 2000 would have been specialist software for taxi dispatch that you sell to taxi cab operators.

5. 4:54

   Uber in 2010 was, screw it, we're doing the whole thing. Airbnb in 2000 would have been booking software for bed and breakfasts, right? Running on a Windows PC, right? And then Airbnb is just like, screw it, we're doing the whole thing. And so, and, you know, Chris Dixon came up with this sort of term, the full stack startup, which he kind of meant. But the other way to think about that is just you're actually, the company is delivering the entire, basically, promise of the technology all the way through to the actual customer.

6. 5:20

   Which is basically quicker to get there. also i suppose you get more margin capture when you do it that way and you just get the technology seeped in rather than having to sell it through is that the idea prior to 2010 there were two kinds of tool companies consumer tool companies and business tool companies right so you know b2c b2b right as we called them in those days and you know the consumer side was great but like you know consumer you know it's just like selling you know video games and consumer software it was great you know flying toaster screensavers it was great but there was only so far you know that was going to go. And then the B2B side for things like taxi dispatch or for bed and breakfast bookings, the problem is that you're selling advanced technology into incumbents that are not themselves

7. 5:56

   technology companies, right? And so are they actually going to take those tools and then actually build the thing that the technologists know should actually get built? More modern version of that is what you see now happening with cars, right? So who's going to build the self-driving electric car, right? Is it going to be an incumbent who's able to adjust, who's buying you know good components to be able to do that or you know is it going to be a tesla or a wemo yeah right that's going to do that same as spacex and nasa i suppose exactly yeah you could there are many companies that sell technological components that go into rockets but was any of that going to lead to the existing rocket companies making the rocket that's going to land on its butt and then you know be relaunched within 24 hours right and so and by the way same

8. 6:36

   thing airbnb or uber it had had you sold a the uber uberized version of taxi dispatch software to the taxi operators wouldn't have resulted in the Uber customer experience. And so I think basically what happened was, and there was sort of, you know, as Peter says, these things are overdetermined. So it's a bunch of things that happened. But it was sort of the smartphone completed the diffusion kind of challenge for getting computers in everybody's hands.

9. 6:58

   And then mobile broadband completed internet access in everybody's hands. And then the minute you had that, there was just no longer, you just had this ability to get directly to people in a way that you just never had. You didn't have to like have a giant marketing campaign. You didn't have to, you know, have a giant established, you know, consumer brand. And so there was a way to kind of get to market that didn't previously exist.

10. 7:15

    And then, you know, and then look, also consumers just evolved. And, you know, people, especially, you know, kind of Gen X and then millennials were just much more comfortable with technology than the boomers were. And they, you know, the sort of Gen X was entering, you know, and boomers and millennials were kind of entering their consumer prime at the time this happened. And then you started having these big successes.

11. 7:29

    And so you started lining up Uber, Airbnb and Lyft and SpaceX and Tesla. And, you know, you kind of you start stacking these up. And at some point you're like, all right, there's a pattern here, right? There's there's a thing that's happening. And that's what's happening. And we're 15 years into that. And what's happened now is basically that idea now has blown out basically across every industry, right?

12. 7:47

    And so the tech industry used to be a relatively narrow tools, picks and shovels business. Today, it's a much larger and broader and more complicated, basically, process of applying technology into basically every area of business. The result of that is that the companies are much bigger. Like when you're both the picks and the shovels to yourself of the whole company, you're much bigger. And that changes venture math.

13. 8:08

    Yeah, you eat the market, right? And so Tesla ends up being worth more. Like there have been points in time in the last five years when Tesla has alone been more valuable than the entirety of the entire auto industry put together, right? And SpaceX is, you know, like you go through this. And Uber is worth far more than the totality of every black cab operator and taxi cab company that ever existed.

14. 8:27

    that Airbnb is worth far more than the bed and breakfast industry ever was. And by the way, it turns out some of these markets just turn out to be much larger than people think, right? When we do a retrospective on our analysis over 15 years, like one of the things that's been hardest for us to do is to do market sizing. And sometimes we overestimate market size, but it's- More often, it's the other way.

15. 8:42

    More often, well, for the winners. Yeah, yeah, yeah. More often, it's the other way. I guess the net blend is that you underestimate it. Yeah, and this goes to venture economics, you'll talk about it. So the core thing on venture bets, right, is because venture doesn't run on leverage. Yeah. Right. Because nobody will bank. Yeah. Nobody will bank a startup or a venture firm for leverage because there's no assets when these things start. Yeah. It's asymmetric. You can only lose one X. Yeah. But you can potentially make a thousand X. Yeah. And so that means right then there's two errors in venture. There's the error of commission where you invest in the thing that fails and then the area of omission where you don't invest in the thing that succeeds. And of course, just in the math, overwhelmingly, the error that matters is the error of omission. And

16. 9:24

    And so if you run an analysis, and by the way, lots of people did this, you run an analysis that says ride sharing is only ever going to be as big as taxi cabs.