Marc Andreessen Visits Peter Thiel’s Stanford Class To Talk Startups, How He Invests & The Future

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It wasn’t so long ago that Peter Thiel began publicly pushing the somewhat controversial idea that higher education is in a bubble, or launching an initiative to help smart young people “stop out of school.”

That’s why for someone who’s advocated for alternatives to higher education, invested in them, and said “we have to reset what the bar is at the top,” it was slightly unexpected when Thiel decided to begin teaching at the top. Last month, he announced that he would teach a class at Stanford called “Computer Science 183: Startup.”

Thiel has a track record of prescience, both in entrepreneurial and investment decisions, choosing to co-found PayPal, sink early money into Facebook, LinkedIn, Zynga, and others. Those all worked out well. In turn, Thiel has become known for his controversial views, although many would argue that a re-examination of higher education is just about as close to Truth as we get in Silicon Valley. Obviously, some called Thiel’s return to higher education hypocritical, but as David Brooks of the New York Times pointed out, it’s likely more complicated — or really, more philosophical.

In one of his first lectures, Thiel makes the point that the competitive spirit that is embodied in American capitalism often has the unfortunate consequence of constraining the creativity it requires to get ahead. Both are essential to success for life after college, both in entrepreneurial fields and otherwise, but Thiel seems to imply in his lectures that creativity is paramount.

Rather than become someone who is slightly above average in a crowded and established field, Thiel says that it’s far more valuable to approach the problem creatively — to establish an entirely new market, and dominate it, rather be just another fish in a big pond.

This is the type of advice the investor is giving to his students at Stanford, something we know thanks to Blake Masters, a student of Thiel’s class, who is graduating from Stanford Law this month. Masters has been documenting these lectures in notes, transforming them into essays and posting them on his blog. Check them out here.

Through his blog, Masters gives all a comprehensive look into Thiel’s philosophy, his advice to entrepreneurs, and, in a sense, we all get to take the class with them for free. Thiel has brought friends and other notable investors and entrepreneurs into the classroom to share their advice and experience with his students. So far, those guests have included Max Levchin, Stephen Cohen, Paul Graham, Sequoia’s Roelof Botha, Reid Hoffman, and, most recently, Marc Andreessen.

Each class begins with Thiel lecturing on his topic of the day, before moving onto conversations with the guest. Both individually and collectively, the posts are fascinating reads, and its no surprise that Masters’ blog has been seeing some serious traffic.

The notes that he’s been posting online are not verbatim and instead are his interpretations of those lectures, although he says he’s tried to keep as close to their words as possible — and Thiel has confirmed their accuracy.

While they are all of interest to entrepreneurs, investors, and tech enthusiasts, the latest lecture and conversation with Marc Andreessen is particularly fascinating in that it offers an amazing snapshot into the Netscape co-founder’s thoughts on both being an entrepreneur and a VC. Thiel starts out talking about the future, and touches on the concept of (my words) how, while it may be to make some high-level predictions about how consumer behavior is changing or what the future may hold for technology, timing is crucial — especially for entrepreneurs.

As the two discuss, investors were eager to throw money into mobile technology 15 years before the space hit the tipping point. They give the example of Apple, and its release of Newton in 1993. Companies, Apple included were thinking about and investing in what they believed the future would hold, but it obviously took another 15 years before it got the timing right for the iPhone.

Below are some of the highlights, and you can find the whole post here.

Marc Andreessen on Mosaic and how he thought about the future in ’92, ’02:

Really, the causes of peoples’ anti-Internet bias back then were the same reasons people fear the Internet today; it’s unregulated, decentralized, and anonymous. It’s like the Wild West. But people don’t like the Wild West. It makes people feel uncomfortable. So to say in 1992 that Internet was going to be the thing was very contrarian.

It’s also kind of path dependent. The tech nerds who popularized and evangelized the web weren’t oracles or prophets who had access to the Truth. To be honest, if we had access to the big power structures and could have easily gone to Oracle, many of us would have fallen in. But we were tech nerds who didn’t have that kind of access. So we just made a web browser.”

Yes. The great irony is all the ideas of the ‘90s were basically correct. They were just too early. We all thought the future would happen very quickly. But instead things crashed and burned. The ideas are really just coming true now. Timing is everything. But it’s also the hardest thing to control. It’s hard; entrepreneurs are congenitally wired to be too early. And being too early is a bigger problem for entrepreneurs than not being correct. It’s very hard to sit and just wait for things to arrive. It almost never works. You burn through your capital. You end up with outdated architecture when the timing is right. You destroy your company culture.

Could Zuckerberg have created Facebook if he weren’t younger than 30?

Andreessen:

That’s the good news for students and young entrepreneurs today. They missed the late ‘90s tech scene, so they are—at least as to the crash—perfectly psychologically healthy. When I brought up Netscape in conversation one time, Mark Zuckerberg asked: “What did Netscape do again?” I was shocked. But he looked at me and said, “Dude, I was in junior high. I wasn’t paying attention.” So that’s good. Entrepreneurs in their mid-to-late 20s are good. But the people who went through the crash are far less lucky. Most are scarred.

On his philosophy that software is eating the world:

The strongest form is that, as a consequence of all this, Silicon Valley type software companies will end up eating everything. The kinds of companies we build in the Valley will rule pretty much every industry. These companies have software at their very core. They know how to develop software. They know the economics of software. They make engineering the priority. And that’s why they’ll win.

All this is reflected in the Andreessen Horowitz investment thesis. We don’t do cleantech or biotech. We do things that are based on software. If software is the heart of the company—if things would collapse if you ripped out your key development team—perfect. The companies that will end up dominating most industries are the ones with the same set of management practices and characteristics that you see at Facebook or Google. It will be a rolling process, of course, and the backlash will be intense. Dinosaurs are not in favor or being replaced by birds.

Can Spotify and Netflix be successful?

Look at what Spotify is doing, which is something very different than what Napster did. Spotify is writing huge checks to labels. The labels appreciate that. And Spotify put itself in position to write those checks from day one. It launched in Sweden first, for example, because it wasn’t a very big market for CDs. It’s a disruptive model but they found a way to soften the blow. When you start a conversation with “By the way, here’s some money,” things tend to go a little better.

It’s still a high-pressure move. They are running the gauntlet. The jury is still out on whether it’s going to work or not going forward. The guys on the content side are certainly pretty nervous about it. This stuff can go wrong in all kinds of ways. Spotify and Netflix surely know that. The danger in just paying off the content people is that the content people may just take all your money and then put you out of business. If you play things right, you win. Play them wrong, and the incumbents end up owning everything.

Spotify and Netflix are spectacular companies. But, because of the nature of their business, they have to run the gauntlet. In general, you should try the indirect path where possible. If you have to compete, try to do it indirectly and innovate and you may come out ahead.

What areas do you think are particularly promising in the very near term?

Probably retail. We’re seeing and will continue to get e-commerce 2.0, that is, e-commerce that’s not just for nerds. The 1.0 was search driven. You go to Amazon or eBay, search for a thing, and buy it. That works great if you’re shopping for particular stuff. The 2.0 model involves a deeper understanding of consumer behavior. These are companies like Warby Parker and Airbnb. It’s happening vertical by vertical. And it’s likely to keep happening throughout the retail world because retail is really bad to start with. There are very high fixed costs of having stores and inventory. Margins are very small to begin with. If you take away just 5 or 10%, things collapse.

Is your perspective different as a VC than as an entrepreneur?

The big, almost philosophical difference goes back to the timing issue. For entrepreneurs, timing is a huge risk. You have to innovate at the right time. You can’t be too early. This is really dangerous because you essentially make a one-time bet. It’s rare are to start the same company five years later if you try it once and were wrong on timing. Jonathan Abrams did Friendster but not Facebook.

Things are different with venture capital. To stay in business for 20 years or more, you have to take a portfolio approach. Ideas are no longer one-time bets. If we believe in an idea and back the company that fails at it, it’s probably still a good idea. If someone good wants to do the same thing four years later, that’s probably a good investment. Most VCs won’t do this. They’ll be too scarred from the initial failure. But tracking systematically failures is important.

But seriously—if you think you can execute on an idea that someone tried 5-10 years ago and failed, good VCs will be open to it. You just have to be able to show that now is the time.

Why do you pass on entrepreneurs?

The number one reason that we pass on entrepreneurs we’d otherwise like to back is focusing on product to the exclusion of everything else. We tend to cultivate and glorify this mentality in the Valley. We’re all enamored with lean startup mode. Engineering and product are key. There is a lot of genius to this, and it has helped create higher quality companies. But the dark side is that it seems to give entrepreneurs excuses not to do the hard stuff of sales and marketing. Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a “viral marketing strategy.”

We hear it all the time: “We’ll be like Salesforce.com—no sales team required, since the product will sell itself.” This is always puzzling. Salesforce.com has a huge, modern sales force. The tagline is “No software,” not “No sales.” AH is a sucker for people who have sales and marketing figured out.

On Apple’s power:

Just recently, Apple blocked any iOS applications from using Dropbox. The rationale was that allowing apps to interact with Dropbox encourages people not to buy stuff through the App Store. That doesn’t seem like a great argument. But it’s like fighting city hall. Even a big important company like Dropbox can get stopped dead in its tracks by Apple.

On creating boards:

Generally, you must try to build a board that can help you. Avoid putting crazy people on your board. It’s like getting married. Most people end up in bad marriages. Board people can be really bad. When things go wrong, the bias is to do something. But that something is often worse than the problem. Bad board members frequently don’t see that.

I’ve never seen a contentious board vote. I’ve seen every other thing go wrong. But never a contentious vote. Problems get dealt with. They either kill the company, or you figure it out in another way.

On what entrepreneurs should be doing more of:

There is probably too much in the air about optimal legal terms and process. Not enough attention is paid to the people. Startups are like sausage factories. People love eating sausage. But no one wants to watch the sausage get made. Even the seemingly glorious startups only seem that way. They’ve had crisis after crises too. Things go horribly wrong. You fight your way through it. What matters more: what processes you follow? Or who is with you in the bunker? Entrepreneurs don’t think about this enough. They don’t vet their VCs enough.

How should startups establish their founding teams?

What’s ideal is to have a founder/CEO who is a product person. Sales operators handle the sales force. The sales force does not build the product! In poorly run software companies, sales orders product around. The company quickly turns into a consulting company. But if a product person is running the company, he or she can just lay down the law. This is why investors are often leery to invest in companies where you have to hire a new CEO. That CEO is less likely to be the good product person. You can’t just bring in a Pepsi marketing executive to replace Steve Jobs.

On the importance of design:

Even designers are becoming great CEOs—just look at Airbnb. They’ve got the whole company thinking in terms of design. Design is becoming increasingly important. Apple’s success doesn’t come from their hardware. It comes from OSX and iOS. Design is layered on top of that. A lot of the talk about the beautiful hardware is just the press not getting it. The best designers are the software-intensive ones, who understand it at the deep level. It’s not just about surface aesthetics.

On the CEO:

At AH we think that being CEO is a learnable skill. This is controversial in the VC world. Most VCs seem to think that CEOs come prepackaged in full form, shrink wrapped from the CEO mill. They speak of “world class” CEOs, who usually have uniquely great hair. We shouldn’t be too glib about this; many very successful VCs have the “don’t’ screw around with CEO job” mentality, and maybe they’re right. Their success sort of speaks for itself.

But the critique is that that with the “world class” CEO model, you miss out on Microsoft, Google, and Facebook. The CEOs of those companies, of course, turned out to be excellent. But they were also the product people who built the companies. It’s fair to say that the most important companies are founded and run by people who haven’t been CEO before. They learn on the job. This is scary for VCs. It’s riskier. But the payoff can be much greater.

But the Valley is infected by the Dilbert view; everybody thinks management is a bunch of idiots, and that engineers must save the day by doing the right things on the side. That’s not right. Management is extremely important. We are looking for the best outcomes on the power law curve. You have to look at what’s worked well and try to reverse engineer it. Great management and a great product person running the company is characteristic of the very best companies.