My Interview With Bloomberg Markets

Bloomberg Markets was nice enough to publish an interview with me this week, mostly on finance and banking topics. Since the interview is correct but abridged, took place in early April, and is just coming out now, I offer a few additional thoughts.

Unbundling banks: I think banks are getting unbundled with or without Silicon Valley or Bitcoin due to market changes plus regulation.

Any big bank executive will tell you: Over time, the ratio between what non-banks can offer vs what banks can offer is steadily increasing. Post-crisis reforms like Dodd Frank are accelerating the unbundling, whether that’s what regulators intended or not.

But Dodd Frank is a double-edged sword: It also makes it harder for new entrants to the core banking system. Banks both protected and restricted.

Bitcoin and regulation: Since the interview in early April to the present, there’s been substantial movement by many regulators on Bitcoin. There are plenty of discussions and disputes between market participants and regulators but overall, I think a lot of progress is happening.

Finally, much like the Internet 20 years ago, Bitcoin as a technology can and will be adopted by both incumbents and new market entrants. We are seeing a rapidly escalating level of engagement and interest in Bitcoin and cryptocurrency by large financial services companies. The opportunity is clear and present for both big companies and startups to use new technology to improve financial services broadly.

Since the interview, the other huge earthquake to hit the financial services industry is the launch of Apple Pay. Between Apple Pay and Bitcoin, I predict more changes coming in financial services and banking in the next 3 years than in the last 20 years.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13

The Challenge of Threading The Needle

In response to Cash Burn Rates at Startups, one of the responses was a question asking, why isn’t this just hypocritical venture capitalists overfunding reckless founders of out-of-control startups? In fairness, there is probably some of that, though we and the investors we respect try hard not to indulge in recklessness and irresponsibility. But while it’s irresponsible to vaporize cash and your company, it can also be irresponsible to NOT invest to become #1 in a big new market. Particularly now, since there are SO many more people on the Internet and SO many more businesses that can consume cloud/SaaS vs 15 years ago.

Tension: Over invest, escalate burn, risk down round, vaporize when the market turns OR under invest, starve growth, don’t win the market and implode. Why is this so important? In tech-driven markets, the overwhelming economic returns tend to go to the company with the highest market share and the winning company with the highest market share can invest the most in research and development to build the best and most advanced products. This is the prize.

Via Glengarry Glen Ross: The reward for market position #1 is 90% of the economic value. #2, a set of steak knives. #3, you’re fired.

The challenge for CEOs and boards of tech startups is to thread the needle. Make just enough of an investment to take the #1 position, but not more. Meeting this challenge has resulted in thousands of venture-capital-backed companies creating millions of jobs over the last 50 years. This challenge becomes more difficult when money is flowing freely, since more competitors get funded. It’s very tricky and requires deep judgment. BUT opting out of the race generally guarantees you won’t be #1 or even #2. It’s not a good idea either and is just as serious a risk as blowing up.

There is no single answer. It’s up to VCs, CEOs, boards, and later-round investors to think very carefully about this for each specific circumstance.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13

Cash Burn Rates at Startups

Recently and have sounded a vivid alarm. I said at the time that I agree with much of what Bill says and I want to expand on the topic further. New founders in the last 10 years have ONLY been in an environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST. When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE.

High cash burn rates are dangerous in several ways beyond the obvious increased risk of running out of cash. It’s Important to understand why:

  1. High burn rate kills your ability to adapt as you learn and as the market changes. The company becomes unwieldy and too big to easily change course.
  2. Hiring people is easy; layoffs are devastating. Hiring for startups is effectively a one way street. You can’t change once you’re stuck.
  3. Your managers get trained and incented ONLY to hire, as the answer to every question. The company bloats and becomes badly run at same time.
  4. Lots of people, a big shiny office, and high expense base equals a fake we’ve made it! feeling. This removes the pressure to deliver real results.
  5. More people multiplies communication overhead exponentially which slows everything down. The company bogs down and becomes a bad place to work.
  6. Raising new money becomes harder and harder. You have a bigger bulldog to feed, need more and more cash at higher and higher valuations. Therefore you take on an escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. They VAPORIZE. Further, to get into this position, you probably had to raise too much cash at too high a valuation before; this escalates the down round risk even further.
  7. Even if you CAN raise an up round, you are increasingly likely to incur terrible structural terms like ratchets to chin the bar. That nice hedge fund investor willing to hit your valuation bar? Imagine him owning 80% of company after a down round. How nice will he be then?
  8. When the market turns, M&A mostly stops. Nobody will want to buy your cash-incinerating startup. There will be no Plan B. VAPORIZE.

Finally, there are exceptions but if you’re reading this, you’re almost certainly not one. They are few and far between. Worry.

Reference Material:

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18

Andreessen Horowitz Invests $50 Million In BuzzFeed

Tonight I’m tickled pink to be able to talk about our new investment in BuzzFeed! My partner discusses our new investment in BuzzFeed here.

We think of BuzzFeed as a technology company. They embrace Internet culture. Everything is first optimized for mobile and social. BuzzFeed has technology at its core. Its 100+ person tech team has created world-class systems. Engineers are first class citizens.

On top of its technology core, BuzzFeed’s reporting team is now routinely committing breathtaking investigative journalism.Here are a few examples.

We think the opportunity in front of , , , and their colleagues is effectively unbounded. We are very excited to work with everyone at BuzzFeed to help them realize their dreams of a profoundly important new media institution.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12

 

Why We Live In The Golden Age Of Journalism

Something I believe that a lot of people I know believe is that, we live in the golden age of journalism as measured by the quality of the top contributors. I’ve collected 238 members of the press I most respect into this Twitter list. It’s a joy to read every day! As I’ve discussed before, the great unexpected side effect of the Internet is that the best journalists have a far broader reach now. I can’t resist singling out some who fall into the category of drop everything I’m doing to read anything they write.

It’s sheer delight to watch the impact and their colleagues at are having: I love being voxsplained! My inner engineer and math nerd marvels at — their quantitative lens adds tremendously to complex real world topics. Finally, it’s really remarkable watching bring back full-on gonzo journalism, including in the world’s most dangerous places.

Over the next 5-10 years, I think we’ll be able to build more tools/systems for reporters like these to maximize their scope and opportunity. The quality of work plus the explosion of journalism entrepreneurship plus the rise of 5 billion smartphones in the world plus new tools/systems equals interesting times!

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16

Outstanding Piece On What Today’s Economic Gloomsayers Are Missing

Outstanding new op-ed by the best living economic historian, Joel Mokyr at Northwestern: What Today’s Economic Gloomsayers Are Missing.

There is nothing like a recession to throw economists into a despondent mood. Much as happened in the late 1930s. The economic growth experienced through the 20th century, they tell us, was fleeting. Our children will be no richer than we are.

 

What is wrong with this story? The one-word answer is technology. The digital codification of information = reinvention of invention. [Terms] like ‘IT’ don’t begin to express the scope of the change [array of] tools that the digital age places at science’s disposal.

 

The consequences are everywhere, from molecular genetics to nanoscience to research in Medieval poetry. As science solves problems that were not even imagined, inventors, engineers and entrepreneurs are waiting in the wings to design new gizmos and processes based on the new discoveries that will continue to improve our lives.

 

The economy may be facing some headwinds, but the technological tailwind is more like a tornado. Fasten your seat belts. So: If everything is so good, why is everything so bad? Why the gloominess of so many of my colleagues?

 

[GDP and productivity] work for a steel-and-wheat economy, not [ours], as they mismeasure the contributions of innovation to the economy. Many new things are expensive to design, but copy at low/zero cost: They contribute little to GDP even if the consumer welfare impact is large.

I highly recommend Mokyr’s books: The Lever of Riches: Technological Creativity and Economic Progress, The Gifts of Athena: Historical Origins of the Knowledge Economy, and The Enlightened Economy: An Economic History of Britain 1700-1850. I also highly recommend Mokyr’s recent podcast with from Nov 2013, an hour of genius.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13,14

The 40 Year Collapse Of Trust In Print News

Something I believe that nobody I know believes: Woodward and Bernstein Watergate coverage precipitated the 40yr collapse of trust in print news. That long slow slide of trust can be seen, among other places, in Gallup polls over the years. After Nixon resigned 40 years ago this weekend, Washington Post Watergate coverage became exemplar for the entire next generation of reporters. The political press became obsessed with unearthing scandal, which metastasized throughout print journalism, gunning for Pulitzer bait.

There are clearly scandals that need to be unearthed, like Watergate, but endless scandal frenzy is exhausting and demoralizing. Particularly when applied indiscriminately across the news landscape, and particularly when extrinsic press motivations are so clear. Irony is we now know Woodward and Bernstein less reported Watergate than had the story fed to them by Mark Felt, a partisan in an internal FBI battle.

I think the 40 year echo effects of Watergate have more to do with the existential crisis of newspapers than anyone would ever admit. As news consumers, the endless barrage of scandal, tragedy, and conflict has real psychological effects. They make the world seem worse than it is.

Followup reading that provokes thought: Avoid News, The Information Diet, You Can’t Not Believe Everything You Read. Also the book “Breaking The News” by is thought provoking and recommended. Last but not least, Steven Pinker on the broad perspective of our era.

Source Tweets: 1,2,3,4,5,6,7,8,9,10