Building a software company in healthcare is hard — and comes along with unique challenges no other entrepreneurs face. In this conversation, a16z bio general partner — and previous founder of genomics company Knome — Jorge Conde; and a16z bio partner and former founder Julie Yoo (of patient provider matching system, Kyruus) share their mistakes and hard earned lessons learned with a16z partner Hanne Winarsky.

Why is this so damn hard? How should founders think about this space differently? What are the specific things that healthcare founders can do — when, where, and why? You’ll wish you only knew this when you started your own company!

Show Notes

• How the healthcare market presents a unique challenge to software companies [0:28], and details around issues they encounter [10:19]
• Discussion around the best way to structure a software company in healthcare [15:53], including team-building [18:17] and product-building [23:23]
• Understanding how slowly the healthcare space adopts new technology [25:34], and advice for functioning in a market that is distorted [31:06]

Transcript

Hanne: Hi, and welcome to the “a16z Podcast.” I’m Hanne, and this episode is all about “Building A Software Company in Healthcare.” In this conversation, Jorge Conde — a16z general partner in bio and healthcare, previous founder of the genomics company, Knome — and Julie Yoo, partner on the deal team for the bio fund, and previous founder of the patient-provider matching Kyruus — explain what it is that makes building a company in the healthcare space so fundamentally different from other sectors, and why exactly it’s so damn hard.

Challenges of the healthcare space

So, let’s start with, basically, just the very fundamental difference between building a software company, full stop — and building a software company in the healthcare space. What are the most foundational, crucial differences?

Jorge: Well, historically, at least, software had two very important qualities in healthcare. The first one, the actual quality of software deployed in healthcare systems historically has not been great.

Julie: User interface-wise and experience-wise.

Hanne: Bad track record.

Jorge: Bad track record there. And the second one is that it was usually not highly valued. So, at least a lot of times it was considered either free or cheap.

Hanne: And why was that — that from the very beginning, there was not a lot of value attached to this?

Jorge: In the healthcare system, a lot of things still have a very human component to them. Automating things and, sort of, creating frictionless experiences or delightful experiences — the things that software is really good at doing — is just really hard to do in the healthcare system. The second one is, and I’m gonna generalize for a second — but I think a lot of times in the healthcare system, software is sold as a component of a broader service or of a broader offering. And so, therefore, it’s the piece that tends to get, sort of, devalued first, because it obviously has the lowest marginal cost. It’s kind of created this weird dynamic for software companies that are trying to build in healthcare.

Julie: There’s a higher degree of sensitivity in this particular market for things that get in the way of the patient-provider experience. One of the challenges/opportunities within healthcare is that it tends to be much more risk-averse when it comes to adoption of new technologies. One meaningful difference in introducing a software product to this market versus other markets is the level of scrutiny, and the bar that you need to hit from a, you know — not even usability perspective, but just utility, and actually having validation of — if you are going to introduce something new into the care delivery flow, it better work, because the stakes are so high, right? If you get it wrong, you could either send a patient in the wrong direction, or they might not get the care that they need, or it could actually harm the individuals involved.

Hanne: So, not just higher barrier to entry, but higher stakes immediately?

Julie: Correct.

Jorge: And you have a reticent buyer, generally speaking. They’re running on very thin margins. If we’re, like, selling into the healthcare system, the provider space, it needs to work. Because if it doesn’t, obviously, there can be patient harm. And so, you know, the probability that a newcomer, an upstart, can come in and sort of make that case in a convincing way is a very, very difficult challenge.

Hanne: So does that mean you have to have certain prerequisites that you may not need to have in other spaces? If you know you have these challenges and you know that you’re entering this space with a lot more barrier to entry and a lot higher stakes, like, are there certain things you need in place, you know — a certain kind of proof of concept that you might not have to have otherwise?

Jorge: Well, first of all, I think you’re touching on a very important thing, which is, in the space — and I’m going to specifically focus on, sort of, the healthcare system. So, let’s call it provider systems — payers, and the like. You have to really understand what the workflows are, what the problem space is, and how to actually address any of those things. And so, one of the biggest challenges, I think, that companies have when they wanna build software products here, is to really understand what problem they’re gonna solve. Because I think you have this weird sort of intersection between — it’s very non-intuitive, it’s still very human-driven and centric, there are regulatory barriers. You don’t wanna get in between, say, a provider and a patient. You know, most people aren’t born with the ability to say, like, “I know I can insert a piece of software into this part of the workflow, and I will solve an acute pain point for the system.” That’s not obvious.

Julie: Yeah. And some of that is actually lack of standardization. You would think that medicine is an industry that has a tremendous amount of standardization and protocols around how people make decisions and do things, but it actually turns out that healthcare is an industry that actually is characterized by a tremendous amount of variation.

Hanne: And variation in what kinds of ways?

Julie: It could be variation in terms of actually, literally, the decision that if you have 10 doctors who are all presented with the same patient, you might see 10 different decisions about how to treat that patient. Some physicians might be more aggressive about using invasive surgical techniques, versus others who are more holistic. Even just how I was brought up, religiously or culturally, might impact the way I think about that problem. From a product perspective, you could have multiple drugs that all treat the same condition that all have different implications and whatnot. So, even there, even though you have a patient population that is characterized by the same diagnosis, you could have dozens of different ways that those patients play out. And so it makes it very hard for a technology company to come in and, sort of, generalize, and say, “There is one single method for manufacturing this thing or for making this decision and managing this patient population.” Ultimately, that reflects as differences in the financial profile of different patients. 

Jorge: Healthcare, it’s like politics. It’s very local. Thinking that you’re gonna have an out-of-the-box, one-and-done solution — even in systems that look similar from either a size standpoint, or a reach standpoint, or even a geographic standpoint — these are all kind of “n of 1s”.

Hanne: So, what does that mean? So, we have, kind of, knowledge of workflow, the knowledge of variety and spectrum, and that you are ultimately working in, weirdly, an “n equals one” scenario. I wanna bring it back to like actual practicalities of this sort of company building. In your experiences, you both founded companies — what do you wish you had known or done differently from the very beginning, given the complexity of that space, and the unique challenges that building a company in healthcare presents?

Julie: With Kyruus, one of the products that we had was a product that was used by call center agents in hospitals. And our thesis when we first launched the product was, “Oh, well, we’re just gonna go after every hospital that has a call center, and they probably all operate similarly. And what constitutes the job of a call center agent is probably relatively homogenous. And so we can make all sorts of assumptions about how it’s built, how it’s deployed, and how it’s managed over time.

Hanne: The thing that strikes me already is that feels like a reasonable assessment of the lay of the land.

Julie: Yeah. And especially, I think it’s very easy to get fooled in healthcare by looking at other industries and seeing how it works in the rest of the world, because certainly…

Hanne: And then you pull up the…

Julie: Yeah. And then you pull up the wool and it’s like, “Oh, it’s completely opposite.”

Hanne: Yeah, it’s something else completely.

Julie: Call centers, I mean, that’s definitely an industry that if you look at retail, or even all the airline companies and how they operate their customer service operations — tend to be pretty standardized, and pretty sophisticated, in a lot of cases.

Hanne: When did you start to realize this wasn’t maybe, like, your average call center?

Julie: Like, on day one. First of all, there’s heterogeneity in the actual scope of services of pretty much every call center that we encountered. Some call centers might be fully centralized, and they’re, like, a central 800 number that receives every call that comes into the hospital — versus others that are decentralized, that only serve the primary care line, versus the cardiology line, versus the dermatology line. And because of that, they will have just fundamentally different starting points of where they have to be in the workflow for the thing to work.

The other aspect is the scope of functions that the call center plays. It could be everything from just a general marketing service, where a customer might call in and say, “Do you provide these kinds of services? Can you give me directions to the clinic?” All the way to, “I need a prescription refill. I’ve been diagnosed with this thing, I need to figure out what kind of surgery I need.”

Hanne: So, again, a much bigger range of possibilities, basically?

Julie: Correct, yeah, when you boil that down to, like — I’m a call center agent, and how do you define my job so that when I give you another piece of software to use to do that job, it’s gonna be seamless? And when you have that kind of heterogeneity around even the sheer definition of what the job is, it makes it very hard to design a scalable solution that can, kind of, fit into all those different environments.

So, day one, we actually were fortunate to get a customer that did have a pretty robust centralized call center group that was hundreds of people, who literally were answering every call that was coming into the health system. And so, the immediate sort of leap that we made was, “Oh, they must all look like this. Even if 80% of it was the same, and there was a 20%, sort of, buffer that needed to be modified, we can deal with that.” Yes, they all had central call centers, but the fundamental scope of jobs that they were doing were completely different across the board. And some were more clinical in nature, some were more marketing in nature, some were more financial in nature, etc.

Hanne: So, what were the knock-on effects of that?

Julie: Yeah, it probably had an impact on, like, go to market, product design, and product strategy. Most importantly, the service model of — you could either say, “We’re gonna design our software to be so flexible that it could work in any environment.” Or you could say, “We’re gonna provide services to come train your people to behave in a more standardized way, relative to the rest of our book of business.” And so we ultimately ended up taking a hybrid approach to both. But the latter, you know — that services approach — is something that we hadn’t thought about, that allowed us to sort of abstract out the variation to some degree, but also provide value back to the customers in a pretty unique way. Because then we had the best practices for how it should work.

Hanne: So, ultimately, it was a good thing — but it was a major fork in the road, basically?

Julie: Absolutely. Because there’s so much variability, because there’s so much localization, the notion of the pure SaaS model — where you’re just throwing technology over the fence and assuming that it will fit into whatever environment you’re deploying it into — that is a moot point in healthcare. You actually do need to think about the services component of things. There was a whole generation of companies that got started, like, a decade ago that took these sort of tech-only approaches and failed to get scale, or had to fundamentally pivot their models to actually take into account more of the human element of the service delivery model.

I mean, even — there’s a term for it now, right? Tech-enabled services is a way of doing things now in digital health that, I think, is well recognized that it’s necessary to wrap the technology with a human component to essentially address and be able to accommodate all the variation that you see across different customer bases. And it changes your cost structure fundamentally. The nature of how we talked about the business and how it scales, and even our fundraising strategy, fundamentally changed because of that. And so we did have to raise more, and give ourselves more runway, and think about different ways to manage our margin.

Hanne: It sounds like everything that could have been changed was changed by that.

Julie: Yeah.

Specific issues encountered

Hanne: Let’s go back to a specific example where you really put your foot on it.

Jorge: Well, so — our experience at Knome was interesting, because here this is a company — the sole purpose of the company was to provide software capability to analyze genomic information. And so when you launch that, your assumption is, “Well, this could be used to power all kinds of applications.” It could be used for research, either in academia and industry, it can be used for clinical diagnostics.

Hanne: It’s flexible.

Jorge: We thought it was very flexible. And so challenge one is, you know — a solution looking for a problem is always a very, very dangerous thing. I think that’s universally true, and it’s especially true in the healthcare space. And challenge two was understanding exactly where, in the case of the clinical setting, where this technology would be used in the workflow. So, here, we wanted to go after the clinical labs.

Hanne: That was your initial hypothesis?

Jorge: Our initial hypothesis for an application in a clinical setting — you have technicians and docs that are inside of the laboratory setting receiving samples, running a test, analyzing the results of that test, generating a report that gets signed off by a lab director that goes back to a physician. Usually it’s in the form of a diagnosis, right? And it gets signed off and it goes to the physician. The physician now takes that report, and basically, decides what to do based on that information.

So, our assumption was, “Well, if you have the ability to sequence DNA now, in a way that you couldn’t before. Before, you’d have to do all of these specific tests, you have to know what to test, and then you’d test it, and then you’d get a report. You had to know what streetlamp the keys were under, right? Like, there in that case. Whereas once you had the full genome, you would just sequence everything and just run a bunch of software queries. So, our thought going into this was, “Well, that’s an incredibly powerful tool for clinical labs. Because first of all, you can sequence just once and analyze over time. So, you can again and…

Hanne: Right. Again, it seems like a totally legitimate assumption to make.

Jorge: Right? And it turns out that there was a lot of challenges with that assumption. The first one is, every lab is different. A lot of them didn’t have the budget, or the willingness, to basically pay the upfront piece to buy the capability to use this technology — or they didn’t have the ability to sequence everything upfront, even if all of the subsequent queries would be technically free later.

Hanne: Why not?

Jorge: It’s the way they’re reimbursed.

Hanne: Oh, how fascinating. Too expensive, basically.

Jorge: It’s too expensive. So, even though theoretically there’s an ROI — a return on the investment of sequencing upfront — just the way the industry is structured, the way reimbursement flows, the way payments flow, it just didn’t make sense for a lot of labs to do this.

Hanne: So, how was that not just a complete roadblock at that point?

Jorge: It was a big roadblock. So what that required us to do was to then focus on clinical labs that had the ability to make certain investments in upfront cost. And those tended to be very sophisticated labs that do a lot of research work, in addition to patient care. And they tended to be on the bleeding edge, and they wanted to incorporate new technology, and they were great partners and all of that. But then it goes back to your “n of one” problem. 

So, you sell something into that lab, and you go next door, and next door has a totally different set of capabilities — a totally different set of constraints, a totally different set of expectations. And so, therefore, all of a sudden, the solution you created for lab A is not relevant, or unattainable, for lab B. Now, to just add to stepping in it — you know, when you’re analyzing genomic data, there’s a massive amount of computation required. And so we went in there assuming, “Well, this is easy. We’re just gonna shoot all of this up to the cloud, we’ll run the analysis, we’ll send the data back to the lab, the lab could verify it, generate a report, and off we go.” It turns out labs weren’t comfortable sending data up into the cloud, full stop.

Hanne: At that time, it was just completely…

Jorge: At that time. Arguably, even today. Arguably, even today in 2019. But definitely, at that time, we probably should have known that earlier, that would have changed how we thought about going into the clinical lab space.

Hanne: How would you have done your homework? I mean, what would that have actually looked like?

Jorge: It was frankly, I think, just defining the specs of what would be required to bring in our technology. Because I think people intuitively know that genomic data is massive, but I don’t think they know the level of computation required to run the interpretation.

Hanne: Right, so like really running the numbers.

Jorge: Running the numbers for them. And by the way, we tried everything. I mean, we brought representatives from AWS that could show them that they had a HIPAA-compliant cloud, that they had received all the certifications, and it came back to risk aversion. So, someone —the lab director — saying like, “Look, I’m sure all of that’s true, but I’m not gonna risk sending all of this data up into the cloud.” So, that was a big, big challenge for us, and it ended up being a major limitation for our ability to expand into the clinical setting, because of all of those barriers.

Hanne: So, what did you do?

Jorge: We had to do a plan A and a plan B. And so the plan A was, we assumed that there would be a couple of forward-looking labs, or forward-thinking labs that would be willing to work in a cloud environment. Much easier to deploy there. The plan B was, we had to create a box. We had to create a box, and the box had to have, essentially, the computational capability.

Hanne: A Knome appliance?

Jorge: Yeah, we had a Knome appliance.

Hanne: Yeah, I remember that. Oh, my gosh.

Jorge: Because they didn’t want the data to go outside. And it’s for the reasons that we’d expect. You know, there’s regulatory, there’s risk associated with that today in 2019. In fact, the companies that have managed to use this technology have taken the sort of full-stack service approach. So, that sort of high-low strategy became the approach, is — get folks to deploy into the cloud, when they were willing to. And in the case where folks needed an appliance, we basically had to go to labs that had enough sample volume that an appliance made sense for them, and make, basically, the case there from an investment standpoint.

Hanne: So, again, multiple-choice, variety, and addressing in different ways.

Structuring software companies

Jorge: A pure software company in healthcare is a really hard thing to do. Because on the one side, you have this challenge that — it’s hard to create a solution that’s gonna fit everyone. And, therefore, you need to have some level of services around that software. That’s on one extreme, so you need to have humans in the process, or in the loop. And then the other extreme of it — if it is pure software, then it’s considered that it should be free, so it’s very hard to abstract value.

Hanne: That’s so interesting. Do you think that’s shifting at all, with the, kind of, understanding of the importance of data and some other things?

Jorge: Yeah, look, I would argue it’s shifting on a couple of axes. The first one is — is data is becoming more and more valuable. Historically, data was viewed as being either too small in terms of its impact, too narrow, too dirty, etc, etc.

Hanne: Too difficult.

Jorge: Yeah, too unstructured. So, that historically has been the case. So, if you have ways to ingest data and clean it and make it meaningful, then I think that is valued. Probably the most public one is what Flatiron was able to do, and ultimately getting acquired by Roche for $2 billion. That’s viewed as using an electronic medical record to capture patient experiences, take that information and give researchers the ability to drive valuable insights from that. That’s a relatively new thing. So, I think there is the ability to create value there. So, I think that’s one axis. 

I think there’s a general shift in the model that having a tech-enabled service can be a valuable thing, and if done well, can be a scalable business. In other words, if you know what you’re trying to build, and if the software layer reduces sufficient friction in the system and allows you to add people — not linearly, as you scale, right, but in a leverageable way — then all of a sudden, you could have tech enabled services that can grow and become large businesses.

Hanne: So, leaning into what it is that makes it difficult almost, and then scaling that, leveraging that.

Jorge: Exactly, finding ways to make that scalable. That’s not easy to do, but I think it is now doable in a way that probably wasn’t a decade ago.

Julie: And I think we see that same trend actually happening in the consumer world, where you used to have a bunch of services, like, the marketplaces that were purely tech, and were just matching supply and demand and then getting out of the way. Whereas now, you see a lot more services, like, in the real estate market, where they’re actually managing properties — or actually gonna clean the place and make sure it has good furniture, and all that kind of stuff. I think the same premise holds true in healthcare, where you realize that in order to truly make an impact, you kind of have to own certain parts of the full stack. And that’s what you see playing out in the rest of the world as well.

Hanne: Okay, so we’ve talked about kind of knowing the workflow and the complexity of the system, running the numbers and speccing it out as concretely as possible. How about in terms of team building? Are there ways that you, knowing what you knew down the road, that you would have changed how you thought about building the team from the very beginning?

Julie: My prior experience was not in healthcare, and so a lot of my views on how to do these kinds of things were informed by a company that was just a pure enterprise software company. And one of the mantras was — you wanna, in the early stage of the company hire for all-around athletes, and just people who are utility players. Who can, like, roll with the punches and figure it out. It doesn’t matter what kind of experience they had, as long as they’re scrappy, intellectually motivated people, they’re gonna figure it out. So, [we] certainly took that approach when we started Kyruus and hired folks — not necessarily from healthcare, who maybe had some engineering experience or sales experience from elsewhere in the world and said, “We’re just gonna go in there and figure it out.”

Hanne: But you surely had some deep experts in the space as well, no?

Julie: So, my co-founder is a physician by training, so we had, sort of, the deep clinical knowledge. But I would say, actually, we didn’t have that many people who knew the specific market that we were going after. And that’s another characteristic of healthcare startups is — healthcare is so massive, that when you talk about market segment, you have to be very specific about what you’re talking about. So, like when people come and say, like, “Oh, I have a company that sells to providers.” I’m like, “That’s great. That’s like, you know, 20 billion .”

Hanne: What does that actually mean?

Julie: Yeah, like, “There’s 20 billion ways that you could just describe providers. Like are you selling to hospitals, are you selling to health systems, are you selling to individual practices? And each of those can be multibillion-dollar markets in and of themselves.

Hanne: I used to work in publishing, and it reminds me of people who would pitch their books to us and be like, “It’s for the general reader.” <laughter> There is no general reader. There’s, like, somebody who likes to read Amy Tan, and there’s somebody who likes to read, like, Dan Brown, or whatever. Like, these are different people.

Julie: That’s a good analogy. Yeah, there you go. So, yeah, so basically, we had folks in our company who had “healthcare experience,” but maybe it was from the pharma industry, or from payer, <Not super relevant, yeah.> or even like a different segment of the provider market, but not the specific market that we were going after, which was, like, a very esoteric — we were going after the biggest health systems, like, the top-down approach in the enterprise space. And there’s very specific characteristics of those organizations that are very different than even smaller hospital networks.

The areas of the team building exercise that I wish we had been more thoughtful about were, in terms of customer-facing roles, where it was the team responsible for managing the customer relationship longer term — you know, just how important it is for those people to have some kind of understanding and empathy, and ideally, experience, with the kind of people that we were servicing. There is total merit to saying, “Actually, we need some insiders who might not have any technical skills whatsoever, but can help us understand the culture, and the politics, and what it means to even, like, talk to a physician.” We had a bunch of folks who had never been in healthcare, who walked into meetings and called doctors by their first names. And that was a complete taboo in certain cultures, where you have to call them Dr. Jones or Dr. Smith.

Hanne: Like, “Stranger in a Strange Land.” Here’s the language here.

Julie: Yeah. So, I think from a team building experience, one of the biggest lessons that we certainly learned was A, valuing healthcare domain expertise earlier in the evolution of a company relative to other sectors. And then, also thinking about where that makes sense — like, what functions that makes sense, because it’s not [a] 100% universal statement across the board. I would say, our engineering team — it was actually better that they came from outside of healthcare because…

Hanne: Oh, so in specific areas where you need knowledge and where you don’t. That’s interesting. Why was it a bad thing for engineers to have that?

Julie: Not a bad thing, per se, but you wanted people who could, like, really think out of the box, and not be, sort of, married to the way it’s done today, because actually, that’s exactly the point of building companies in this space is to not do it the way it’s been done. And so most of the technology systems that are in place are written on super legacy technologies, and don’t have things like APIs, and whatnot. You need to be super creative about how to get into these systems and get data out, because they were fundamentally not designed to have liquidity around the data that’s stored in them.

And so, it was helpful to have people from the financial services industry, for instance, who had figured those things out, with similar banking systems and whatnot, and could kind of bring some of that creativity to the healthcare space. So, engineering is definitely a space where I felt there was a positive to not having that healthcare domain knowledge. But certainly on the commercial side of the business, I think it’s critically important.

Jorge: Making sure that the engineering team is as modern as possible is the most valuable thing you can do for your company. Because I think what’s generally true, and probably definitely true across the board, is in healthcare, the data sets are so complex, right? They’re complex in terms of their variety, they’re complex in terms of their volume, they’re unstructured, there’s regulatory requirements. There are so many things that are challenging from a data-handling standpoint, so building the pipes in the most modern way possible — absolutely critical. Whoever is customer-facing, I think, has to be from that game, has to understand the space, has to understand who the customer is, has to understand the cultural norms and all of those things. Those things are both true.

Hanne: So you need both from the get go, immediately.

Jorge: You need both from the get go. Industry-specific on the customer-facing side and domain expert from the engineering side, right? And then let’s talk a little bit about the middle — the product, right? That’s where the sausage gets made.

Julie: Totally. I’m gonna be biased, because I was the Chief Product Officer of my company, and that’s where I would say it was split — where I do think it’s important for the leader of that organization to have a pretty deep understanding of the market. And so, I happen to have had healthcare experience — not specifically in this particular segment, per se, but I understood some of those cultural nuances and just dynamics of how the market worked to be able to set strategy.

Below me, however, some of my best product managers were not healthcare people at all. And, in fact, we had three products — one that was the call center product that I mentioned earlier, where the end users themselves were not healthcare people, right? And so these guys, you know, some of them were, like, high school graduates who go home and they use their iPhone, and they’re used to all these modern technologies in the rest of their lives — and then they come to work, and they’re faced with these totally esoteric, crappy hard-to-use systems. And so I wanted someone who actually had, kind of, a consumer mindset.

Hanne: Did you find yourself doing a lot of sort of explaining and educating, though, to bridge that gap?

Julie: Yeah, my philosophy was just throw them in the deep end. As part of the onboarding experience at Kyruus, you had to visit a hospital call center, and they actually let you listen in on calls. There was, like, a religious transformation for these team members who went. Some came back and said, “I cannot believe that this is how these organizations operate.” Because everyone thinks of healthcare as this very pristine, like — “I’m going to trust you with my life.” And they’ll come back and be horrified, because they see that things are being run on paper and just how much burden they put on the customer. 

Because part of what you hear when you’re listening in on these calls is, like, asking the patient, “What do you wanna do?” And the patient’s like, “Well, would I have understanding — I’m calling you guys, the hospital. You’re supposed to tell me what to do.” So that was one reaction. The other reaction was completely emotional, because a lot of these patients who were calling in had just been diagnosed with cancer, and they have no idea what they’re doing, and they’re calling because they need help. And then the call center agent sometimes felt helpless, because they didn’t have the tools or the workflows or the information.

Hanne: Oh, it reminds me of, like, a 911 operator with no training. Somebody’s thrown into the middle of, like, I’m having a massive life crisis.

Julie: Exactly. Yeah, it was inspiring and motivational, and so that became part of our training process — was to just go out there and see it versus me explaining it.

Getting the timing right

Hanne: That’s really interesting. Okay, so what about timing? Do you think it’s different in the healthcare space, how you think about — what’s the right moment for your product?

Jorge: One of the big challenges in healthcare is this idea that you can be too early. You can be too early for a couple of reasons. One is, you need a lot of changes to workflows for the entire system to become much more modern.

Hanne: But you think this is different from being too early with, like, pets.com?

Jorge: That’s a good question. So, look, the way I would think about it — I described what was, for us at the company, a very obvious evolution of where genetic testing would go. You would sequence everything first, and you would test multiple times in silico.

Hanne: You could see the light at the end of the tunnel.

Jorge: I mean, that’s a clear future. And so the question is, when is the system ready for your particular solution to a problem that everyone agrees exists, right? Everyone agrees that we have to do a better job at being able to diagnose folks with genetic disease. And I think everyone would agree that using genomics, the ability to do this at large scale, to query multiple times, to use software to make intelligent queries — would be a very powerful tool, a very powerful solution for that. But the reality was — continues to be — that just the structures of the industry are such, even though that’s where I think we will end up, it’s just not ready for it now. And I think this is true for any entrepreneur, right? Timing is a big part of anything you do. I think timelines are especially warped in healthcare, because it just takes a long time to adopt new technologies.

Julie: There actually is a peer-reviewed study of the average number of years it takes for new technologies that are introduced into the medical setting to become mass-market adopted, and it was…

Hanne: Fascinating. Wait, wait, let’s guess — two years?

Julie: Seventeen years.

Hanne: No!

Julie: Yeah.

Jorge: Well, I mean, we still have fax machines.

Julie: Yeah, we still have fax machines, we still use the same…

Hanne: That’s true. But we’re not talking about when technology leaves. But you’re right. It’s the same thing really. Yeah, when it gets <crosstalk>.

Julie: So you can think about it as all the things that have tried to replace the fax machine are not yet mass-market adopted. And it’s the same — you could see it in — I think the study actually focused primarily on, like, stethoscopes and thermometers, and things that literally have not been redesigned for hundreds of years, because it’s been so hard to disrupt them.

Hanne: Yeah, over the last 17 years, there’s been a bajillion better versions of the stethoscope that we’re just not seeing. The wheel could have been reinvented, but better.

Julie: Absolutely. Those are the tangible examples, but the same applies to software and technology, and that’s a lot of the reason why you see the market-leading companies that own the EHR space today are literally 45 years old. And by the way, those companies also didn’t hit their stride until, like, 20 years into their journeys, right?

Hanne: So, time functions completely differently, basically, in this system. It’s almost like…

Jorge: It’s like a wormhole.

Hanne: And second of all, it’s [an] incredible testament to the strength of these systems that…

Julie: Totally. It’s like, once you do make it, it’s totally sticky. The LTV, essentially, of tech companies that actually make it and get to a certain level of scale is through the roof. There’s no incentive to rip them out because if they work, they work. The switching costs, because of all the human and cultural elements that we described, is huge.

Hanne: Yeah, so the longevity of your company, if you’re looking at success, is also incredibly promising.

Julie: Yeah. I mean, certainly at Kyruus, the way we mitigated it was we thought about what our fundraising strategy would be to give ourselves enough runway to have that model play out. We needed to fund the sales cycles and the adoption cycles to create a new category of solution that didn’t exist.

Hanne: Just to hang out in the wormhole for a while.

Jorge: It’s a big oxygen tank.

Julie: Yes, nothing meaningful happens in healthcare in under three years. And so you kind of have to give it some runway.

Jorge: That’s one of the things that we’ve spent time talking about is, what does a minimum viable product in healthcare look like?

Julie: Yeah, it doesn’t exist.

Jorge: Big gang, you’ve got to go in, and you’ve gotta create a category and you gotta get that adopted.

Julie: I think in other industries, you can sort of “get away” with having a product that does one thing really, really well, and then start there — and, yes, expand over time. But at least you can get buy-in to prove your value with that initial use case. I think going back to one of the points you made earlier, in healthcare, when you’re in the flow of impacting a patient encounter, and saying, like, you’re gonna rip something out or change the way that you’re doing something or what have you, you have to make sure that it’s gonna give you the right answer, so to speak. And so even if it’s just one feature, it might mean — okay, yes, it could be one feature, but you have to be integrated into seven different systems to make sure that the data flowing into that one feature is enough to inform the right outcome or decision…

Hanne: So really fully baked.

Julie: If the transaction falls through the cracks while you’re doing some kind of revenue cycle type encounter, you might not get paid for a procedure that could have a severe impact on your bottom line. You need more funding, you need to think differently about your strategy for product and what that footprint looks like.

Jorge: You have to have the full solution. And the related point I would make to that is, it’s really hard to have a point solution, even if that point solution is very, very good. I think people in general in the healthcare system are looking to buy a complete solution. So, if you take the problem from A to B to C to D, that’s great. But somebody — they need A to Z. And if they can’t get A to Z from you, it’s very hard to get them to buy A to C from you. I’ll go even further than Julie — I will say not only does MVP not exist in healthcare, I would argue that product market fit doesn’t exist in healthcare.

Hanne: What do you mean by that?

Jorge: You know, the definition of product market fit is, when the right product meets a good market, right? All of the things we talked about create such distortions in the marketplace that by the time you actually get through all the hoops, you have such a, sort of, skewed product. It’s not really product market fit, it’s almost, like, accepted product capture. Here, you have regulatory issues, you have pricing concerns, you have incumbents. You have so many aspects that sort of distort the market, that I would argue that you don’t have a normally functioning market for software in healthcare.

Working in a distorted market

Hanne: How would you both embrace that distortion early on, and not get completely sort of knocked off your path by it? Because it strikes me that a lot of what you’re describing is, kind of, like — know thyself. Like, know yourself very deeply. And, like…

Julie: That was the tagline at Knome, by the way.

Jorge: That was Knome’s tagline. Know thyself.

Hanne: Oh, was it really? That’s really funny. I did not work that in for you. But also, like, know where you’re going, and do that, kind of, deep — I wanna say, like, soul searching on a company level and build out accordingly. So, how do you get that big center of gravity of really knowing yourself, knowing where you’re going, but be able to be flexible with that distortion along the way?

Jorge: The only North Star you can have — and this is gonna sound cliche — but really understanding your value proposition truly, from the customer standpoint, becomes a critical sort of guide for what you do. And this is a debate that healthcare companies have all the time, which is, should your value proposition be, “I’m gonna save the system money?” Because the healthcare system is very inefficient, and it runs on very low margins, generally. Should it be that “I am gonna result in better outcomes for patients?” Is it gonna be, “I’m gonna create some sort of lift in terms of return on investment?”

There’s a bunch of different ways you can think about value proposition. If you don’t have that crystal clear from the outset, the amount of obstacles that you are going to hit along the way are gonna make it such that it’s gonna be very difficult to get to the other side. If you don’t really understand the workflow, and the culture, and the regulation, and the governance, and the politics, and all of the other things, you can have a theory on what the value proposition is, but you need your customer to confirm that early on. And sadly, the best way to confirm that is to have them buy something, obviously.

Julie and I have had this debate before, which is — a lot of the software platforms that go into healthcare have been sort of predicated on, “We’re gonna cut costs.” And I don’t know of any, sort of, solution out there that has meaningfully been able to make a very, very strong case that they can cut costs. And by the way, part of it is, I think — is because it’s really hard to measure costs.

Julie: It’s almost, like, a necessary evil where you have to say — in some way, shape or form — you are gonna reduce costs, but that can’t be your primary value proposition. Because at the end of the day, it’s a line in the cost structure that can get wiped out over time and potentially get commoditized.

Hanne: So, is the takeaway — know your value proposition as early as possible and test it?

Julie: That, and then have the conversation of like, “Okay, if we were able to accomplish what we just described, is it worth it? Is the juice worth the squeeze? Because it’s so expensive to distribute product in this market, because of the sales cycles and the nature of the enterprise sales motion, and whatnot, that if you’re not able to envision a path towards being, like, at least a $500,000 kind of a year type solution in this space, it’s actually not financially worth it to build a business in that area.

Hanne: Right, which goes back to your point of, like — run the numbers, basically.

Julie: At least, like, back of the envelope, whiteboard kind of thing.

Hanne: Yeah. I mean, is there anything that you can figure out as you go? It sounds like you need to know so much before you begin, and be so self-aware, and so, kind of — have the end game in sight. Like, are there things that you can leave, sort of, more organic, and feel out as you go?

Julie: Yeah, no, I mean, absolutely. There are tons of things you can be doing on a daily basis with end users. And just feedback mechanisms on, like, how people — are they actually able to do their jobs, for instance, and making minor tweaks to the workflows and whatnot. So, that was always a component of a more organic and dynamic aspect of how we did things.

The other thing that you need to, kind of, think about doing in parallel, is — so much of success of technology in healthcare is predicated on integrating into other ecosystem players. And so this is actually — probably one industry where you definitely can’t just build in a vacuum. You actually should understand, even if it’s not for another few years that you’re really gonna have to do this, like — who are the players we just need to get to know. So that we’re on their radar when time comes for us to take the hammer, and try to break down the wall of integration with that vendor — that we are on their good side and that they know who we are so we can kind of make that happen faster. So things like that, I think you can be doing in parallel to the kind of formulation of what the footprint of the product is. 

Jorge: If you’ve got the right solution, you can get very creative in how you get paid. So figuring out different pricing structures or value capture mechanisms, I think, is something that you can do pretty organically. Because, if you are making a difference in the system, the system has so much cost built into it, and so much revenue flowing through it, that there are ways to be very imaginative there. So, that’s the first thing I would say. The second thing I would say is, thinking about adjacencies — going from one — your core function, to the next adjacent use case. Not all adjacencies are created equal. One might be easier than the other. It’s almost like jumping on stones across a pond or something, right? What’s the next one I can jump on that’s least likely to make me fall into the water, even if it doesn’t get me as far as another one?

Hanne: Yeah. Right, always have that “closer spot” insight.

Jorge: Yeah. Because you’re creating the next thing and the next thing and the next thing, and you build up from there. And eventually, you cover so much surface area that you become a very sticky solution and you, hopefully, become a complete solution, sort of, closer to the A to Z type vision.

Hanne: Okay, last question. The biggest takeaways? Quick lightning round for your founder struggling right now, what would you say? Bullet points.

Julie: Know your market segment. Be very specific about what segment you’re going after, because that has major implications for your go-to-market and your product.

Hanne: Good one. Jorge, biggest “you wish somebody had said to you?”

Jorge: One is build the multidisciplinary team early. Two is understanding if the person that suffers from the pain point can actually pay for your solution, because there’s a lot of misaligned incentives in the healthcare system. And three, with the right technology, you can have massive impact on patient lives and the experience that we have with the healthcare system — which we will all touch in our lifetime. And if there’s anything you can do to make it better as an entrepreneur, I would say that is extraordinarily satisfying.

Hanne: That’s fantastic. Those are some good bullets. Thank you both so much for joining us on the “a16z Podcast.”

Julie: Thank you.

Jorge: Thank you.

• 

  Jorge Conde is a general partner at Andreessen Horowitz where he invests in companies at the cross-section of biology, computer science, engineering. Before a16z bio, he was CSO at Syros, cofounded Knome, & more.

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• 

  Julie Yoo is a general partner at a16z where she invests in healthcare technology. Prior to joining the firm, she was the cofounder and Chief Product Officer at Kyruus and VP Product at Generation Health.

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• 

  Hanne Winarsky

Join a16z Deal and Research operating partner Frank Chen for a conversation with longtime Apple software engineer Ken Kocienda for an insider’s account of how Apple designed software in the golden age of Steve Jobs, spanning products like the first release of Safari on MacOS to the first few releases of the iPhone and iOS (very first codename: “Purple”).

In this podcast, which originally appeared as a video on our YouTube channel, Ken vividly shares about the creative process, how teams were organized, what it was like demo’ing for Steve Jobs, and many other fun stories. Along the way, we repeatedly probe the question: is Apple’s obsession with secrecy during the product development process a feature or a bug?

Show Notes

• Background prior to joining Apple [0:00] and early work designing the Safari browser [6:26]
• The influence of Steve Jobs on the creative process [15:03]
• Short stint in management and transfer to the iPhone design team [20:54]
• How the iPhone team was structured [29:13] and technical issues building a touch keyboard [37:00]
• Apple’s culture of secrecy and the difficulty of getting outside help [43:19]
• What it was like to demo for Steve Jobs [54:06], and further discussion about his influence and personality [1:09:21]
• Why having a liberal arts background is beneficial [1:18:07], and general advice for young people interested in tech [1:24:32]
• Discussion of Apple’s culture of collaboration [1:30:30]

Transcript

Frank: Hi, welcome to the “a16z Podcast.” This is Frank Chen. This episode, which is called “Inside the Apple Software Factory,” originally aired as a YouTube video. You can watch all of our YouTube videos at youtube.com/a16zvideos. Hope you enjoy.

Well, welcome to the a16z YouTube channel. I’m Frank Chen, and today I am so excited. I feel like I have won the golden ticket to Willy Wonka’s Chocolate Factory. Because look, if you’re in Silicon Valley, the one chocolate factory you want — you’re desperate to go visit — is Apple. And the reason for that is Apple has consistently, over its history, turned out some of the most intuitive, and delightful, and just plain awesome products that people use. And people are dying to find out — how is it that Apple makes such delightful products? And so today, I’m here with Ken Kocienda. And I’m so excited for him to tell us all about the creative process that he used, and his team used, to create these products. So Ken, thank you so much for coming.

Ken: Well, thank you so much. It’s great to be here with you.

Frank: Well, let’s get right into it. So maybe talk a little bit about how you ended up at Apple. Because, like, on paper, you don’t look like the typical software engineer. So go back and do the long — like where were you born and, like…

Ken: Well, I was born in New York, stayed there on Long Island, downstate. Grew up close to beaches. Lived there until I went away to college. I went to Yale and got a degree in history. And then after I graduated from Yale, I didn’t do the typical thing, I went to motorcycle mechanic school.

Frank: Really?

Ken: Mm-hmm.

Frank: All right. Ivy League to — and what motivated that, like, you just loved motorcycles?

Ken: I wanted to learn how to fix motorcycles. When I graduated from college, I wanted to do something that was as different from Ivy League college as possible. This…

Frank: I think that qualifies, motorcycle maintenance.

Ken: Right. This was dismaying to my parents — my father, in particular, I can tell you.

Frank: I’m sure.

Ken: But yeah so I…

Frank: At least you didn’t have an Asian parent.

Ken: Well, I think…

Frank: You would have been disowned, that’s like…

Ken: …my dad was pretty confused about the choice. But anyway, But eventually, you know, they got behind and supported that. And so I fixed motorcycles. And then I wasn’t really quite sure what I wanted to do. I had this degree in history, but I wanted to, you know — kind of, keep following my nose, finding new and interesting things to do. I also did a lot of work in photography when I was at Yale. I spent a lot of time in the art and architecture library on the Yale campus, just reading books, learning about art.

Frank: Beautiful buildings on campus. Gothic, and…

Ken: Yeah, for sure. Yeah, very interesting architecture — the art and architecture building in particular. Well, anyway, so I became more interested in photography. I wound up getting a job at a newspaper in the New York area, “Newsday.” Did two years there working in their editorial library in their — with their photo archive. But then I kind of decided that wasn’t really going anywhere fast enough, so I moved to Japan. <Wow.> And I had a three-part plan for going to Japan. I was gonna photograph myself — make a portfolio of my own work. And I thought that it might be interesting to get some teaching experience. So I taught English. And I was chasing a girl. So, that was the…

Frank: And not in that order, right?

Ken: That was the three-part plan, right. Photograph, teach, chase a girl. I wound up catching the girl so we’ve been married for — it’s gonna be 25 years in…

Frank: Oh, congratulations.

Ken: …a couple months.

Frank: That’s so awesome.

Ken: So, after that, I took that — the portfolio of work that I put together, two years in Japan, and applied to a fine arts program at the Rochester Institute of Technology, for a Master of Fine Arts degree program. But it was there that I discovered the World Wide Web. And so I put my plans to be a fine art photographer, or maybe a professor of photography — or you know, putting together the teaching experience with photography. I just set that aside, because I saw the web for the first time. It was probably 1994, and I thought it was the most amazing thing.

I saw Mosaic and the professor, oddly enough, loaded up, you know, one of the few websites, comparatively, that was available then. Yahoo, when it was text only, right? And so to me, the interest was — I wanna make photos show up on this thing. Let me take my experience, my love of fine art and the liberal arts, and figure out how to make that come alive on the web. And I just wind up getting more and more into programming. I graduated — or, I left RIT without graduating with any degree. But by that time I’d learned enough to go get a job in a web development company and wound up making websites. And this startup, that startup, the next startup. I wound up at a company called Easel.

Frank: Oh right, of course.

Ken: I did Linux software development, making desktop Linux.

Frank: Right. Every year is the year of desktop Linux. Every year for the last…

Ken: Desktop Linux. We thought ’99 or 2000 was gonna be the year of desktop Linux, it turned out not to be, but…

Frank: Not to be. But you worked on the Nautilus file browser.

Ken: I actually worked on the portion of Nautilus that connected to these, sort of, proto-cloud services, right. And interesting…

Frank: Dropbox before it’s time.

Ken: Interestingly, for where I am here, Andreessen Horowitz — we hosted our cloud services at LoudCloud.

Frank: Wow. Thank you very much for being a customer.

Ken: And so, we went ahead with that project. But, of course, that company didn’t succeed. But of course, Easel had this long-standing connection through some of its principals. Andy Hertzfeld, Mike Boich, Bud Tribble…

Frank: Yeah, the legends, right? Macromedia and…

Ken: That got me an introduction to Apple. So I started [at] Apple in 2001, and started getting into making the web browser for Apple — was my first project.

Early projects at Apple

Frank: That’s fantastic. And why don’t we get into that story, because, as you tell in the book, you, sort of, started experimenting with the old Netscape codebase, right?

Ken: Right.

Frank: Called Mozilla, I guess, by then. But you ultimately didn’t go that way.

Ken: Right. Well, you see, you know — it’s, sort of, interesting. And maybe we’ll get into this more as we talk. The way that Apple worked in this period, during the Steve Jobs era, is that he would set this vision. And so his vision was — Apple needs its own web browser. So at the time, when I joined in 2001, Mac OS 10 — the new version of the desktop operating system, replacing the old classic version of Mac OS that had been chipping on the computer since the ’80s, right. So came along with this Unix-based replacement. But that system didn’t have its own web browser. It was still part of the agreement that had been made a couple of years earlier with Microsoft, to provide Apple with a web browser, so Internet Explorer.

Frank: When Bill invested…

Ken: That’s right.

Frank: …he brought Office to the Mac, and then IE became the default browser.

Ken: Correct.

Frank: People don’t remember this anymore.

Ken: Correct. But that was the situation that Apple was in, is that this exciting new technology — the web — was something that wasn’t under its own control. And so, you know, the vision for Apple back then, and even still today, is that Apple wants to be in control of what it considers to be critical technology — critical to its user experience.

Frank: And as all the operating system companies decided, right, the web browser was critical. It wasn’t an optional add-on component. Netscape and Microsoft famously got into a legal battle over this. So Apple arrived at the same insight. And then, interestingly, the two codebases that you consider to get Safari off the ground were Mozilla, right — the Netscape codebase — and then Conkeror, which was a Linux web browser. And they were both open source. And so talk to me about what it felt like at the time, to be looking at open source inside Apple — which is a famous, sort of, like, “We’ll build it all ourselves.”

Ken: It was interesting that the executives — people like Avi Tevanian, who was the chief software VP at that time, and Stev — were willing to consider open source. But just to give you a brief summary of our full investigation, we considered writing a browser…

Frank: From scratch.

Ken: …from scratch. We also considered going out and licensing from a company like Opera. That was the company that…

Frank: There were many licensing browsers back then.

Ken: Right. And so, but we — but Don Melton and I, which was the two people — we joined on the same day in 2001 — to begin this browser investigation. And we looked at open source because we were a team of two people, and a web browser is a pretty complicated thing, right?

Frank: Complicated. It’s harder than it looks.

Ken: It’s harder than it looks. So we thought that if we could make a compelling case to use open source as a way to jump ahead in the effort, you know — stand on the shoulders of giants, right? You know, it would get us to a point where we would have something sooner. And that was really the goal. And, being open source, if we took the software from, say, another platform that — neither Mozilla nor Conkeror worked on the Mac. So we were gonna have this opportunity to bring this code from elsewhere and make it Apple’s own, and really make it look and feel like it was a native program to the Mac. So that was — and looking at that it really just came down to, Conkeror was one-tenth the size of Mozilla. And so as a two-person team — soon, thereafter, a three-person team — this just was the easiest way to get from where we were to where we wanted to be.

Frank: Yeah, it makes sense. I mean, people don’t remember this about the early days of the browser, but when we shipped Netscape, we had to do it on 20 platforms. So every build was a, “All right, here’s the one for Arix, here’s the one for Digital UNIX, here’s the one for AIX, here’s the one for HP-UX. And here, by the way, is Windows 95, Windows 98, Windows NT. Like, it was such a cross-platform exercise, you know — the codebase, sort of, grew and grew.

Ken: Sure. And so we only had to do that once, in that we took this Linux code and brought it over to the Mac. And, of course, it was a challenge for us. So I can only imagine what it would be to kind of keep all of these platforms going concurrently, as you’re trying to make improvements and add features and make things better.

Frank: And so you ultimately decided on the Conkeror codebase as, sort of, your starting point. And then pretty early in the development process, you ended up building a stopwatch, the PLT. And so, maybe talk a little bit about — why did you decide to do that — and then ultimately, flashforward. Like, when Steve announced the browser, he would say, this is the fastest — like, it was one of the key features. And did you know at the time that you built the stopwatch that he was gonna do that or, like, did you get lucky or…

Ken: So no we didn’t — it was not luck at all. Steve was very, very clear to us at a very early stage in our browser development process — was that — well, of course, he wanted to deliver the best experience out to customers, that was it. He wanted to put a smile on the user’s face, right? And so if you think about the challenge that we had, there was this existing browser on the platform…

Frank: Right, Microsoft.

Ken: …that people were familiar with, right? And so now we’re gonna come along and say, no, you had that other thing — here is this new browser that we want you to use. It’s Apple’s own browser. And, well, what is gonna convince people to make the change? And so Steve thought, well, we’re gonna need a compelling argument. And to be compelling, it needs to be simple. And so his idea — his vision — was look, we need to make this thing perform fast. Again, thinking back to the time that — well, the network wasn’t so fast. I mean, some people were getting, you know, maybe broadband at the office, but certainly, at home, you’re still doing dial-up.

Frank: You’re definitely in dial-up.

Ken: Right? And so anything we could do to speed up the browsing experience was something that would be attractive to people. People would notice. And so he said, “Browser team, you need to figure out how to make this browser fast.” And he told us this a year-plus ahead of time. So this PLT — the “page load test” is what PLT stands for — was this performance tool that we used during our daily development, so that every code check-in that we had, we would run our page load test to see that there were no speed regressions. We had this idea — that was really Don Milten’s idea, who was the manager of the team.

He had this little bit of sneaky logic, where he said, “Okay, team. If we check-in code and it doesn’t make any speed regression, only two things can happen. Either the code will remain the same speed, or it’ll get faster, right?” And again, it’s just one of the simple things that just turns out to be this profound truth. Because as we would go over, you know, the weeks, the months, hundreds and hundreds and hundreds of check-ins, that’s what happened. Either the code either stayed the same, or it got faster. And over time, because there was the speed priority coming straight from Steve, we would look for ways to make it faster. And eventually, Safari, when it was released — it was three times faster than MS IE at loading web pages.

Frank: That’s fantastic.

Ken: And the point is, again this — Steve Jobs going out on stage, he has this reputation of being this great marketer, the reality distortion field. Anything that Steve says you’ll believe, just because he has this — through the sheer force of his personality. But this was more of a matter of just — of him just saying, “Well, we executed on this plan, we got a great result, and here it is.”

Influence of Steve Jobs

Frank: So, I love this idea that, sort of, Steve set this goal early on. Ship the fastest browser that you can ship, because when I launch it, like, that’s what I’m gonna talk about. And as I was thinking about, sort of, basically the software development process. You know, it’s rare for a CEO of a big company — and Apple was a big company back then — to be so intimately involved in the planning process. And, sort of, how important do you think that was to, sort of, your age of design?

Ken: I think the way that Steve organized the company and built the teams — built the culture — was an essential part of how we did our work. And the way I like to describe it, is that Apple was this wonderful combination of top-down leadership and bottom-up contributions. So, Steve — the top-down part, I think is almost well-known. Steve was very, very clear. He could be almost, you know, domineering, right, in pushing his vision forward, right? So when you worked at Apple in software development, you knew what the vision was. That was always very, very clearly communicated. But it still was just a vision.

Now, sometimes he would get specific, but most of the time, he just would tell us, “I want a great browser, and it’s gotta be fast.” And so with that as a brief, handed over to the engineering team, it was our job to figure out how to do it. And so then that’s where the bottom-up contribution comes from. He didn’t say, “I want you to make a performance test, and I want you to institute this policy where every check-in doesn’t allow any speed regressions.” No, we came up with that. Providing that bottom-up contribution that helped to realize the vision.

And then one of these other things — and perhaps we’ll get into it a little more as we go, because it is such an important part of Apple’s culture — is that there would be demos. So, we would periodically — I remember quite clearly, there was a 0.1, there was a 0.2 demo — where we needed to demonstrate the strength and the potential of this open source idea — of the, sort of, the Conkeror source code that we had chosen. And of our porting plan and efforts before they would commit to going through to the project — to go from 0.2 to 1.0. So…

Frank: It was Steve at the demo at that point?

Ken: He would see the code yeah. Very, very often very, very…

Frank: So that’s a little unusual. I compare that to, sort of, a typical Silicon Valley company where, like, you’re doing these demos frequently, right? And so in general, you, sort of, think of the CEO of a company this size not being involved in every single milestone, right? Because you’re Safari on Mac OS —Mac OS is one of the many products that Apple was shipping at the time. And so, like, it seems unusual that the CEO would be involved in this many demo points. And how important do you think that is to, sort of, the…

Ken: See, I’m actually gonna dispute one of the things that you said, if I may — is that certainly during the Steve Jobs era — and I still think to today, here in 2019 — Apple didn’t ship a whole lot of products. Back then, Steve quite famously, when he, you know, re-established control over the company, he came up with that product matrix, right? Where we’re gonna have, you know, [a] consumer product, a pro product, a desktop product, and a portable product, right? And so we’ve got four products, and it’s the same operating system, right —Mac OS — and so it’s actually very, very few products.

Now, interestingly, when I joined Apple in June of 2001, Mac OS 10 had come out. And so we had that two-part product matrix that we were still working in. And that was still four months before the announcement of the iPod, which was just that beginning of Apple expanding out from being — well, Apple Computer to being Apple Inc., right? You get into the more consumer-focused products that weren’t really thought of as being computers. But because — I mean, the point of going through all that, is that since there were so few products, Steve could keep tabs on what the software teams were doing. That there was this big initiative to make a web browser so he could his — keep tabs on it. He could find the time on his schedule to get updates on how the software was doing, and he did.

Frank: So it was, sort of, a focus thing, right? By Steve saying, “Look, we’re not gonna have that many SKUs, we’re not gonna have that many products — like, then I can put all my eggs in one basket and watch that basket very carefully.

Ken: You say the word — and it is one of the best words, perhaps the best word, to describe Steve’s approach — which is focus. Focus on what? Great products. I mean, there, in those three words — focus, great products — you can distill down Steve’s approach — his formula to just a couple concepts.

Frank: So you ship Safari — awesome browser, fast, native, you get a lot of people to switch over. And then at that point in your career, after having been this individual contributor that, like, shipped this awesome product, you thought — like many people in your shoes — time to be an engineering manager. So, maybe talk a little bit about that story of, sort of, you know — how you thought about it, and then how you got the job, and then what the job was like when you got it. As your first engineering manager job?

Early work with iPhone

Ken: Well, you know, I always try to think about, well, what’s next? And I don’t really have a big career vision because — especially the tech world, it changes so fast, right? And so, it always seems like you come to the end of one thing, and then that’s the moment to really decide what the next thing should be. And as you say, engineering management seemed to be, like, this new domain that I didn’t have a lot of experience in. So I thought that this would be an interesting opportunity. And so I pushed for it, I asked for it.

And it was actually Scott Forstall, the software executive — really instrumental in coming up with a lot of the, you know, interesting user interface work in the iPhone software project later, which I’m sure we’ll get to — but he was the one who was in my management chain who gave me this opportunity. And so I started working on the sync services software for the Mac, which at that time, was really still the software that would be up in the cloud, and would help two Macs sync with each other. I mean, we didn’t really have…

Frank: There were no phones, no iPod.

Ken: Right. Okay. So it’s like, you have a desktop computer in the office, you have a desktop computer at home — or maybe you have a portable and a desktop. And it was to get those systems exchanging some data — your contacts, your address book, things like that. And so, I thought this was, you know, an interesting challenge, and you know, people were gonna be getting more devices and things like that. But I found that very soon after I got into the job that I was miserable. That I hadn’t really reckoned, at that point in my career, with what management really is. It’s about people. I was still — certainly at that point in my career, still fascinated by the software itself.

That’s what was [attractive] to me — about sync. It seemed like this distributed computing problem, and I was enamored of the technology, and you had client server, and you know, and all of this. And not really, again, thinking about how the right focus was to build a team, build a team culture — support the people so that they can do the technology. And again, at that point in my career, I wasn’t really ready for that, and I found myself within just a couple of months, I was miserable.

Frank: It’s the lament of a lot of, sort of, first-time managers, which is — you think, on the other side, of course, “I want a manager job. It’s the way up, it’s the natural hierarchy.” And then you get there and your job is about shipping a team and not a product. And a lot of people go through that. I didn’t wanna ship a team, I wanna ship a product. So it sounds like that’s what you did — you, sort of, went back to being…

Ken: Yeah. Well, I had, I’m almost ashamed to say, you know, it was like a mini-meltdown. I went to Scott Forstall and I say, “Hey, look, Scott. I don’t wanna do this. I led you astray, led myself astray. I quit. I offer to resign.” Because — and part of the thing is that it was a feeling of responsibility — that I had taken on a responsibility that now I did not want to fulfill. And I felt like, well, the only thing for me — there’s really just two choices. I could continue on being miserable about it, or I could just go and say, look, I’m done with this. You know, I submit my resignation. And so Scott was like, “Whoa, whoa, whoa, just a second…”

Frank: Not quite yet.

Ken: …stop right there. I wanna understand what’s going on there.” So I explained to him what I’ve just explained to you, about really wanting to still be in closer touch with the technology. And so he said, “Oh, okay, well, just go away.” He was not pleased with me. But…

Frank: We got you the management job you asked for.

Ken: You said that you wanted [it], right? And now you’re coming back, and now a couple of months later, saying that you want something else. What’s going on? So yeah, he wasn’t that happy but he had…

Frank: And at that time, you had, sort of, started taking calls from Google recruiters, right?

Ken: Yeah, I mean, because I thought that I was resigning. So I need to go get another job. So I actually did, and went to Google.

Frank: Full interview cycle?

Ken: I went and did the interview process at Google, and they offered me a job.

Frank: So you were serious, you were ready to go.

Ken: I was serious. I was serious. But turned it down — turned down, you know, that job, because Scott continued to engage with me. And he said, “Just kind of sit tight, maybe we’ve got something for you.” And a couple of days later, it was actually my direct manager at the time — said, “Come here.” And he took me into his office and he said, “We want you to work on this new project, sign this paper.” And I kind of thought there was just the barest little hint on the grapevine. So I just, like, reach out, I signed the paper. And he said, “Yeah, we’re making a cell phone, and you’re now on the team.”

Frank: So that’s fascinating, right? So this is a great part of Apple that’s, sort of, very different than most Silicon Valley companies, which is — in most Silicon Valley companies, if you get assigned to another project, there’s not this level of secrecy. You’re not signing papers saying — so tell me a little bit about that. Like, what did they read you into at the time? It was Purple at the time, right, was the codename.

Ken: The funny thing is that at Apple, I was already under this blanket non-disclosure agreement…

Frank: You couldn’t say anything about it.

Ken: …for all the — I mean, for the whole time that I worked there, I was under these document retention orders. I would get these periodic emails from the lawyer saying, “Do not destroy anything,” because of the work that I had done was then submitted in patents and, you know, perhaps there was gonna be patent litigation. So this is just the whole mindset, the whole culture of what Apple was. There was [a] secret, we were doing patentable — where we were trying to innovate. And we were, you know, interested in treating that work as a trade secret, something that was valuable, you know, to the company. And so…

Frank: So, already super-secret culture.

Ken: Already.

Frank: And then you have to sign something, which is — I’m gonna introduce you to an even more secret culture…

Ken: Even more.

Frank: …inside Apple. It’s kind of like, you know, when you do the logic classes, like — infinite sets can be larger than other infinite sets.

Ken: That’s right.

Frank: Now you’re into the larger area — like, seriously? Like, what?

Ken: Now you’re in a bigger, deeper, darker…

Frank: …there’s more secrecy?

Ken: … infinity. That’s right, it is a bottomless well, truly. So, yeah — I had to sign this additional NDA. And yeah, I got introduced to this project, it was called Purple.

Frank: Purple.

Ken: The code name for iPhone, and it was in development. And my job was to join the software effort, which at that point was maybe six or eight people, to do…

Frank: That’s a tiny team.

Ken: Tiny little team, to do what I like to term the high-level software. The plan was that we were gonna take as much of the Mac as possible and bring it over and squeeze it into one of these — you know, tiny, little, you know, smartphone form factor. So we’re gonna take the operating system kernel, and some of the low-level libraries — you know, the networking stack, things like this — the graphics stack. But above the level of core graphics, which was, you know, the low-level graphics library — above that, it was then — I was invited onto the team that was gonna invent the touchscreen OS.

So, we weren’t gonna take any of — naturally, the mouse tracking or handling, or anything of app kit, which was the, you know, the user interface level software for the Mac. We were gonna make that from scratch for the phone. So what became UIKit, for people who know about, you know, the technology for what became —  you know, iPhone software iOS — that was our job. And so we started with a clean slate, and that slate was pretty well clean when I joined. Again, just about six or eight people on that effort at the time.

The iPhone design team

Frank: Yeah. So they tap you on the shoulder. You’re on the Purple team. It’s like six to eight people. So tell me about the people on the team. Like, what are the roles — are there product managers, are there UX designers?

Ken: Right. So when I say six or eight people, that was software engineers. There was also this other team of designers, which in Apple we call the human interface team — the HI team, human interface. And that was the team of designers — they would do graphic design, animation design — but they would also do concepts. They would provide the thinking behind what is going to be the experience of the person that is gonna be using this product that we make? And so there was the small team, half dozen software engineers, and HI designers, and then executives — managers. So there was a fellow named Henri, who was leading the software engineering team. There was a fellow named Greg Christie, who was the day-to-day manager…

Frank: HI.

Ken: …of the HI team. They both reported to Scott Forstall, who was the executive who reported to Steve. And that’s it.

Frank: And that was it.

Ken: That was the team. Now, eventually, we wound up adding, over time, more people. We probably never had more than 20 software engineers, and maybe 10 designers. Those two managers, and the executive, and Steve, and that was it. And so…

Frank: Super interesting, no product managers

Ken: There were no product managers.

Frank: No product managers, no QA engineers, like, until later.

Ken: Until later.

Frank: So the core that, sort of, got the whole product going is software engineers, human interface designers, and executives. And that’s it.

Ken: Yeah, then we added, then, a program manager. So there were maybe, like, two people in just managing the schedule, tracking risk — you know, looking at the bugs. A couple of QA people joined. You know, at Apple — you know, certainly from my standpoint, you know, I consider them engineers. You know, they’re the QA engineers, right. But still, that still is all-encompassed in the numbers that I gave you. And, in a way — I say there were no product managers, but I would say that we had one product manager. There’s two ways that I could say it. We either had one product manager, Steve.

Frank: Yes, the ultimate decider.

Ken: Right? Or that we all were. We all were, it was all…

Frank: So that’s really interesting.

Ken: …our responsibility to make sure that the product was going to be great for people. We all shared commonly in that responsibility.

Frank: So that’s really interesting, because you, sort of, distribute the responsibility. Now it’s everybody’s responsibility. But, you know, a lot of companies would think, ooh — I’ve gotta have a throat to choke. I’ve gotta have, like, the one person. But of course, at Apple…

Ken: So we did.

Frank: Right. The one person was Steve.

Ken: And then another way, when you get down to the level of features, we had this notion at Apple of directly responsible individuals…

Frank: Oh yeah. Let’s talk about this.

Ken: So we had DRIs, right? And so when I started working — when I was invited to join the Purple effort — because of my experience on the web browser, I started working on crunching down Safari. Optimizing Safari, so that it could fit on a smartphone operating system and form factor. But then, after a couple of months, we had a bit of an impasse with the software keyboard. And we had what was really quite unusual — really unique in my experience at Apple — is that this was judged to be — the development of the software keyboard was judged to be sufficiently high risk, and that the risk was not being matched by commensurate progress, right? I mean, the whole thing was high risk, right —we’re gonna make it a whole new touchscreen operating system, right? So the whole thing was high risk.

But the thing is that we were making good incremental progress on most of those areas — touchscreen, and the UI kit, and Safari, and messages, and calendar, and you know, all of these — you know, the phone app. But the touchscreen keyboard was lagging behind all of these other projects. And so, one day — really, again, unique in my experience — Henri, who was the software engineering manager, called all of the engineers out of our offices into the hallway, and we had a group meeting. Again, about two dozen people, probably even less than that. And said, “Okay, you all stop. Stop what you’re doing. Stop working on your calendar, phone app —you know, the user interface level software. Everything, stop. Starting from now, you’re all keyboard engineers.”

Frank: Wow, that is crazy. Like, the entire team…

Ken: Entire team, stop.

Frank: …everybody is a keyboard engineer.

Ken: Because the idea was that if we don’t crack this problem, we might not have a product.

Frank: Yeah. So I think we need to take people back to that era, right? Because this seems super counterintuitive, that you’d put all 20 people on one project. And so take us back in time. So, the most popular phone at the time was the CrackBerry — the RIM BlackBerry, and it has a physical keyboard.

Ken: Has a physical keyboard. And so, this was in the fall of 2005. And again, to just give the time perspective — Steve stood up on stage and announced the iPhone in January of 2007. So again, this is a really, really compressed timescale. So, just a little bit more than — you know, it’s less than a year-and-a-half out from the day where we were trying to hit that target.

Frank: Eighteen months, not a lot of time.

Ken: And we still had really nothing to show for this effort to give a solution for our phone which would compete with the BlackBerry, right? And of course, the BlackBerry had this wonderful keyboard, the hardware keyboard, the little plastic keys, click, click, click, click — the little chiclet keys. And again, you said the word CrackBerry — people loved…

Frank: Loved those things.

Ken: …loved the products, it’s a great product, right? But we were gonna provide this different vision for what a smartphone would be. Is that it was gonna be this — that there wasn’t going to be enough room for a plastic keyboard with the keys fixed. We were gonna give more of the front of the display over to a screen, to software. And so the keyboard…

Frank: And that was…

Ken: …had to be in software.

Frank: And the idea of an all — for, sort of, software-based keyboard was one of the design things that came from Steve early like it was…

Ken: Yes. 

Frank: ….just like, look, this is not negotiable. I’m not shipping a physical keyboard.

Ken: That’s right. His idea was that we need a keyboard some of the time, but we certainly don’t need it all of the time. And so the idea of the keyboard being in software is that it could get out of the way, it could go off the screen. Which would then make the rest of that screen real estate available for a customized user interface that was great — that was optimized for either the phone app, or if it’s the calendar, you can see more of your appointments, or see more of a month view for the calendar. So it was absolutely essential that the keyboard could get out of the way when you weren’t using it, so that the device could be opened up for these other, better, richer experiences in the apps that we were gonna be shipping.

Frank: And what problems were you running into at the time? Like, were people missing keys, were the keys not big enough? Like what caused the…?

Ken: You know, again, I mean — in some ways, it’s hard to think back, given how history has played out, right? That we have our phones now, and — you know, maybe you’ve got — you know, I’ve got my phone here today, and I’m two-thumb typing, and I’m hardly even looking, or whatever. Back when we were working at this early stage, and we were all new to interacting with touchscreens, we found that we had this real sense of apprehension. Apprehension, whenever we were gonna touch a target on the screen that was smaller than our fingertip, right? That was actually a really interesting threshold. A constraint that we were dealing with when we were designing the user interface, is that if the target that you were going for was larger than your finger, you could target because you could maybe move your hand a little bit out of the way, and you could see what you were going for. If the target was smaller than your fingertip, like, did I get it? I don’t know, right? And so we started…

Frank: You don’t have tactile feedback.

Ken: We didn’t have the tactile feedback of that BlackBerry, right? You could feel the edges of the keys with your fingers. And of course, with the touchscreen, it was just this sheet of glass. And so that’s the challenge with the keyboard, is that you needed enough keys to have a typing experience, right? But in order to give the number of keys necessary, the keys needed to be smaller than your fingertips. So what do you do? And so, it turns out that, you know — through investigation and lots of demos and lots of sleepless nights, right, that the way to close that gap was to give software assistance.

Frank: And so Henri waved the magic wand. Everybody now is a keyboard engineer, everybody needs to figure out how we’re going to make a reliable keyboard that’s delightful. And so what happened from that point? Was it like a series of demos, where people were just…?

Ken: Yeah. We did this series of demos. See, again, going back to the way that it was in that hallway — and it was just one hallway, since it was so few people, sort of, 20-ish people. And we all had our individual offices at the time. This was not [an] open-plan office, right? Everybody had their office. Mine, when I was working and thinking, I had my door closed, right? But then, okay, so I would be in my office with my door closed, and I would come up with a demo — an idea, right? — that could be represented in a demo. Then I open the door, and I go to see who else’s door is open, and say, “Here, try this,” right? And so we would have this culture, we were all demoing to ourselves all the time.

And when we were set off on this thing, you’re all keyboard engineers — we all just went in our own directions. Some of us, you know, had already well-established — you know, collegial relationships where I would collaborate a lot with you. And some other people, you know, they had — maybe they work by themselves. Some people had a good relationship with one of the HI designers, or whatever. So we just cobbled together our own little teams, our own little efforts, and started making demos.

And again, trying to combat this problem of the keys being too small. So one idea that we experimented with was making larger keys with multiple letters on the keys. I started experimenting with software assistance — maybe there could be a dictionary on the phone that the software could consult to provide suggestions that maybe, you know — much like we have today, that there’s this bar on top of the keyboard that is updating as you’re typing keys, giving you some notion of what the software thinks you’re trying to do.

Frank: Autocorrect. The author of autocorrect, which is now not only super useful on the phone, but probably my favorite comedy genre. You know, go watch the Facebook videos. Autocorrect comedies, they’re fantastic.

Ken: Well, sorry about that. So eventually, you know — the breakthrough, if you will, that made it possible for software keyboards to really work, you know, in a shippable product was software assistance — to the extent that the software may change the letters that you type. That it’ll change it to what it thinks, rather than what you did. And actually, this phrase is really, really important. I think really, really — one of the important organizing concepts for so much that we did to make the touchscreen operating system work is because you didn’t get this tactile feedback, because you couldn’t feel the edges of either keyboard keys, or any button, or anything in the user interface — is that the software had to be there working behind the scenes, to give you what you meant, maybe differently than what you did.

Frank: And how did you come up with this idea? Because this is a classic “thinking outside of the box” idea, right? Like if you were gonna try to solve this problem, I bet you saw a lot of variations of, sort of, key sizes — and you know, that type of thing. But like consulting the dictionary putting up suggestive words, like where did the idea come from?

Ken: It’s just this iterative process. It just takes, you know, a long, long time. You start with ideas, maybe somebody else does a demo — does an idea, and you had your idea, and you think, “Oh, maybe if I can combine those two ideas and make a demo of the best of everything that I see.” And it was just this collaborative soup of ideas all swirling around, and you just take the — you know, all of us were — there was a sense of friendly competition, and it was both of those.

We all wanted to do the best. We all wanted to be the one. I mean, I think we all had a sense of maybe — a sense of ego, that we wanted to be the one to crack this hard problem that we were given. But it was all very friendly, in the end, that if your idea wound up winning — proving useful — yeah, you got a little bit of, sort of, geek cred for that on the hallway. Everybody knew who it was that came up with the idea.

Secrecy at Apple

Frank: I wanna talk to you a little bit about this, sort of, secrecy, right? You got led into the Holy of Holies — it’s more secret than, sort of, other parts of Apple. And at one point, you decided — as you were refining the autocorrect algorithm — that there were actually experts outside of the Purple team that might be able to help. But, of course, they hadn’t been disclosed. And so, like, what was that like to try to go get their help, and was it offered?

Ken: It was tough — it required getting approval. It’s like, well, I’m gonna go and talk to these people, but there was no process really, at that point, to get them disclosed. I mean, really, you know, at a certain point, Steve was still personally approving every person that was submitted to get disclosed on the project. But I did get permission to talk to them. So as long as I told them, I can’t tell you why I want to know how, say, the Japanese input method works. You know, the way the Japanese works is that there is this input method — that there is a sophisticated way to take the keys that a user types and turn it into the Japanese language. A text that actually reads as Japanese.

And so that — and I just won’t get into the details of that. But it seemed like it was similar, in a way, I mean, at least in the thought process. Is that we have this real software whirring away in the background, other than — you know, different than say, just like a desktop keyboard, where if you type the A, you get an A, right? And so I went and talked to them. But you know, in the end, it was just more of conceptual help than really, you know, anything concrete that I could put into the software. It just turns out, really, that the problem that I was trying to solve, which is really input correction — that you weren’t sure what key you hit — was a class of problem that was different enough that it really required different solutions.

Frank: Looking back at it now, which is, sort of, the extreme secrecy — you couldn’t really describe the problem, right? And so as a result, you got some conceptual help, but not, sort of, concrete design help. Would you think of the, sort of, tiers of secrecy inside Apple as a feature or a bug, or somewhere in between?

Ken: Yes. You know, the thing is, I think there is a really underestimated power in keeping your team small. The cohesion — the small unit cohesion that you have, where simple things — like, we’re gonna have a meeting. Who do we invite? Everybody. We’re gonna have a team meeting, right, where we’re gonna talk about important milestones. We’re gonna call everybody out of their office. Henri could say, “Hey, everybody, come out of your offices, please.” And within 30 seconds, everybody was…

Frank: Everybody is there.

Ken: …standing there, right? So, you know, you get these — there are advantages to keeping things really, really small. And of course, then there is the disadvantage that when you are trying to tackle difficult problems, you may not have all of the talent that you need. And you may not have a sufficient amount of diversity, right? That all the — you know, especially, you know, a company like Apple is trying to make products for everybody. Well, how do you design for everybody, if the design team isn’t a microcosm of everybody? And so, there are these really profound challenges, right? You know, back in these times, we did the best that we could within the constraints, you know — and we tried to then really tap into the benefits that the smallness and the secrecy gave us as well.

Frank: Another funny thing that I learned reading your book is the secrecy was so extreme that, like, you didn’t even know what the product was gonna be named. And so, like, the word iPhone wasn’t even in the dictionary…

Ken: That’s right.

Frank: …like after Steve launched.

Ken: That’s absolutely true. So there was — we were all heading toward this announcement for the iPhone in January of 2007. So if you remember how Steve introduced the product, he said — you know, he gave his very dramatic introduction, you know. So he said something to the effect of, well, we’ve got you know, a groundbreaking product — you know, and you’re privileged to be involved in, you know, a product like this maybe once in your career. But Steve, he had been involved with, you know, the Mac, and then the iPod. And he said, “We’re gonna have three new products of this class today.” And I’m saying like, wait — there were two other secret projects that I didn’t know about? I mean, truly, for a moment I didn’t get — and it’s like, oh, no, no, no, it’s just how he’s gonna tell the story.

Frank: It’s my product he’s talking about.

Ken: That’s right it’s gonna be…

Frank: That’s awesome.

Ken: …you know, the phone, and it’s, you know, gonna be you know, the touchscreen music player. And then, you know, the internet communicator. And no, this is actually all just one product, and we call it iPhone. And when he said that, that’s when I knew that I was gonna have to go back the next day and add iPhone to the autocorrection dictionary.

Frank: That’s awesome that he fooled you too, because he fooled me, like, I — and like you were working on it, so I don’t feel quite as bad.

Ken: Again, the secrecy. You know, I have to admit that it was just a moment where it’s just like, wait, wait a second — is there something that I don’t know? No, it can’t be. But yeah, that was just the culture and the times and the way Steve liked to run things.

Frank: Now, a feature we all take for granted now actually didn’t appear in iOS until several releases later, and that’s copy and paste. So I wonder at the time, did you guys talk about that? And did you make an explicit decision to, sort of, like, yep — let’s ship without copy and paste? And was that contentious? Because on the surface it would seem like that’s contentious.

Ken: Yes, it was. But one of the other things that we were really expert at, to bring back the word that we had talked about earlier — was focus. In that, we were very, very good — really very, very early in the development process — to say what was in, and what was out.

Frank: Physical keyboard out, super early.

Ken: That’s right, very, very early. And that it was clear that this was — that getting the text entry system working at all, was going to be one of the real challenges. I got used to being in the team meetings where Henri, team engineering meetings — again, everybody is in the room. So we got 20 people in the room and Henri is, you know, up at the front of the room, and he’s got you know, a Keynote slide deck. And he’s saying, okay, big challenges — well, keyboard, of course, you know, and then whatever other challenge there may have been.

And those challenges came and went, but [the] keyboard was just a constant throughout the whole, you know, 18-month development cycle. And so, we knew that we wanted copy-paste, but we knew that there was simply not gonna be time for it. So we didn’t spend any real development effort on it. The one thing that I did implement for the first iPhone was the loop. So you press and hold, and it would give that little magnifying…

Frank: The magnifier.

Ken: …glass above your finger that would show. And the whole idea of that is that we wanted your finger to be right where the insertion point, you know, the little cursor would move. And so then we needed to show you what — and so this was an idea that I came up with. But then there was no time to capitalize and expand on that to do cut copy, paste. And it even got delayed an extra year, because in the second year, after we did the initial release of the iPhone — and then we had that six-month delay before we did the first customer shipments — and then that whole next year was taken up by making third-party APIs.

Frank: So, two releases before you run copy and paste.

Ken: That’s right.

Frank: And so I wanna get right into this because, sort of — look, Apple was famous for having exquisite taste around the design trade-offs. And a feature like copy and phase kind of feels like wait — you’re arguing against copy and paste? Like, that’s not a great user experience? And so, like, how did the argument evolve? And, sort of, the big setup is, there’s taste — taste-making, making hard decisions like this. And then there’s, sort of, another style of decision making which, sort of, Google made super popular — which is just relentlessly A/B testing everything, right? And so like, maybe the way Google would have come at this challenge is all right — let’s give people tasks. This one has copy and paste, this one doesn’t have copy and paste, let’s A/B test it. But Apple made, sort of, like what I would argue is a pretty courageous call, right — that seems to fly against the user intuition. To exclude it.

Ken: Well, it was simply a matter of setting the constraints and keeping them. You know, again, you know, maybe if we had doubled the size of the team, we could have gotten some other things done, but maybe not to the same level of quality. And again, once you start adding people, other things begin to break down, right? You can’t invite everybody to the team meetings, you can’t find a conference room big enough, right?

Frank: Right. And now, there’s 40 people who can break the build.

Ken: That’s right. I mean, [it’s] how you start to have problems like this. And so we just decided that, well, you know — it’s, like, a Steve way of maybe communicating this was — look, this is the greatest product ever. The touchscreen iPod, it’s the greatest iPod that we’ve ever shipped. It’s got all these great features. It’s a phone, it’s got web browsing that you can take anywhere with you now. And there’s no copy-paste — well, who cares? We’ll get to it, right. I mean, in the meantime, you’ve got this, you know, the most amazing product that we’ve ever made. And so, that was — and Steve just was — you know, in his mind, he believed that the things that we did do, were good enough to counterbalance for the things that we couldn’t do.

Demoing for Steve Jobs

Frank: So that’s great — great segue to, sort of, the next segment. I’d love to, sort of, take us into what it was like to demo for Steve. Like, what was the room like, who’s in there? Like, what’s the emotion of it? Everybody wants to know this, right?

Ken: It’s pretty…

Frank: It’s probably the scariest room in Silicon Valley.

Ken: It was pretty scary. Steve could be intimidating, there is absolutely no doubt about it. But you know, to get back to this point I mentioned before of the top-down and the bottom-up — as I mentioned, except for this very brief interlude where I was a manager, throughout my whole Apple career — over 15 years, almost 16 years — I was an individual contributor. And yet I got the opportunity to demo to Steve some of the latest work that I did at various points in my career. Because he wanted to see from the person who did the work.

And because when he would ask questions, well — go and ask the expert, right? Go ask the person who is the DRI, right, the directly responsible individual. The person who is — at least according to plan — the person who when they lose sleep, they’re losing sleep over that thing, that they’re gonna be demoing to me. So that’s what he wanted to do. And these demos were very, very small affairs. Now, interestingly, the demo room for Steve — the software demo room — was this really shabby little room.

Frank: That’s not what you would expect for Steve Jobs…

Ken: You wouldn’t think you think…

Frank: …coming out of performance, right?

Ken: …would be this pristine room …

Frank: Exactly, [a] beautiful blonde woman.

Ken: Like you know, air filter — the air is clean or, you know — like, the scent of redwoods, or something like that piped in. No, no, it was this shabby little room with this mangy old couch, and just standard-issue office furniture. And that’s what there was. I don’t know why he didn’t want better. But the only reason that I can say is that, again, it was a matter of focus. He was focused on looking at the software and not worried about the decor.

Frank: All right, so take us in the room. It’s a mangy couch. Who’s in the room? Let’s do the version where you’re trading off, sort of, the keyboard with the big keys, or the keyboard with the little keys.

Ken: Okay, so skipping ahead a couple of years after the original iPhone, when we were then doing the original iPad. So this is now 2009, as I recall — so a couple of years later. And so this is actually an original iPad right here…

Frank: Lovely.

Ken: …and it’s actually a good one, which is autographed by Steve Jobs. So this was the iPad that I got at the end of the iPad development process. But back at the beginning of the iPad process, you know — I would have a prototype that looked pretty much like this. And so we were thinking of, well — what’s the typing experience gonna be like? And so here’s an original iPhone, an original iPad — well, we’ve obviously got a bigger screen.

Frank: A lot of pixels now.

Ken: Right. So now what are we gonna do to make great use of these additional pixels that we have? And one thing that I also noticed was, if you turn the iPad to landscape, that screen distance is actually just about the same as the distance between the Q key and the P key on a laptop keyboard. So I was thinking, hey, like — wait a minute. We could maybe fit a full-size — something that is a full-size keyboard — on a landscape iPad.

Now, it turns out that right around at the same time, one of the HI designers — one of my favorite HI designers that I really loved working with, and who I’d also collaborated with on the iPhone keyboard, Bas Ording. He was starting to think about iPad keyboards, as well. And so, he had come up with this demo where he had all of these variations, all of these ideas. And so, he gave me a demo where he went through — he showed me, you know, 10, 20 different ideas. But one of them made — really struck me, which was — he had a design that showed pretty much just a shrunk-down laptop keyboard to fit in this space. And so, what that meant is that I had two ideas — it’s that maybe I could use this larger screen real estate to make a version of the keyboard that had big keys, that was almost the same size as a laptop keyboard, but then one that also gave you, like, the number row and all of the punctuation keys exactly where you would expect to find them on a laptop keyboard.

And so I figured, well, you know, and I first started talking with Bas, and we came up with this demo where we would have a special key we called the zoom key — that would take you from this keyboard that had the small keys — that would zoom up to the larger keys, and then back down to the smaller keys — as a kind of a complement to the globe key that changes the keyboard language. So we would have this other key — this kind of complementary key — that would change the keyboard layout. We thought this was a great idea to, you know — and again, the idea of, what are we gonna do with this larger screen real estate for the iPad, right? A software key.

Frank: The idea was, give the user choice.

Ken: Give the user choice.

Frank: I have these pixels.

Ken: Give the user choice.

Frank: I have the real estate.

Ken: Use these new pixels that are available on this new platform, this new form factor, and have that be the pitch that we make to people. And so before, of course, you can make the pitch to people you need to make the pitch to Steve.

Frank: To the man.

Ken: That’s right. And so, I got to demo this for Steve. And so the way that this worked is that there was a very small team that was, like, the chief demo review team. The small group of people that Steve wanted around him as he was reviewing demos. And this was Scott Forestall, Greg Christie, Henri — people that I’ve mentioned — so, you know, the chief managers for iOS. And then a couple of HI designers, like Bas Ording, the fellow that I collaborated with on this keyboard, was, you know, almost always in this meeting. Another fellow, Steve Lemay — another HI designer — was often in the meeting. But as I recall, he wasn’t in this particular one where I was demoing the keyboard.

Frank: So half a dozen people-ish.

Ken: Half a dozen people in the room, yeah. And so then what would happen is that people like me who had individual demos — so it’s, like, there were circles inside of circles. So I was in the circle of people who could demo to Steve. But then there was this circle inside of that who would stay for all the demos. And so my role would be — or my — you know, how I would figure is, I would go in, give my demo, and then leave. And so, you know, think of that — beforehand is that, you know, I’m sitting there with my iPhone you know, down the hallway, waiting for Henri to text me.

Frank: Waiting for my turn.

Ken: That’s right. You know, and so he sends me a text, “Go stand outside the door,” and then, you know, the door is gonna open, I’m gonna get invited in. So I get the text, I go stand outside the door. And you know, I’m waiting, and I’m waiting, and I’m waiting, and it just seemed like, well — he just texted me. Why did he text me? And so then the door opens, I get invited, and I figure I’m on. I’m gonna go do this iPad keyboard demo. And I come around the corner and turn into the room, and Steve is over there and he’s like this. He’s like…

Frank: He’s on the phone.

Ken: He’s on the phone staring at the ceiling, like, you know, going back and forth in his office chair. And I’m like, gulp — I was like, what do I do? Like, now I’m eavesdropping on Steve on his phone call, right? And so you know, it’s pretty uncomfortable. And I think — I actually do think that he was talking to Bob Iger, the head of Disney.

Frank: Disney.

Ken: Disney, right. And so he’s like, “Yeah, Bob, yeah, that sounds great. Yeah, I’ll call you next week. Yeah, great talking to you.” So then you know, he hangs up. And then he does this thing, he takes his iPhone — he puts, you know, his phone back to his pocket. And then he does this, right? It’s like, I don’t know if you know — it’s like the Eye of Sauron, right? The “Lord of the Rings,” right? You know, the great eye turns to focus on you, and that’s what it feels like.

And so it’s very, very interesting, then, how the demos go from that point — in that, he didn’t want a lot of words. He didn’t want a lot of, you know, used car salesman pitches, right? All he really wanted to know was what was next. And so what happened is, he hung up the phone, he turns towards me. And then Scott Forstall was the one who then stepped up. He goes — and the iPad was already in the room. And so he goes and wakes it up and brings my demo up. And says, “Steve, we’re gonna be looking at iPad keyboard options now.” Ken, he did work on the iPhone keyboard, and now he’s got ideas for the iPad keyboard. So Ken.” So I said, “Yes, Steve, go and look at the demo it’s on the screen now. Try the zoom button.”

Frank: And that’s it.

Ken: That’s it. That was the intro. And so then Steve goes — he, you know, slides his office chair over, and he starts, like, looking at the iPad screen. And what was up was one of the two keyboards — let’s say it was the big key keyboard, the one that was more, like, suitable for touch typing. And he’s looking at it, he took a long time to look at it. It’s like, he even did this little thing where he was like, turning his head to see what it looked like, like in his peripheral vision. It’s like he’s just — it’s just incredible to see — what does Steve do when he evaluates product? Okay, so this is what — and it’s what he did. And he hadn’t even touched it yet, he was just looking at it.

Frank: And this is going on for a long time.

Ken: You know, it seems — it’s like one of those things where it was probably maybe 20 or 30 seconds that felt like 20 minutes, right? But he took a long time to study, and then, eventually, he goes out and touches the zoom button. And this zoom button to change between the two keyboards — in this case, shrinking the keys down to be the more laptop-like keyboard layout. The animation that Bas Ording had designed was one of the most beautiful things I’d ever seen. I mean, it really looked like they were — like the keys were just, like, morphing. It was absolutely beautiful.

But Steve just was, like, no reaction. He does the zoom. And then he does this study again, he’s like looking at all the keys, looking at how the screen changed. Then he does the zoom again, and it goes back to the state that it was in the beginning. And then he studied a little bit more, and tapped [the] zoom button again, to see that it’s like, okay — there are just two states that we’re going here between, right. We’ve got two keyboards, I see the animation go between one, then the other, back to the first one. He satisfies himself that he’s seen what there is to see. And so then he turns to me and he says, “We only need one of these things, right?”

Frank: You’re like, I’m on the hot seat.

Ken: And I’m like, “I guess so.” And then he says — I mean, this is again the interesting part. He asked me, which one do you think we should use? He asks me. He doesn’t ask, you know, Scott Forstall — who is, you know, he knows much better. He doesn’t ask, you know, any of the other people in the room. He asks me, the individual contributor. You know, he’s coming in…

Frank: You’re the DRI.

Ken: But I’m the DRI you see, that’s the thing. He wanted the answer from me. Now, the thing was, I had to give an answer. You know, if I didn’t give a good answer, maybe I would never be invited back again.

Frank: Not the DRI anymore, with that answer.

Ken: And I had no idea that this was what he was going to ask. But in that moment, I came up with an answer, because I thought about my experience with these two keyboards. And I thought that, you know, the one with the bigger keys, I found more comfortable. I was getting to be, you know — that maybe with, you know, like four or five fingers, that I could touch type. And auto-correction was helping. So that’s what I said to Steve, I said, “Well, I like the bigger one, you know — the auto-correction is kind of helping, and I’m starting to get a feel for touch typing.” And he says, “Okay, we’ll go with that one.” Demo over. And you know, the interesting thing is that, then, that’s the keyboard that shipped on the product — with the slight modification of taking away the zoom button, which was now no longer needed, right?

And so Steve had this amazing ability to simplify, and to rely on his people to have a good enough idea about what they were doing. And to be involved enough in the work that even when you get asked difficult questions, you know, about it, that you’ve been thinking about it. You have this background of just context, of having been thinking about the problem for weeks and weeks. That experience was then something he was interested in tapping into to provide a way forward for the product.

Frank: What was going through your head when you were just watching him, sort of, head tilt in silence? Were you like, tempted to, like, explain things? Were you like…

Ken: Yeah, well, you just know that that’s not…

Frank: That you’re not supposed to do that.

Ken: That you’re not supposed to do that. I would imagine that if [I] had done so, he would have been in no uncertain terms — he’s like, “Let me look at the thing.” Because now it’s like, what was he doing? He was, in my view — I don’t know what’s going on inside his head. But just having seen him do that — having at least, you know, enough experience with him and his approach to evaluating work — is that he was putting himself in the position of a customer. He was envisioning himself being in an Apple Store, as a customer, walking up to a table, seeing this new iPad thing for the first time. What’s gonna be my impression of it? So he pictured himself as customer number one.

And so you know, I don’t want anybody — I don’t want the engineer, the engineers aren’t gonna be there to be whispering in the ear of the person in the Apple Store. Sure, they can maybe get the help of, you know, one of the nice people, you know, working in the Apple Store. But gosh, wouldn’t it be better if I can figure this thing out for myself, and decide for myself? And see the evidence of the care that the engineers and designers had put into the work. I can decide for myself — yeah, this is a thing I wanna take home with me, right?

Steve Jobs’ lasting influence

Frank: So, obviously, if you have a leader like Steve, that’s that into being able to emulate the user — who has great taste — like, you wanna make this person benevolent design dictator for life, right? Now, the downside of that, you know, Silicon Valley is getting a lot of criticism for these, sort of, super charismatic, “reality distortion field generating” CEOs. Where, like, you might not agree with them, right — and, you know, in the, sort of, ultimate downside case, there’s, sort of, just too much hero-worship of CEOs. Like, do you think that ever became part of the Apple culture, right? Sort of, the blind obedience to the fearless leader?

Ken: Yeah, I think Steve’s reputation and his success causes people to draw the wrong conclusions, to take away the wrong lessons. I think that if you go back and look on YouTube of old videos with Steve — maybe, you know, on stage with Walt Mossberg and Kara Swisher at their, you know, AllThingsD Conference. Or, I just had a reason to go back and look at the Antennagate….

Frank: Oh, I forgot about that.

Ken: …because — and the reason I did this is because, you know, it’s current now that there was a bug in group FaceTime. And Apple issued an apology saying, “We’re sorry that we had this problem, and we’re gonna be fixing it,” whatever. And so I wanted to go back and see well, what did Steve say about Antennagate — you know, which was the issue with the iPhone 4, where you’re holding it wrong, and the signal strength would go down. And I wanted to see what he said. And it’s really interesting — this is on YouTube, you can go and look at it. And Steve held a little press event. And you know, he was just very, very clear — very, very upfront saying, “Our goal is to make our customers happy.”

And so, that’s the kind of lesson that people should be taking away. It’s not that he was domineering. Not that he was this, you know, absolute monarch, you know —  21st-century absolute monarch now in a company rather than a government. Or, you know, all of that, you know — that he had this, yeah, reality distortion field personality. It’s that he had this focus on doing great work and making customers happy. That’s really what he cared about.

Frank: And then, sort of, how did the organization morph itself to, sort of, reflect that you had this, you know, great tastemaker — who wanted to make these decisions that are, sort of — very granular level in the design? So there was an example where you were designing an animation. I think it’s, sort of, the scrunched zooming demo. And you got to the point where, like, Steve and Scott Forstall actually disagreed. So maybe tell us a little bit about that and…

Ken: This was for iOS 5. So, this was, you know, maybe the second version — second or third version of iPad software. And we wanted to come up with multitasking gestures, is what we called them, so that you would have some way of interacting with your whole hand on the screen. Well, obviously, from the beginning — even though multi-touch was something that shipped even in the first Apple product, there was no way that you could have sophisticated gestures — multi-finger gestures on a screen that size. But with the iPad, we thought that you could.

And so we had this idea of, well, what if you’ve got the home button that way, you still maybe want some gestures to interact with the device to control going between app to app. So I came up with this idea of using this five-finger gesture, like you take a sheet of paper and crumple it up and throw it away, to go from an app back to the home screen. There was then this other interaction where you would swipe side to side, to just go between one app directly to some other app, right? So you know, you launch Mail, and then you launch Safari — well, then I can just swipe to go from Safari back to mail, right? So that the system would keep track of the history of apps that you launched.

So now, here’s the part that Scott didn’t like. So let’s say you start up your iPad from nothing. You know, you take it out of the box and you bring it home. And yeah, you launch Mail and you launch Safari, you’ve only ever launched two apps. So you swipe to go from Safari back to mail. Well, what happens if you continue swiping in that direction, right? There’s no other apps.

Frank: End of list.

Ken: End of list. And so what I came up with was this, sort of, morphing, stretching, rubbery distortion of the app to show you that you were at the end of the list. And it would kind of do this bloop, bloop, bloop, sort of, animation when you let your fingers up off the screen. And Scott Forstall hated it. He hated it. And his argument went like this. He said, “You know, that’s not fair to the designers of the apps, because they really didn’t design for what their apps would look like when you stretched them.”

Frank: That’s super interesting. They didn’t have a say in what it’s gonna look like.

Ken: That’s right.

Frank: You’ve taken away their taste.

Ken: And it’s an interesting aspect to what happens as you evolve a product. They would, then, for the subsequent version — but we would be shipping a version that added a new feature — multitasking gestures — and it would have to work with all the apps that were already in the world. Of course, there was a huge ecosystem by that point. So this was Scott’s argument — is that the designers — you’ve done something to the designers that they couldn’t really have accounted for in the design of their apps. Okay, so I got the chance to demo this to Steve, too. And I remember that Steve — what he did was, he had the iPad in his lap. So he was sitting like this, and doing the gestures, trying them side to side and whatever. And when he just discovered — by himself — this rubbery…

Frank: End of list.

Ken: …end of list animation, he did it, he did it again, and he didn’t look up. He said, “This is Apple.”

Frank: Awesome.

Ken: So it’s a pretty good moment for me.

Frank: How did you stop yourself from like, doing the victory lap? Woo-hoo.

Ken: He thought that it was — you know, sort of, tapping into the — excuse me, the little, sort of, whimsical aspect that went all the way back to, sort of, like the happy Mac on the original Macintosh, right? That it was this whimsical little animation that showed that the system has this playful character to it. And that was an aspect that he really loved. And so — and it also just goes to show that there could be disputes, even up at the highest level. Scott knew that I was very excited about this feature and wanted to show Steve, so he let me. And Steve was the one who had the final vote, and he sided with me in that instance.

Frank: And do you feel like that slowed decision making down at all in the org, where basically, we’re just gonna wait for Steve to decide — so, like, why bother making a decision?

Ken: But again, DRIs were responsible. You needed to bring him proposals, right? You know, you might think of that keyboard demo example — was, “Well, we were bringing him two keyboards and we wanted him to pick which one.” No, that wasn’t it. We were presenting him with a design we wanted to ship in the product. The design was going to have these two keyboards. He was the one who unpacked it, and to say we only wanted one of these. So no. And the point is, is that if you brought him shoddy work that was, like, you know, the equivalent of a shoulder shrug. “Steve, we’ve got five things, we don’t really know which one we think we like,” that was a way to…

Frank: Never get invited back to a demo, right?

Ken: It’s a way to not invited back to the demo. And that was the way that Scott Forstall, then, would have gotten blowback from Steve offline — to say, Scott, why aren’t you presenting me with solid designs? I’m not here wasting my time, I wanna see the full result of that bottom-up process. So that he could then give his top-down approval, disapproval — no, send this back for more work with specific feedback on what to change. That was the outcome of every demo with Steve. Approved, not approved, bring me something different next time — or not approved, give me these specific changes. It was one of those three things.

Benefits of a blended background

Frank: So Steve himself is, sort of, legendary for, sort of, fusing liberal arts and engineering thinking, right? And if you think about the classic Silicon Valley stereotype, companies are a lot more about, like, the pedigreed computer science engineer, right. Like, that’s the stereotype of, like, that’s what we’re looking for now. But your own background, and other people at Apple who’ve, sort of, had the valued liberal arts and engineering degree — talk about, like, what are the advantages of, sort of, melding the traditions? What’s an example of a decision that got made that was a better decision because you’re sort of…

Ken: Well, I mean, it’s all the process of designing experiences for people that are useful and meaningful. Right? And I think that, how do we define what’s useful and meaningful? Well, we look to literature, right? We look to philosophy, right, we look to art, we look to the creative media, right? To decide what’s useful and meaningful. And so you know, I think — and you know, I didn’t know Steve well enough to know what he thought.

But the culture that he helped to create, and that I found my place in that culture was — the part of the approach was that these devices are a part of people’s lives, righ? More and more now, to the extent that now, right, we think that there’s a problem with the amount of time that we’re spending looking at the screens, right, that we need to have apps and features on the phone to help us track, right?

Frank: Too much screen time.

Ken: Too much screen time, right? And so if we’re going to have this object, this device, these experiences that are so important to us, so deeply ingrained — well, then, it requires, I think, the care and attention and the thought about — it’s not just a technology artifact, it’s a social artifact, right? It’s a human artifact, right? And so that’s where liberal arts comes in. Yes, you do need to have the technological background to come up with the hardware, and the software, and the networking, and the services, to get everything packed together so that a product like this is possible. But if you — you know, you’re gonna ask well, what is it good for? You know, why do we do this feature rather than that feature? I think that yeah, that’s a liberal arts process.

Frank: Tell the story, if you would, of how you guys arrived at the home screen app icon size, right? It was a fun liberal arts twist to this, right?

Ken: Okay. So now, you know, going back to a phone that looks more like this, this is my original iPhone that I still have. So you know, this is the screen size that we were dealing with. Now, one of the — you know, again, now jumping back all the way to 2005, 18 months out from, you know, the product announcement. We were still in the early stages of trying to figure out, well, what is the home screen of apps gonna look like, and how is it going to work? And one of the fundamental questions that we had was, well, how big should the icons be?

And again, I mentioned before, this apprehension of touching targets that were smaller than your finger. And we were still in the phase where we didn’t know how big on-screen objects should be. And we had some experiments, but this was still — we didn’t have a good handle on it. And so one of the engineers on the hallway had an idea. And his name was Scott Herz. He was doing work on SpringBoard, the icon launching program himself. And so, he had this idea, is that — I’m gonna make a game. It’s the first-ever iPhone game.

Frank: iPhone game.

Ken: Truly, because this is the point, we didn’t even have — all of our units still needed to be tethered to a Mac. We didn’t have standalone enclosures yet. So we were still at this phase where we had touchscreens that still needed to have a wire tethered to it. But still, we were trying to figure out what the ideal size is. And the game was the solution. And the game went like this. You would launch the game, and there was a minimal user interface. All it was a rectangle on the screen that was a random size and a random position. And the game was, tap the rectangle. And as soon as you did, it didn’t tell you if you succeeded or failed, because the idea was — just go tap the rectangle as quickly as possible. You tap the rectangle, the next one would show up at some other random size in some other random position on the screen. And the idea was to just go as quickly as possible, without, again, being, sort of, weighed down by the feedback of whether you were succeeding or failing. And you would get, then, 20 of them — and then it would give you your score, right? And so it was fun, right?

Frank: Before “Angry Birds…”

Ken: Before “Angry Birds,” we had the little…

Frank: …was random rectangles.

Ken: …rectangle going around. Now actually, what he was doing — he also wrote the software so that he was tracking, rectangle by rectangle, whether people were succeeding or failing. And also based on where the rectangle showed up on the screen. And within a couple — of course, the game was actually fun, right? I finally got 20 out of 20, right? We determined that if you made a rectangle that was 57 pixels square, that pretty much everybody could tap it 100% of the time, no matter where it was — again, since you were going quickly, you could tap it comfortably. And that number — he just, then, since he was working on SpringBoard, and it was his game, it was his app — he put that number into the app. He made the pixels 57 pixels square. And since that was a good number, we never changed it. And so that’s what wound up shipping on the iPhone.

Frank: Yeah, I love that story, that it was, sort of, a game that led to it — as opposed to, “All right, we’re gonna do every possible pixel variation. We’re gonna bring people in to test it and we’ll see what works.”

Ken: No, it was — again, he was the DRI for SpringBoard. It was his job to figure out how big the pixels should be. And he came up with a good solution, so we didn’t change it.

Advice for getting into tech

Frank: So, let’s switch gears a little bit and talk about, sort of, your advice for young people who are thinking about getting into the computer industry. Sort of, you know — liberal arts degree, computer science degree, what set of life experiences — like, what’s your general advice for people who want to join a tech company?

Ken: I think it needs to be a mix. I think if you’re going to be a programmer — yeah, go write programs. I mean, the only way to get better at things is to do them. You know, and one of the wonderful things we mentioned, open source, you know, a bit earlier — the barriers now have never been lower to get involved. I knew that when I was a young person in college — I actually started in college in 1984 — I couldn’t afford a Mac, right? I wanted one.

Frank: They were thousands of dollars…

Ken: Thousands of dollars, there was no way…

Frank: …back in 1984 dollars.

Ken: There was no way that I could afford one. And so, now the barrier to entry is much lower. So if you’re interested in making projects — well, just go out and join a community and start making them. Or maybe you can even lurk in the community. You can download the software and try to make something of it yourself. So I think that — you know, again, if you want to do something, just start doing it. So that’s one piece of advice.

And then the other piece of advice is, yeah, you do need to look at more than technology. Again, for the reason that I said a few minutes ago, which is — these technological artifacts that we’re making now have become so important to people, that if you don’t know anything about people, right? I don’t think that you’re going to be successful in the long term. And so, yeah, read books. Read books, study philosophy, go to art museums, learn about what’s beautiful and meaningful to you, answer those questions for yourself.

You know, if you can answer those questions for yourself, it would be, then, hard as a product designer to then take on the responsibility of answering those questions for other people. Because that’s what you do when you’re a technologist in, say, a product company like Apple. You’re gonna be making decisions on products that are then gonna go out in the world and are gonna be affecting other people. Other people are gonna be putting those things and bringing them into their lives. And so how do you know what’s good?

And so that’s a question that you should be prepared to answer for yourself. What do you like? And why? What are your goals? Why do you make a choice to make the product turn like this rather than that? And so it’s this combination of learning about the technology so that you can actually implement your ideas — but then you’ve gotta actually have good ideas. And again, it’s the liberal arts that provides the grounding for that.

Frank: Super. And it’s counterintuitive in Silicon Valley, right? The suite of interview questions you typically encounter when you’re interviewing for jobs are about linked lists, and do you know TensorFlow, and can you program in Python or whatever — as opposed to what’s good, what’s beautiful?

Ken: And really, you know, it’s unfortunate that there are so many questions like that. Well, obviously, linked lists — we’re still going to have need for those as we go into the future. But you know, the work that — much of the work that I did in my life, there was no way that I could have predicted, right? When I was handed, you know, a piece of hardware like this, and said, “Make a touchscreen operating system for a smartphone,” well, there were precious few examples that we could have looked at. And so how do you have experience in that thing? So again, I think getting flexibility and being able to answer the, sort of, more general questions about what you like, and what’s good, and what your higher-level goals are, because the technology is gonna change.

Frank: And then, sort of, thinking about a company — like, how important do you think it is, if you’re thinking about joining a company, that there be a figure like a Steve Jobs, who has a trusted lieutenant like Scott Forstall? Like, is the absence of those ingredients — like, I’m not gonna join that company. Or, how universal is the Apple experience is another way of asking this question, versus how, sort of, specific to a set of characters and a time in history?

Ken: Yeah, it’s a hard question. I mean, Steve was unique, right? And unfortunately, he’s not around anymore. And so I think it’s kind of a fool’s errand to go out and find who is the direct successor to Steve Jobs. You know, it’s just like, the questions are always changing. And so I think it’s a matter of finding a place where you feel comfortable, where you feel some sort of connection to what the organization is trying to accomplish — and that you like the people, and that you feel that you’re bringing something — you know, it’s this, kind of, this interesting contrast of both fitting in but then also I think providing more diversity.

I mean, that’s an ongoing challenge for high-tech companies is that — again, as the products become more and more important for our culture, I think the people who are making the products need to be a better reflection of the world as it is, right? That it’s not just a bunch of computer geeks who went to, maybe, just a few high-powered schools that have good computer science departments.

Apple’s culture of collaboration

Frank: In your book, there’s, sort of, a couple key ingredients that you, sort of, distilled the Apple experience down to. Like, basically, in reflection, this is what made the iPhone team so productive. And you talk about things like collaboration, and taste, and decisiveness. So we’ll pick up, sort of, a few of these things as we, sort of, finish up the segment. So collaboration, right? Every company says “we have a collaborative culture.” What do you think made Apple’s unique?

Ken: Well, it’s interesting that we were very, very good at combining complementary strengths, right? So, we had this human interface design team, and I worked very, very closely over time with a couple of the folks in there. Of course, there were only a few folks in there in total. And what we would do is — let’s say the example of me working with Bas Ording on the iPhone keyboard. And so, I was coming from the project primarily from an engineering direction, he was coming from the project primarily from a design direction. But Bas was pretty good at writing code, and I would fire up Photoshop and Illustrator. And so we would come up with these ideas, and we would complement each other.

And you know, to the extent — again, you know, whatever you think of software patents, we got them for the work that we did in Apple. And one of the constraints that you have when you apply for patents is that you need to list the inventors. You actually need to be honest about who contributed to the specific invention. And so they would ask us, “Well, which one of you two came up with this specific idea so that we could write it into the claim language? And maybe if we’re gonna take that claim and move it to a separate patent, we have to know who to put as the inventor.” And Bas and I would look at each other and we would go “I don’t know, we both came up with it.”

And so that’s the sign of collaboration — is that where the collaboration is so good that you don’t know where it begins and where it ends. You’re complementing each other so well that “we did it.” And there was no other way to describe it. And part of, you know, as a, sort of, concrete piece of advice — or maybe a way of describing that more at Apple is that — we didn’t have a lot of politics. You know, when Bas came up with an idea, or I came with an idea, it didn’t matter.

Frank: It wasn’t a strong attribution culture, right? Oh, that’s his idea, and like, how dare you claim that that was your idea?

Ken: And I can’t work on that. And now my manager is gonna get involved because now I’m not gonna get the credit for it and whatever. It just wasn’t like that.

Frank: But you still had to have strong DRIs, right?

Ken: Yeah. But that is also one of the ways that just made it clear about — you know, if I was collaborating with someone like Bas, or just some other engineer, you know, on the iOS engineering hallway. If I was the DRI for the keyboard, well, I was the one making the calls. You know, and as long as I kept making good calls, right? I mean, if somebody else had an idea that they really, really thought — they were gonna go to the mat, and they’re gonna say, no, I think Ken made, you know, the wrong call on this, yeah, they could buck that up the management hierarchy. But that was relatively unusual because, again, part of being a DRI is recognizing strong ideas that are coming from other people and including them in the work. And so that helps to describe some of the character of the collaboration that we had.

Frank: Well, Ken, it’s been a fascinating conversation. Thanks so much for taking us inside the chocolate factory. Like, the chocolate factory did not have very many people. So I feel really blessed that, you know, one of those people made it out and is willing to lead the tour and talk to us. And maybe that’ll be the last question I ask you, which is — you know, the famously secretive Apple Corporation, right. Did you have to get their approval to actually write the book and tell the stories?

Ken: Well, no, I didn’t. I don’t know if I was supposed to, but I didn’t. And I took a certain approach to it, which is that I think it’s a positive take on Apple. I loved my career at Apple. So I didn’t throw anybody under the bus, because there was nobody that I thought deserved it. And I limited myself to the Steve Jobs era, which is now, sadly or for good or for bad, passing into history. And again, I was one of the few people who had this perspective — this opportunity to be there during the time that some of these products were getting made.

And so, you know, again, with my background being in history and being in the liberal arts, I thought that it would be good if I collected these recollections, while I still do remember them well, and tell the story. And so, I thought that it was really more of a personal story. And so, no, I didn’t. I was imagining that maybe I would ask for forgiveness if somehow they didn’t really approve. But I thought that I wouldn’t really run into trouble.

Frank: Well, that’s great. Thank you for taking the time here, and for putting the stories down so they don’t fade into the mists of history. It’s been great having you, thank you so much.

Ken: I’ve had a great time. Thank you.

Frank: Great. So for those in the YouTube audience, if you liked what you saw, go ahead and subscribe. And then, in the comments thread on this video, let’s talk about things that you might wanna try in your own culture, now having listened to, sort of, Ken describe what it was Apple — what Apple did, sort of, what would work in your environment and what wouldn’t work in your environment? Would love to have a conversation about — how would you implement some of the ideas that we talked about in your own software development lifecycle. So see you next episode.

• 

  Ken Kocienda
• 

  Frank Chen is an operating partner at a16z where he oversees the Talent x Opportunity Initiative. Prior to TxO, Frank ran the deal and research team at the firm.

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In this episode of the a16z Podcast — which originally aired as a video on YouTube — general partner Alex Rampell (and former fintech entrepreneur as the CEO and co-founder of TrialPay) talks with operating partner Frank Chen about the quickly changing fintech landscape and, even more importantly, why the landscape is changing now.

Should the incumbents be nervous? About what, exactly? And most importantly, what should big companies do about all of this change? But the conversation from both sides of the table begins from the perspective of the hungry and fast fintech startup sharing lessons learned, and then moves to more concrete advice for the execs in the hot seat at established companies.

Show Notes

• Discussion of how pure growth is not always desirable in insurance [2:17]
• How some companies use complex data analysis to target the best borrowers [14:09]
• Approaches that use social pressure to promote profitable behavior [25:26]
• How incumbents might use multilayered branding to mirror the approaches of startups [33:30]
• Turndown traffic and how incumbents can work with startups [39:04]
• Advice for existing fintech companies regarding management and acquisitions [42:19]

Transcript

Frank: Hi, this is Frank Chen. Welcome to the “a16z Podcast.” Today’s episode is titled, “3 Ways Startups Are Coming for Established Fintech Companies — And What To Do About It.” It originated as a YouTube video. You can watch all of our videos at youtube.com/a16zvideos. Hope you enjoy. 

Well, hi. Welcome to the “a16z” YouTube channel. I’m Frank Chen. And today, I am here with one of our general partners, Alex Rampell. I’m super excited that Alex is here. So, first fact — we both have sons named Cameron.

Alex: We do.

Frank: So, affinity there. And then two, one of the things that I really appreciate about Alex — and you can sort of see this from his young chess-playing days — is he understands fintech, and incentives, and pricing, backwards and forwards. And so, fintech has this hidden infrastructure on — how do credit card transactions work, how do bonds get sold, how are insurance policies priced? And there’s deep economic theory behind all of these, and Alex understands them all. So, you’re gonna have a fun time as Alex takes you through his encyclopedic knowledge of how these things are put together. And so, so excited to have you.

Alex: Yeah. It’s great to be here.

Frank: So, what I wanted to talk to you about is, I’m going to pretend to be in the seat of a — let’s call it an incumbent fintech company, right? So, I’m a product manager at Visa, or at GEICO. And I am looking in my rearview mirror, and there are startups in the rearview mirror. And I’m very nervous that the startup in the rearview mirror — exactly as the mirror says — objects in mirror may be closer than they appear. It’s, like — wow, they are catching up to me faster than I really want. 

And so I want to understand, like, what are startups doing? How would they mount an attack on me, the incumbent? And we’re going to talk about, sort of, wedges they can use. And then that’s sort of the first half — like, how are they coming after me? And then the second half, let’s talk about, like — and what should I do about it? So, that’s sort of the premise for our — so why don’t we start with the attacks? Like, how would a startup come for me? And one way they come for me is they come after my best customers. So…

Positive vs. negative selection

Alex: Well, so this is the interesting thing about financial services, in general, because, you know, there’s a Sharp television hanging on the wall, and Sharp knows that they make more money every time they sell an incremental television. So, more customers equals more money — cause-effect. And the interesting thing is that for many kinds of financial services, that is not true, because what you’re really trying to do is assemble a risk pool. And the best example of this is insurance. 

So, what is car insurance? Car insurance has good drivers, okay drivers, and bad drivers. And effectively, your good drivers and your okay drivers are paying you every month to subsidize the bad drivers. The same thing goes for health insurance. You have people that are always sick, you have people that are always healthy. And if you were an insurance company that only provided insurance for very, very sick people, or if you’re a car insurance company that only insures people that get into accidents every day, there’s no economic model to sustain that. You actually have to accumulate the good customers, and use them to pay for the bad customers. And the interesting thing about this is that from the perspective of the good customer, it’s not fair. And I’m not talking morally or philosophically, but just from a capitalist or economic viewpoint. 

It’s like, okay, I want life insurance — and I eat five donuts a day. I just had a doughnut today. I don’t eat five a day, but I have one donut every Friday, as you can testify. And then I have a friend who goes to the gym five times a day, never eats a doughnut. That guy’s probably going to live longer than me. Hopefully not, but probabilistically, he’s probably going to have a better time than I am, in terms of life expectancy. So, why is it that we both pay the same rate? And that just seems unfair to him. Seems great to me, because he’s subsidizing me.

Frank: Yeah, gym guy subsidizing doughnut guy.

Alex: Exactly. Exactly. And that seems unfair. And then the startups can sometimes exploit that psychological unfairness, like, that feeling of unfairness. And it kind of does two things, because from the big company perspective, if you were to take away — think of it as a normal distribution. So, most people are in the middle, and they’re just going to live, whatever — to the average of 79.6 years, or whatever it is right now. Some people are going to live forever. They’re the ones that, you know, have the olive oil, go to the gym, and do whatever it is that they do that makes them live a long time, great genes. And then some people are going to die early. And from the perspective of the startup, if you can get all of the people that are going to live much, much longer, you’re going to be more profitable. 

It’s the same thing for car insurance. If you can get all the people on the good end of that distribution curve, you’re going to make money. And then the nice thing is that if you’re starting a brand new company and saying, “Hey, I give you a loan, if you can’t get a loan.” Who’s going to sign up for that? People who might be bad. If I say, “I’m going to give you insurance, if you can’t get insurance,” who’s going to sign up for that? The people that are eating all the doughnuts. And that might not be very good. So, it actually has this nice, kind of, symbiosis between — if you do it correctly, you get positive selection bias, in that you establish a new criteria. Part of that new criteria is based on data, but part of it is based on psychology. 

But the psychology is, “I’m treated unfairly, I want to be treated more fairly.” That yields a lower price for people, for [a] pretty demand-elastic product. So I say, “I can get life insurance at half the rate because I’m going to the gym? That sounds great. That sounds fair.” But to answer your question, what the incumbent might be left with, is not half of the number of customers. That could be the case — it could be half the number of customers — but it could be half the customers and all of them are entirely unprofitable.

Frank: Right. They took over all the profits. They didn’t have to take all your customers, they just had to take the good ones.

Alex: Right. So you’re actually — and if you just take — and the funny thing is that because it’s not — it’s not like I want to get, oh, “GEICO has X million customers, I want X plus 1 million customers.” You actually might want 1/10 as many customers as GEICO, because if you can just get the good ones — I mean, what if you give people a 50% discount, not a 15% discount, like GEICO advertises about — but a 50% discount on their car insurance. And these are the absolute best drivers in the country. How many claims do you have to pay out on the best drivers? You might have to pay out nothing, literally nothing. And if you have to pay out nothing — and there are these mandatory loss ratios for different insurance industries. So, I don’t want to get into that. 

But imagine that, unregulated, you can pay out nothing — consumers feel like they’re treated very fairly, they’re rewarded for better behavior. This begets positive selection and not adverse selection — then you’re going to have the most profitable lending company or insurance company in the world, because it really is a unique industry where more customers is actually worse than less but more profitable customers, because each incremental customer is like a coin flip of profit or loss. Might generate profit, might generate loss. And that’s not true for the vast majority of industries. Like, Ford never sells a car saying, “Maybe we’ll lose money on this customer.”

Frank: Right. Right. They just, like — I need everybody to buy a Ford F-150.

Alex: They might…

Frank: If you don’t buy an F-150, I need you to buy — this other thing, that’s the Expedition or whatever, yeah.

Alex: They might lose money on the marginal customer until they hit their fixed costs, but they’re never going to have a coin flip of when they sell the car — “hmm, maybe we shouldn’t have sold that car.” But that’s what every insurance company has when they underwrite a policy. That’s what every bank has when they underwrite a loan, so…

Frank: Yeah, auto insurance companies need to find people like me. I have this old Prius, right? First, it’s, you know — [a] hugely reliable car, and then I drive like a grandma because I’m optimizing for fuel efficiency. So, you know, I rarely go above 65. And so, like, rarely say — if I’ve never filed a claim. They need more customers like me, and that’s what drives the profits, right?

Alex: Yes.

Frank: Because there’s no payouts?

Alex: Well, not only does it drive the profits, it actually subsidizes the losses — because there are a lot of people who are the inverse of you. And you’re paying for those people, and the transfer mechanism is through GEICO.

Frank: Yeah. I saw an ad in my Facebook feed recently for Health IQ. And I think they’re doing something like this too, right? So, I think the proposition was, “Hey, can you run a mile in less than nine minutes? Can you bench press your own weight or something like that?’ There’s all these, like — ooh, healthy people. And is that the mechanism they’re exploiting?

Alex: It’s exactly that. I would say the first company to probably do this on a widespread basis in fintech land was SoFi. And SoFi said, “Hey, you’re really smart.” They actually coined this term — they call it the HENRY — High Earning Not Rich Yet. Because if you looked at how student loans work, it’s like, everybody gets the same price on their student loan. It doesn’t matter what your major is, it doesn’t matter what your employment…

Frank: Prospects.

Alex: …thank you, what your employment prospects are. Everybody gets the same rate. You get this rate, you get this rate, you get this rate, because a lot of it is effectively underwritten by the U.S. government. And that’s not — so, think about it, again, from the twin pillars of psychology. Where, I mean, psychology of the borrower — like, how come I’m paying the same rate as that person who’s going to default? That’s just not fair. I’m never going to default. In fact, I’m going to pay back my student loans early. So, that helped.

And then, again, positive selection versus adverse selection, because — and actually, refinance has this concept, in general. Because I would say, if you’re planning on declaring bankruptcy, or if you’re saying, “I’m going to join Occupy Wall Street and never pay back my loans, and I hate capitalism.” Why would you go refinance? It just doesn’t make sense, because you’re just going to default. So, if you raise your hand — and actually, it’s interesting, even on the other side, there are a lot of companies in what I would call the debt settlement space. And this is something that most people don’t know about. But if you listen to some interesting talk radio, you’ll hear all these ads for debt settlement. 

And what is debt settlement? It’s saying, hey, do you have too much debt? If you call us, we will negotiate on your behalf and pay off your debts, and then you just owe us. And you, kind of, need this intermediary layer, because imagine that you owe $10,000 to Capital One, and you can’t pay it back. And you call Capital One, it says press 1 for your balance, press 2 to get a new card mailed to, press 3 if you don’t want to pay us the full amount and want to pay us less. Everybody is going to press 3, right?

Frank: Everybody press — this is why they don’t offer that option. <laughter>

Alex: They don’t offer that option, nor would they ever. However, on talk radio — and this is very big in the Midwest — like, you’ll hear, you know — Freedom Financial. They call Freedom Financial, and we will settle your debts for you. So, they call Capital One and say, “Look, Alex can’t pay you back. We’ll pay you $2,000 right now, and then you’re going to get rid of the loan.” Like, “Well, we’re not happy taking 20 cents on the dollar, but it’s better than 0 cents on the dollar. Fine. We’ll take it.” And then you owe Freedom Financial the 20 cents. But why do they feel comfortable underwriting that? Because you [raised] your hand, you know. You said, “I want to get out of debt.” And that’s positive selection bias right there. 

Because people who are just deadbeats — because, you know, behind every credit score, if you think about how that works — it’s willingness and ability to repay. And the psychological trait of the willingness is, in many cases, as important as the financial constraint of the ability. So, if I owe $1 million to somebody, and I only make $100 a year — doesn’t matter how honest I am, I can never pay that back. It doesn’t matter how long — I mean, I could live 10,000 years and I guess I could pay it back. But otherwise, I can’t pay that back. But the willingness to repay is interesting. And that’s very important. 

And that’s again, this kind of psychological trait, that’s captured in this idea of positive selection. So, what does SoFi do? They kind of, again, hit this twin pillar, which is — I want to only get the good customers. I’m going to reprice them and steal them from the giant pool, that, again, normal distribution. These are the losers, these are the whatevers, and these are the people that you have no risk on whatsoever. Let’s steal all of these people over here. And it makes them feel good. It’s a better marketing message, because it’s differentiated. Like, how do you compete with everybody? It’s like, “Hey, we’re just like Chase but smaller, and a startup, and not profitable. And you probably shouldn’t trust us.” Bad marketing message. Good marketing message is, “You’re getting ripped off. We’re going to price you fairly. Come to us.” So, SoFi did this for lending, and then…

Frank: And what did Health IQ do?

Alex: So, Health IQ did this for health, really for life insurance. So, they started off with a health quiz. Because, I mean, it seems almost self-evident that healthy people are healthy — I mean, it’s a tautology. Like, healthy people are healthier than not healthy people. But can you actually prove this from a life expectancy perspective? So, they started off with just recording data, and then building a mortality table. And it turned out that, you know, what I would assume is a prima facie case, turned out to actually be correct — which is, these healthier people do live longer than not healthy people. And then they turn that into both a positive selection advertising campaign, which differentiated them from a brand perspective — but also left them more profitable. 

So, what they do is they say, “Yeah, can you run a nine or an eight-minute mile? Can you do these things to prove that you’re better than everybody else?” And why is that important? Well, from their own balance sheet or profitability perspective, they want to get these good customers. Versus, you know, a brand new life insurance company that said, “Hey, life insurance takes too long to get, it’s a big pain, and it’s expensive. We’ll underwrite you on the spot in one minute, no blood test.” That’s gonna be adverse selection. That’s like, ooh, I think I’m gonna die soon. <Right.> I want to get — and everybody rejected me for life insurance. I’m going to that company, as opposed to here, they’re only getting the customers that kind of hit — they think they’re going to hit the underwriting standard, which is great. They think it’s fair. So, it’s a differentiator from a brand perspective, and then it turns out that again, each marginal customer in insurance is kind of a coin flip. They’re getting a weighted coin, because they’re only getting people on the far right side of this normal distribution.

Using data to find the best customers

Frank: So, wedge number one is exploit psychology, right? Positive selection, rather than negative selection. And what you’ll end up with, because of this sort of unique dynamic of the fintech industry, is you’ll end up with the most profitable customers. What’s wedge number two? We’re going to talk about, sort of, new data sources, and what startups can do to sort of price their products smarter than incumbents.

Alex: Right. So, imagine that you have a group of 100 people, and of the 100 people, half of them are not going to pay you back. So, think of this as the old combinatorics problem of, you know, bins and balls. You’ve got this giant ball pit, you scoop up 100 balls in your bin, and half of them are going to be bad, half of them are going to be good. So, what’s a fair rate of interest, if you’re a lender, that you have to charge this whole bin, if half of them are going to default, and you assume that you can’t lose money? The answer is going to be 100%.

Frank: Oh right. Because half of them, you have to make up for all the deadbeats.

Alex: Right. So, half of them — you know, you lose all of your money, half of them, you double your money. So you’re back to square one.

Frank: Now you’re even.

Alex: Now you’re even. So, the problem is that that’s not good. Because well, in the United States, you can’t charge 100% interest. It’s regulated.

Frank: Right, right, illegal, step one.

Alex: It’s called usury. There are other parts of the world, again, illegal. Step one. Europe — so, that’s a problem. But, what if you can use different data sources to — again, it’s not positive versus adverse selection, as in for some of the insurance companies, but it’s saying, can I collect more forms of data? So that instead of saying the only way that I can make my operation work is to charge an interest rate which actually turns out to be illegal — can I come up with more data sources that effectively — even though discrimination sounds like a terrible word, and it’s certainly used in that construct. If you discriminate against criminals, that’s fine. I mean, some of the people that try to take advantage of lenders are actual, like organized crime. You don’t want them in your bin, you want to throw them out. 

How do you take more data sources and actually start measuring this? And the interesting thing here, and it’s somewhat unfortunate — but you have a giant market failure happening in many different regions of the world. Because in the United States, like, the top interest rate that you can charge — it’s regulated on a state by state basis — but Utah has a 36% usury cap. So, a lot of people export that cap. That’s a lot less than the 100% that I was mentioning. And there are lots of ways of, kind of, gaming that system. You charge late fees, and you charge this fee, so it actually might end up looking more like 100% or 200%. So, you can’t charge more than 36%. 

And then you actually can’t use certain types of data, if they are prone to having an adverse impact. So, if you think about how machine learning works — I always kind of describe it somewhat over simplistically as linear algebra, where I have — here’s every user that I’ve ever seen, here’s every attribute that I’ve ever measured. And what I’m looking for is strange correlations that I can’t even explain. So, I’m going to ask you — I’m not even asking you a lot of these things. It’s like, how long did you fill out this field for on my loan application? Did you enter all caps or not all caps? Like, just all of these different things.

Frank: Did you take the slider on “how much do you want?” and jam it all the way to the right. All of these things.

Alex: Right. I can ask you, do you have a pet or not? That might be interesting. I don’t know if that’s a leading indicator of defaults or not, but I want to collect all these different variables. And then at the end of the day, I’m going to see “default” or “not default.” That’s the output. And then I’m going to see what’s correlated with that. And it’s a little bit of this, it’s a little bit of that — I can’t explain it, but the computer can. Now, the problem is that in the United States you actually can’t do this, because it might have an adverse impact. And what does an adverse impact mean? There actually was outright and terrible discrimination in lending in the United States. Well, there’s, unfortunately, terrible discrimination in many things in the United States — but lending was one of several, or one of many. 

So, imagine that I said, “Are you married or not? Oh, you’re not married? I’m not going to make you a loan.” Well, that’s illegal now. “Are you this race? Oh, I’m not going to make you a loan.” Well, that’s illegal now. So, what did people do to get around — the people that were actual racists? Or actual, like — maybe they weren’t racist or discriminatory at heart, but they were picking up on cues. They’d say, “Oh, what part of town do you live in? Oh, you live [in] that part of town. Well, that’s like 100% correlated with this race, or this gender, this, that. I’m not going to make you the loan.” So, the law was strengthened. So, there’s a law called Fair Lending in the United States. And then one of the components of it, is this idea called adverse impact. It’s different than adverse selection. It’s saying, I don’t care what you said you did for why you rejected Frank for a loan. If it turns out that everybody in your reject pile has a disproportionate, you know, gender ratio, race ratio — something like that — I’m going to assume that your underwriting standards are having an adverse impact.

Frank: So, you as a bank, couldn’t say, “Hey, look, I asked him if he had cats, and I’m using that to make the loan decision.” If it turned out that having cats was correlated with being a particular race, they couldn’t use the “cats” answer to deny you a loan.

Alex: Correct. Because that was — and in all fairness to the law, this is what people use with your geography. “What zipcode do you live in? Oh, you live in that zip code?” One hundred percent you are a member of this particular race, and the intent all along was to discriminate against people of that particular race. But now, instead of using loan officers that use — you know, God knows what to decide — do I want to make you the loan or not? You’re using a computer, you can look at the code. 

So, I think there is a lot of — there are some anachronistic laws that have to catch up here. But let’s take an area outside of the U.S. to answer your question, where perhaps you don’t have interest rate caps. Because, you know, the thing that a lot of people say, “Oh, you know, 200% interest is terrible. Five hundred percent, that sounds awful, you should go to jail for that.” But what does APR mean? APR stands for annual percentage rate. And what if I’m giving you a four-day loan? So, I say, okay, I’m gonna loan you nine dollars right now, you don’t look very trustworthy. I want you to pay me back $10 on Monday.

Frank: Yeah, that doesn’t sound so bad. It’s a buck, right? Yeah.

Alex: Yeah, it’s like, you’re gonna pay me a dollar. But what is that on an APR basis? That’s like 9,000%. I made that up. But it’s probably about that, right? Because it’s 10% every four days,or every three days, 10% every three days — and that accumulates. Like, that’s a lot of money or a lot of interest on an APR basis. But it’s the wrong metric because, effectively, it’s like trying to figure out what your marathon time is based on your 100-meter dash. Like, the winning marathon time would be an hour, and that’s not true. We know that nobody…

Frank: Nobody can do that.

Alex: …can do run a two-hour marathon, right now. Yeah. So, maybe Angela can.

Frank: Maybe Angela.

Alex: So, there’s a company that we invested in called Branch. And what they’re doing is, they just collect every form of data possible, and they look for these strange correlations. And the interest rates on an APR basis might be high, but they’re really charging, like, a dollar to the lenders.

Frank: And these are small loans, right?

Alex: They are very, very small loans. So, I loan you — and actually the other interesting — like, one of the nice data points that they’re accumulating over time that is a really interesting idea, I think — it’s not new. In fact, it’s almost “Back to The Future” old, where they loan you a dollar, if you pay it back, they loan you two dollars. If you pay it back, they loan you four dollars. If you pay it back, they loan you $10. And they ladder up your credit, and they keep that information proprietary to them. Because induction turns out to be a pretty good formula for figuring out not so much the ability to repay, but the willingness to repay. You’ve established a pattern of willingness to repay. But they also look at “where were you today?” And again, you provide all of this information in order for them to crunch this — in order for them to give you a loan at, ideally, a lower rate. Because the more information — because it’s kind of twin pillars, right? The less information we have, the higher the rate that we have to charge. Not because we’re evil, but because otherwise, you’re going to have a market failure, like you have in lots of the…

Frank: Yeah, the bin and ball problem, right?

Alex: Exactly.

Frank: Because you have no idea how many deadbeats.

Alex: Exactly. And if I don’t have any idea, I either have to charge a high rate or not charge anything at all. And “not charge anything at all” doesn’t mean, like, everybody gets a 0% loan. It means I don’t make any loans. And like both of those are bad outcomes. The better outcome is, you accumulate more data, and you figure out “here are the good people — let me not accept the bad people.” Because again, the way that the good people end up paying more money is if the company starts accepting more bad people, because it goes back to what I said at the beginning — which is, more customers, in this unique industry, often is bad if you don’t understand how to select them correctly. And for many of these new-fangled lending and insurance companies, the default customer is going to be adversely selected. Because if you’re a new lender, and you have no underwriting standards, basically, you’re advertising free money — never pay us back. And those are the people that will be attracted to you, both the criminals and the non-criminals in droves.

Frank: Yeah. So, this is, sort of, startup attack wedge number two, which is — I’m going to generate a new data source that allows me to price my product in a way, or reach a customer that a traditional company would never even try, or they don’t have the data source, so they have the bin and ball problem. So, what are the types of data that Branch went to go get to try to figure out — should I give you a loan of a dollar or two?

Alex: Well, the other type of data — so, Branch was somewhat unique, in that they said, “We’re going to get data from your phone.” And it seems odd — it’s like, most lenders in the developed world — or not developed versus undeveloped. It’s really, like — with developed credit infrastructure. If they look up…

Frank: If there’s a credit bureau.

Alex: They look up your credit report. If it’s good, they make you a loan. If it’s bad, they don’t make you a loan. It’s actually not that hard. And there are all sorts of nuances that you can layer on top, but this is how it’s been working for a long time in the United States as an example. Whereas there, it was like, “Okay, where did you work today? Did it look like you worked today?” So, it was stuff like that. And even like, how many apps do you have on your phone? Like, weird stuff that you would never assume actually has any kind of indication of willingness or ability to repay, but in many cases, it does. Like, are you gambling? Well, if you have a gambling app on your phone, you’re probably gambling. Maybe that’s good. Maybe it’s bad. It’s actually not making human judgments — and it’s also not looking at any one of these unique variables as a unique variable. It’s looking at them in concert, and then correlating them with these outcomes, so really observing the outcomes and then linking them back to all of these different inputs.

Frank: Yeah. I remember talking to the team when I was researching my last machine learning presentation, and the fascinating things that I found were — if you’ve got more texts than you sent, you were more creditworthy. If you had the gambling app, you were more creditworthy, rather than less — which is not kind of what you would expect. If you burn through your battery, you were more likely to default, right? So, like, all of these things where a human, or loan officers, would never really guess, right? And they probably would guess the wrong way because they wouldn’t guess…

Alex: Because many of them are counterintuitive. And then many of them, they’re not unilateral. Like, so it’s not just — I mean, I don’t know. But it’s not just the battery thing. It’s the battery thing with this, with that, with that. If you think…

Frank: Right, different combinations, right?

Alex: It’s like, you know, humans can only really observe three dimensions plus time — so I guess four — and these are, you know, 9,000-dimensional problems. So, it’s much, much more challenging for humans to really grok.

Influence of social pressure

Frank: Yeah. Got it. So, that’s the — sort of the second category of attack. Which is, you generate a new data source, and then that allows you to price or find customers in sort of a more cost-effective way. Let’s talk about the third, which is around, sort of, fundamentally changing behavior. So, why don’t you talk about — maybe Earnin is a good example of this?

Alex: Yeah. So, if you assume that humans are static — so they’re born — both of our Camerons were born, and their DNA is set upon birth. Maybe it changes a little bit with some mutations from some gamma rays here and there. But it’s set upon birth, and then human behavior never changes. And that’s one way of looking at things. Then you think about adverse selection versus positive selection. Good drivers are always good drivers. Bad drivers are always bad drivers. Let’s just get the good drivers. 

So, the other category — and it’s not just that these other two groups don’t do this. But if I look at a company like Earnin, most payday lenders are reviled, because they charge high fees, they don’t educate their borrowers very well. Now, it actually provides a valuable service, because if I’m getting paid next Friday, but my rent is due today, and I don’t have money, do I want to get evicted? No. I want to get paid right now, and the only person that does this is the payday lender. But the payday lender is competing with other payday lenders for advertising in the local newspaper, or something. And if they’re able to rip me off more, not because they’re evil but because they have to afford the advertising spot — they’re now incented to do so. So, it’s a vicious cycle. 

So, let’s talk about Earnin. So, what Earnin does, is they say, okay — we know that you’ve worked this long. So, again, new data source — because the phone’s in your pocket, and you work at Starbucks, and you’re getting paid hourly, and we’ve seen the phone in your pocket, or in your locker in the Starbucks office, you know — by the barista counter, for eight hours. So, you worked, we saw your last paycheck hitting your bank account, we know that that’s where you work. We’re not taking your word for it. We have real-time streaming information about this. And now we will give you your money whenever you want. Not money that you haven’t earned yet, but money that you have earned, but you actually haven’t gotten paid for yet. And then you can tip us. There’s no cost. If you want, you can tip us.

Frank: No interest, no fee, no — huh.

Alex: Nothing. If you want to pay us nothing, that’s fine. I mean, we would appreciate it if you pay us something, because obviously, we’re providing a valuable service for you. And then you can even give tips for your friends. There’s this community that’s really emerged of people on Earnin. And actually, if you look back at different business models — but this idea of microfinance, in general. So, if you think about Muhammad Yunus and what he did — this idea of, can you encourage people to pay back loans using social pressure? So, again, not adverse selection versus positive selection, but actually trying to force everybody down positive behavior.

Frank: Yeah. Let’s get the community to encourage repayment.

Alex: Right. Because then, saying — or, like, let’s get the community to encourage people actually driving safely, because there’s underwriting at the time of admission. There’s underwriting based on ongoing behaviors. So, like, many of the car insurance companies that are brand new are saying, “We will re-underwrite you, like — yeah, if you drive like Frank when you signed up, great. But now you switched into, like, race car driver mode, and you were trying to hack us, but we’re actually monitoring your speedometer at all times. So, guess what? You got a higher rate now. So, that might encourage you to drive safely.” 

If I’m Frank, and I drive safely in my Prius, but then I decide — and then I got a really good rate on my car insurance as a result. And now I’m like “Aha, I gamed the system, now I’m going to drive like a maniac.” Well, the nice thing is that you can make underwriting dynamic, and you can say, “All right, we’re actually going to re-underwrite you every day.” So, we have the positive selection to try to attract the Franks. We have the continuous evaluation to try to encourage the right behavior, post-Frank signup — and also to stop the gamification of — it’s like, I’m going to pretend to be safe and then be like a maniac. But then how do you actually get — what if Frank was a bad driver initially? Doesn’t fall into my positive selection loop, but I still want to try to make Frank a better driver.

Frank: Yeah, if I can turn him into a good driver, he’d be profitable. So, what can I do?

Alex: Right. Because that’s the flaw with, kind of, wedge one and wedge two, of like, creaming the crop. Really wedge one, which is we’re going to cream the crop. We’re going to do what SoFi did, we’re going to do what Health IQ did. I mean, it’s a great strategy, but the rest — again, if you assume that it’s all nature and there’s no nurture, then perhaps there’s nothing you can do. But if you can actually try to nurture better behavior, you actually see better — you do see better behavior, and then the profitability goes up. And the interesting thing there is that you’re still finding mispriced customers, but you’re actually helping turn them into correctly priced customers. 

So, you know, somebody, like a bank would turn away that customer, and say, “We don’t want them because they have a 500 FICO,” which is really bad. And then you have to figure out — and as with all of the new startups that are saying, “We only want the best customers — we want to leave the banks with the bad customers.” But it’s kind of the twin pillars of — can you identify something that’s below that credit score, or below that driving score, or something? And then can you encourage positive change? And if you can, then you can start actually creaming the crop of the bottom half of the customers. Not even the bottom half, it’s the customers that are just neglected, because nobody wants to underwrite them. And then you do that, you take them on, because you have a secret to change their behavior.

Frank: Right. You’re seeing a lot of companies that, sort of, are using behavioral economics research to figure out, “How do I nudge people into better behavior?” And so, this would be an example of how you’re trying to change behavior to get the profitable customer.

Alex: Right. So, you know, there is one company in the lending space a while ago called Vouch — I think ultimately, it didn’t work. But when you apply for a loan, it actually, kind of, taps your social network, and it requires that they do a reference for you. Either a reference, in terms of like, yes — Frank is a good customer, you can trust him. And even kind of a co-commit. So, I’m getting a loan for $1,000, and you say, “Yeah, Alex is okay.” Or I’m saying, “Frank is okay. And if he doesn’t pay you back, I will put $100 in, because that’s how confident I am.” And it’s not all $1,000, but it’s $100. 

And then you’re my friend — I go bowling with you. We go take our Camerons out together. And if you don’t pay back this $1,000 to this, kind of, faceless, large, evil corporate entity — not really — but if you don’t pay that back, I’m on the hook for 100 bucks. I’m not going bowling with you anymore. So, there are other things that are really interesting to try to encourage the correct form of behavior, when — and, actually, part of it is just making it personal. Like, this was the whole Yunus theory. Which is, if you are, kind of, held accountable by your peers, that is so much more powerful than getting a collections call from Citibank. Like, you’re like, “Ooh, that’s the collections number?” iPhone block. Done. But how am I going to block my friends out?

Frank: Right. If Alex calls me and said, “You really got to pay that loan back, otherwise, I’m out 100 bucks,” right? That’s much more powerful. I mean, this has worked great for Omada Health in a different domain, right? Which is, if you are trying to get a pre-diabetic patient not to get diabetes, the most effective thing to do is lose something like 6% or 7% of your body mass. And the way they do it is they get you into a group. They mail everybody a scale. Everybody sees your weight in the morning, right? Like, that’s a powerful motivator.

Alex: Yeah, I mean, this stuff — psychology is very powerful. So, there are a lot of tricks that you can use here. And if you understand the impact of them, you actually have to reassess your entire branding and customer acquisition strategy.

Frank: Right. Right. All right. So, remember, I opened up pretending to be the product manager at Visa. And now we’ve gone through all of these three categories of how the startups are coming for me — and like, I’m starting to sweat here, right? They can come and get my best customers, they can generate new data sources that I would have a hard time doing. They can actually even go after sort of worst customers, change their behavior, turn them into profitable customers. I’m scared now. Like, what in the world should I do? Like, you’re in my seat — you’re the head of innovation, or head of strategy, or head of digital at one of these big fintech companies — what should I do with respect to startups?

Alex: Well, I think it’s actually very hard for a company that’s trying to be all things to all customers. Because, if you look at what SoFi is — look at SoFi’s brand. Brand is, you know, we are the high — like, if you’re great, you’re good enough for us.

Frank: If you’re HENRY, right?

Alex: If you’re a HENRY, you’re good enough for us. Health IQ. If you’re healthy, you’re good enough for us. So, on that sector of the curve, you know — how does GEICO say, “Hey, if you’re a good driver, go to this special part of GEICO. If you’re a regular driver, you still save 15%. If you’re a bad driver, and you had a DUI, well, we can cover you over here.” It’s lost in this, kind of, giant GEICO gecko marketing message. So, in many cases, it actually helps to have sub-brands and divide this up, which is somewhat anathema to a lot of companies that want to say, “How do we get as much efficiency and synergy as possible? We’re going to have one overarching brand.” And you know, one of my favorite examples of this — kind of, different industry — but the highest end of the highest end of jewelry is Tiffany & Co. Or, one of the highest and the highest end.

Frank: Beautiful, beautiful rocks.

Alex: And for a long time, it was owned by Avon.

Frank: No, really?

Alex: You know, the Avon lady, Avon. And if Avon bought Tiffany, which they did, and they said, “Okay, we’re gonna rebrand Tiffany & Co. as Avon,” like, that doesn’t work. Like, you’re not going to get 80% gross margins on whatever they sell at Tiffany & Co for…

Frank: Breakfast at Avon’s just doesn’t have quite the right ring.

Alex: It doesn’t work. And then for Avon to say, “Okay, you know, the door-to-door salesperson or sales lady with the pink Cadillac that’s going around, like — we’re now going to have her push, you know, $2,000 bracelets, as opposed to the normal $10 fare.” Like, that’s not going to work either. But it actually can make sense, if you want to just appeal to more customers, you have different brands, and you don’t want to all suck them together. So, you can imagine instead of having, you know — GEICO could be your generic brand, but then you could have — I think I mentioned this to you once before, a friend of mine is Mormon. Doesn’t drink alcohol, and says we should have Mormon Insurance for cars, because it’s just totally unfair. Again, going back to the psychology point, like — why is it that I’m paying for the drunk idiot that goes through the stop sign? I don’t drink, I can prove that. I will never drink, I have a million friends just like me that will never drink. We should all get car insurance — we should all get a 40% lower rate. 

Do they think of GEICO when they go there? Maybe they could. But it could be like, Mormon Car Insure- — sorry, I’m not good at branding. But you could have a separate brand for all of these separate subgroups, and have the same underlying infrastructure behind all of them. But, again, part of this is just how do you brand and how do you market effectively? Because if you look at the efficacy of Health IQ ads, or the efficacy of SoFi ads, there are so much higher — because again, you have this large group of people — or in many cases, small but valuable groups of people — that feel like they’re being treated unfairly. So, yeah, GEICO is save 15% on auto insurance, click here. Mormon Car Insurance, advertises to LDS members in Utah, shooting fish in a barrel — that’s going to have a dramatically higher click rate. And then many of these products are also very demand-elastic. So, I’m not saying save 15% on car insurance, I’m saying save 80% on car insurance. It’s very easy to do. Click here, positive selection bias. That’s going to work better than GEICO, but we also have something for Mormons, too.

Frank: Right. Yeah, the goal is to find the LDS’ers and the hypermilers who are really safe, etc., etc., right? And so it’s very counterintuitive, because if you’re at a big company, you’re thinking scale — how do I get the next increment of revenue, growth, or profit? And you’re saying, actually go the other way. Don’t try to make your single brand bigger. Try to think about a dozen sub-brands, each going after sort of the perfect market for them. How do you positively select into a sub-market?

Alex: Well, the other side effect of this is that, you know — part of the asymmetric warfare that some of the startups have is that, if you wanted to kill GEICO, you wouldn’t steal 100% of their customers. Because if you did that, that would almost be too obvious. You’d steal 20% of their customers, but only the good ones. So, imagine that GEICO could actually devolve, or evolve — depending on your point of view — into 10 sub-brands. There’s no more GEICO. But it’s just, like, the 10 sub-brands basically select for the right types of customers, or even help judge and improve behavior from other subsets of customers. And then expel the 30% that are just bad news. And if you can expel the 30% that are bad news, you might say, “Okay, well, all of this de-synergy of going from 1 brand into 10 sub-brands — well, that was idiotic, because now I have fewer customers.” But actually, no, it isn’t. Because you might have fewer customers, but it’s not like selling widgets, you’re selling probabilistic widgets — where, in many cases, you have negative gross margin when you sell a widget. So, it’s important to figure out how do I get the good ones, keep the good ones, and then get rid of the bad ones?

Branding for incumbents

Frank: Yeah. So, that’s one strategy, which is, sort of, sub-brands — and, sort of, customer segmentation. What if I’ve been told by my management team, “Go find a bunch of startups to work with,” right? Sort of, somehow figure out a marketing or co-selling relationship so that we can start experimenting with some of these new models, and we can keep an eye on the startup community. So that maybe, you know, we can put ourselves in the best place to buy them if it turns out working? Is there a way to do that?

Alex: Well, there are many ways to do that. Probably the easiest way that is often counterintuitive for a lot of big companies — is I call this the turndown traffic strategy. So, Chase turns down a lot of people for loans, either because —again, it’s the bin and ball problem — where it’s like, well, you might be good, you might be bad. Sometimes it’s not even that. It’s like, we think you’re good, but we just can’t profitably underwrite a $400 loan. But Chase has all the traffic. So, what is turned down traffic? It’s saying, “Okay, we rejected you. Hey, here’s a friend that you might like.” So, this is not cream of the crop — this is the bottom tier on the ingestion point for a big financial institution saying, we don’t want you — which is kind of a mean thing to say. A way to ameliorate that potentially is saying, “We don’t want you because we’re not smart enough to — hey, sorry, we’re working on it. All our systems are down. But here’s a great startup that does.” Now, why would you send customers to a startup? Well, the number one thing — GEICO spends $1.2 billion a year on advertising. It’s really hard to compete with that…

Frank: A lot of spend.

Alex: …from a — so, if I could not spend a dollar of advertising, but give 90% of my net income to GEICO as a startup, I still might make that trade. I mean, we don’t always like this, because we want to see — do you have your own acquisition strategies, your own acquisition channels — you’re not dependent on the big company. But from the big company’s perspective, turndown traffic is often brilliant. Because it’s saying, “Here’s somebody that knows how to underwrite better than we do, or more profitably than we do. We’re going to send our customers” — we said, you know, otherwise, what happens? 

And this is what I think Amazon got right in an area where everybody else got this wrong. Amazon said — okay, you’re on Amazon’s website, and you’re looking at the “Harry Potter” book. And then right next to our “Harry Potter” book is an ad for Barnes & Noble for the “Harry Potter” book. Barnes & Noble is like, “This is amazing! We can buy ads on Amazon’s website! They’re so stupid. We’re buying ads, it’s stealing their customers.” But every time you click on that Barnes & Noble ad, Amazon made a dollar. It’s 100% gross margin — they share that with nobody. There’s no COGS on that. 

And then they can use that dollar of pure profit to lower the cost of their “Harry Potter” book, which actually made more people want to go to Amazon to look for “Harry Potter” than go to Barnes & Noble — that said, we’re locking [you] within our walls. It’s like a casino with no clocks. And we’re gonna pump oxygen in. Because what a lot of big companies don’t get is that Google is just one click away. Like, why give all the excess profits to Google, when I go to Chase, I get turned down for a loan. And then I go back to Google, and I say, “Where else can I get a loan?” Well, Chase should be sending you there. And actually, they’re starting to do this. So, that’s one strategy that I think has a lot of legs.

Frank: Yeah, so turndown traffic. That’s super interesting. Look, you spent all the money to bring them to your site, and otherwise, you would have just lost them, right? That sort of sunk cost.

Alex: Exactly.

Acquisitions and team-building

Frank: So, you get something out of it. That’s fantastic. Well, why don’t we finish this segment out? I want to do a lightning round with you, which is — I want sort of, you know, instant advice for somebody in this seat. I’m an exec at Visa or GEICO. And so I’m going to name a category and you sort of just — of how to deal with startups, and you can react to it. All right. So, category one is, you should always invest super early — as early as you can into a startup.

Alex: So, again, remember adverse selection versus positive selection. So, I would say, the companies — so, this is what you have to get right. Which is, if you take nine weeks to make a decision, and like, you know, we’ll decide within a day — or if Sequoia or Benchmark or some other great venture capital firm will decide within a day — like, you’re not going to get good deals if you take nine weeks. So, it can be very, very important to invest early — but, like, the best things always seem overpriced. Like, this is something that we’ve learned, and it’s the same thing with underwriting your own customers. Which is, like, if something is too good to be true, it probably is. So, some of the best things are actually very expensive.

Frank: Yeah. All right. Just given those dynamics, just wait for the later rounds. Let all the venture guys take all the risk, and then, like, you plow in late, that should be a nice strategy.

Alex: I think, in general, that’s probably a better strategy. But again, saying, like, “Ooh, we’re getting a great deal on this one.” That’s probably — then, you know that you’re the adverse selection source of capital, as opposed to — okay, here’s something I can’t believe we’re paying this much money for it. We have to fight our way in. There are 10 other people that want it. You probably know you’re onto a good customer, if you will, or a good investment.

Frank: All right. Partner with as many possible startups as you can, because you don’t know who’s going to win, so let’s open up a marketplace. A hundred startups that I have — either turned on traffic relationships or something.

Alex: I think actually that does make sense. I mean, there should be some kind of gating item to make sure, like — maybe not 100, but how do we stay close to different models that are working well? Because the main advantage that the incumbents have — again, it depends on lending or insurance — but it’s typically something around cost of capital and something around distribution. So, if you have both of those, and you’re not using it to the fullest extent — like, you turn down a lot of customers — you should try to find an intelligent way of using this and using — that’s your unique thing. Like, venture capital firms don’t have that. I can’t fund somebody and send them a million customers tomorrow, but GEICO could. But you can’t do that 100 times, you can probably do that some sub-segment of times, according to how much, you know, additional traffic — or whatever it is that the unique advantage that you want to bring to bear.

Frank: All right. Now, on M&A strategy. M&A strategy one — buy super early before it’s proven to work — because, presumably, the prices are lower. So, M&A strategy early — focus on early-stage companies.

Alex: I’m a big fan of what Facebook’s done with M&A, and I encourage everybody in pretty much every other industry to do this. So, Facebook has two formats for M&A. One is, we buy the existential threat that could kill us, and we price it probabilistically. So, surrender 1% of our market cap to buy Instagram. That was way overpriced.

Frank: Instagram, that’s a good example. Everybody said that, they said, “Why are you…”

Alex: But one — like, there’s a 1 in 100 chance that this is going to be bigger than Facebook. We should probably surrender 1% of our market cap. WhatsApp, 7% chance, or whatever it was. I think it was 7% of Facebook’s fully diluted market cap — was spent on WhatsApp. These were brilliant acquisitions. Oculus. I mean, Oculus hasn’t turned out the same way that WhatsApp has, perhaps — but, like, same idea. It’s like, this could be the new platform. If we don’t buy this, and Apple does, we are subject to their random whims and fancies. So, that’s category one. Category two — and this is super counterintuitive for a lot of companies — buy the guys that failed trying. Because they had the courage and the tenacity to try to go and build something new. And that’s what you want in your company as well. And then — this is the most counterintuitive part is — like, take the person that failed and put them in charge of the person that was successful. And that’s breaking glass.

Frank: For a big company, that’s so hard. You reward your execs on success, not on failure.

Alex: Right. But in many cases, it’s like, you have a big company that’s been trying to build this thing for 10 years. And if they build it, they will get 1 billion customers, because they — I’m making that up. They have the distribution. Then you have the startup that actually built the thing in, like, a week — and they built it for $1 million. And that would take the big company, like, $1 billion dollars and 10 years to do. But like, “Oh, the company failed. Oh, that’s a bad company. These are bad managers.” But actually, you want to take them and put them in charge.

And the joke that I always make is, like — if Amtrak buys Tesla, the worst thing that Amtrak could do — because Amtrak is probably more profitable than Tesla, at this point. But if Amtrak were to buy Tesla, the worst thing they could do is say, “Okay, all of you Tesla bozos, you work for us.” But the whole point of a lot of this other form of M&A is — you’re really trying to buy products that you can push into your distribution. And you’re trying to buy talent that wrote the products, that built the products, that understand that. And the only thing that they needed, the only gap between them and actual huge success is distribution, which these big companies have in droves.

Frank: Yeah. So, that makes perfect sense. Maybe just a piece of advice on how to actually make that happen. Because you have this dynamic, where you’re a big company, you just bought a failing startup, right? You have all of the execs inside that have earned bonuses consistently, over years, for awesome performance, right? You’ve rewarded success. And now you’re going to say, “I’m going to take this guy that kind of failed. And, like, you work for them.” Like, that’s hard to do inside a big company.

Alex: It’s very hard. But I mean, in some cases, you just want to do it early. I mean, I think it actually — where it works best is where you say, “We need this product, we need this product to exist. We don’t have it right now, we haven’t spent eight years trying.” Rather than saying, “Let’s go assemble a team, and I’m going to rely on something that’s just not in our core DNA. Here’s how we’re going to go shopping. We’re not going to go shopping and value this.” And again, this is not a self-serving comment, because if somebody buys one of our failing companies for $10 million, and we have a billion-dollar fund, it doesn’t matter, right? Like, we want the companies that actually beat the incumbents, but the incumbents — the way that they could actually do great is to adopt more of this Facebook mentality. 

And, like, the key thing is that many of these acquisitions, these kind of acqui-hire — that’s the portmanteau of acquire and hire — these acqui-hire acquisitions that Facebook made, these people now run big swaths of Facebook. So, I agree, it’s hard to do if you already have a leader in place. In that case, it just requires a very strong-willed leadership team, and an actual overt strategy that this is what we do. It becomes easier if it’s like, “Okay, we’re trying to do this new thing. Rather than assemble our own team, and they don’t know what they’re doing but they’re well-intentioned, let’s go buy a company. But let’s buy a company that hasn’t already done the thing — but a company that tried and failed to do the thing, but we’re pretty sure that these are the best triers and failers in the business.” That’s the hard thing to really measure, because most people are used to measuring outcomes and not process.

Frank: Exactly.

Alex: And the key thing to make this strategy work is, you actually want to over-allocate on process — and you want to weight outcome to almost zero, because you’re buying the outcomes that were, in fact, zero.

Frank: Yep. The market is about to interview Annie Duke — “Thinking in Bets” — and this is, sort of, the essential “Thinking in Bets” notion. Which is, don’t confuse a bad outcome with, sort of, a bad bet, right?

Alex: Right. Right. Exactly.

Frank: Awesome. Well, thank you so much, Alex, for coming in and sharing your thoughts. For those of you in YouTube land, please like and subscribe. And for the comments thread on this, I’d love to get your input on what you thought of Alex’s idea — that what you really should do is not go after more customers, but instead go after only the best customers. So, what are examples that you’ve been trying in your own startup, where you’re trying to implement that idea? So, see you next time, go ahead and subscribe to the channel if you like it, and see you next episode.

• 

  Alex Rampell is a general partner at a16z where he invests in financial services and real estate companies. Prior to joining the firm, Alex was a serial entrepreneur and angel investor.

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• 

  Frank Chen is an operating partner at a16z where he oversees the Talent x Opportunity Initiative. Prior to TxO, Frank ran the deal and research team at the firm.

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It’s a podcast about podcasting! About the state of the industry, that is. Because a lot has changed since we recorded “a podcast about podcasts” about four years ago: podcasts, and interest in podcasting — listening, making, building — is growing. But by how much, exactly? (since various stats are constantly floating around and often out of context); and what do we even know (given that no one really knows what a download is)?

And in fact, how do we define “podcasts”: Should the definition include audio books… why not music, too, then? So much of the podcasting ecosystem — from editing tools to the notion of a “CD phase” to music companies like Spotify doing more audio deals — stems from the legacy of the music industry. But other analogies — like that of the web and of blogging! — may be more useful for understanding the podcasting ecosystem, too. Heck, we even throw in an analogy of container ships (yes, the ocean kind!) to help out there.

If we really think medium-native — and borrow from other mediums and entertainment models, like TV and streaming and even terrestrial radio — what may or may not apply to podcasting as experiments evolve? In this hallway-style jam of an episode, Nick Quah (writer and publisher of Hot Pod) joins a16z general partner Connie Chan (who covers consumer startups among other things) in conversation with Sonal Chokshi (who is also showrunner of the a16z Podcast) to talk about all this and more. We also discuss the obvious and the not-so-obvious aspects of monetization, discovery, search, platforms… and where are we in the cycles of industry fragmentation vs. consolidation, bundling vs. unbundling, more? And where might opportunities for entrepreneurs, toolmakers, and creators lie?

Show Notes

• Defining what a podcast is [2:04] and why audio has become so popular [6:45]
• Key statistics and getting data on usage [8:24]
• Issues with monetization [12:34] and the logistics of RSS feeds [17:55]
• Seasonality and binge-listening [20:32]
• Further discussion around analytics and monetization [28:38]
• The pros and cons of interstitials [39:35]
• Competition in podcasts, the rise of platforms, and centralization [46:38]
• Terrestrial radio and why the audio world needs to fragment [59:21]
• Advice for starting a podcast [1:04:16]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. So, I’m super-duper excited today, even way more than usual, because this episode is all about podcasting. For newer listeners, we actually did an episode called “A Podcast About Podcasts” about 4 years ago, which you can find on our website, a16z.com. But today we’re focusing this podcast about podcasting, since the podcasting ecosystem has evolved and changed quite a bit since then. By the way, I had hoped that Roman Mars, who was on that episode, would join us again, but he lost his voice so couldn’t.

Our special guest today is Nick Quah, who writes “Hot Pod,” a newsletter that I’ve been following since very early on and has grown to be a go-to source all about the podcasting industry, with analysis, insights, and more. He also publishes and contributes to “Vulture” on similar topics. Also joining us for this episode is a16z general partner Connie Chan who covers consumer, the future of media, and Gen Z social, as well as trends from China, and has observed the podcasting phenomenon there and shares ideas on what more platforms can do here. And the three of us do a hallway-style jam, taking a longer pulse check on where we are right now in the podcasting industry.

Speaking of, since we do mention some companies, please note that the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. For more details, please also see a16z.com/disclosures.

So we began with the latest stats on the industry, touching on structural factors and more, for about the first 15 minutes. Then we do a bunch of lightning-round style takes on how other content and entertainment models may or may not apply to podcasting for about the next 30 minutes. And finally, we go into monetization platforms, analytics, and more — which we also touch on throughout the episode — including impacts on creators. And we end on recent news and moves in the space, such as Spotify Gimlet, how to think about terrestrial radio, and more. But we began by defining a podcast, which seems obvious but isn’t, and is a rather existential question. So, guys, what is a podcast?

What is a podcast?

Nick: So, I mean, the real interesting thing here is, we’re in the midst of a really interesting moment of change, and there is internal conflict within the podcast community about that question. So, historically it’s been largely tethered to the notion of the RSS feed. It’s basically an audio file, or a medium of distribution, that largely happens through, you know, the technology that was carried over from blogging. And now, with the entrance of Spotify, and Pandora stepping up, and Google beginning to do whatever they’re going to do on the search engine side…

Sonal: And Apple, already, as an entrenched player as well.

Nick: Yeah, absolutely. iHeartMedia. And Luminary just announced their, sort of, big $100 million fundraise — and the fact that they’re going to launch in July — a couple days ago.

Connie: With a lot of exclusive content, right? So how does, like, exclusive podcasts fit in with the old definition?

Nick: You know, especially with the Luminary announcement, there was, like, a strong pushback from parts of the community that has been around for a while and, generally, folks who really believe in the open ecosystem. And so we have a situation in which, like, you know, the technical definition is not the popular definition anymore. And if we go from the perspective of what the ordinary consumer thinks of a podcast, that is — it becomes a cultural question, not a technical question.

Sonal: Which, by the way, I want to say, parallels the history of the web. Because this, to me, reminds me, very much, of early blogging…

Nick: Absolutely.

Sonal: …and debates about what is a blog, what is an article, what is a website?

Connie: Yeah.

Sonal: And there was this almost religious, existential debate between the early, kind of — in fact, some of the same people because Dave Winer, one of the people who invented…

Nick: Who also was important to the development of podcasting.

Sonal: Right.

Nick: It’s the same figure, yeah.

Sonal: Exactly. But I think he was technically the first person to do a podcast, like in 2003 or something…

Nick: Right.

Sonal: …or one of the early people. And he’s also who specified the RSS feed, which drives the pipes, and plumbing, and ecosystem of podcasting.

Connie: But today users don’t even think of podcasts that way. It’s like, if it’s just recorded audio of people talking, oftentimes we’ll just call that a podcast.

Sonal: Yeah. One of my favorite things is when the people always call our videos podcasts. Like very few people find that…

Nick: I’m mean, that’s a holdover. Like Joe Rogan still does that. There’s a lot of people who still — dual video and audio, and still call it podcasts. I mean, the way I see it is that the tension has always been between people who see podcasting as the future of blogging, and people who see podcasting as the future of radio.

Sonal: Yes, exactly. You nailed it.

Nick: And we see that tension clash many, many times. And I think we’re in a place where that no longer matters because, ultimately, the mass consumer will lead us where they want to go.

Sonal: Yes. And like the web, the analogy that I would draw is to the advent of the graphical user interface, and how browsing, computing, etc. — there’s always a phase in every technology where there’s a GUI phase, where once you have an interface that’s user-friendly and easy to navigate.

Connie: Right.

Sonal: And what’s interesting about this is that we’re in the phase where the listening has become easy to navigate.

Connie: And more accessible.

Sonal: More accessible.

Connie: Through various kinds of hardware, too. For example, listening to podcasts on their drive to work, because the cars are enabled with podcasts.

Sonal: Right, like the smartphone-connected car, essentially.

Connie: Or AirPods making it so easy to listen to something while multitasking.

Sonal: And in that sense, podcasts are different than audio books, obviously, just for the sake of definition.

Connie: But I would say, like, you can argue that, over time, that even that definition may blur.

Sonal: Of audio books and podcasts?

Connie: Right.

Sonal: Yeah.

Connie: Like, one day a podcast might just be thought of as, like, a self-published audio book.

Nick: I have long believed that audiobooks should be central to the conversation as well, especially a couple of years ago when Audible built, sort of, an original programming team that took after podcast-style programming. And the fact of the matter is — it’s like, these are all distributors and platforms of the same kind of good. It’s just that we think of them and we class them differently. And they also, sort of, are products of different economic systems.

Sonal: I do want to add to this mix, though, that I would not confuse music into this. And the reason is, first of all, from a creator perspective — every tool, until now, has been very music-creator centric for podcast editing, creation, etc. And so, there’s a really bad structural legacy effect of equating podcasting — I mean, we’re essentially bootstrapping tools tailored for music for podcasting, so the new wave of podcast native tools is really important. Full disclosure, we’re investors in Descript. And it democratizes the editing of podcasting because you can essentially edit audio like a Word doc. But the main point here is that I do think music should be treated very differently than podcasting.

Connie: I completely agree.

Sonal: Yeah.

Connie: To me, like, it’s audio with spoken word.

Sonal: Yep. Versus sung.

Connie: Yeah.

Sonal: So, I guess we’re agreeing on, just to recap the definition of podcasting — it is audio. It could potentially blur into including books. If not in a content perspective, then — to Nick’s point — then even in a distribution and business model perspective. But we agree that music should be treated differently.

Nick: Absolutely.

Sonal: And the common denominator here is spoken word.

Growing popularity of audio

Nick: The Infinite Dial Study, which is, sort of, an annual survey conducted by Edison Research — they just announced their latest results earlier this afternoon. The most interesting thing is that there were increases in both audio books and podcasting. So podcasting had significantly, like, a large leap this year. But on audio books, like, after a couple of years of largely being flat, it’s been increased again. And I think that’s a, sort of, really interesting question because I can’t quite think of a structural reason why that would be the case other than…

Connie: AirPods.

Nick: …it’s the, sort of, like tethered effect.

Connie: In addition to that, you have all kinds of really easy-to-set-up wireless speakers at home that also make it [easier] to…

Sonal: Yeah, like Alexa.

Connie: Yeah. To consume this kind of content.

Nick: It reminds me of, like, what people say about the Kindle and romance novels. It helped, like, sales increase because it made people, like, more willing to buy it and consume it, because then nobody would judge them.

Sonal: Oh, the judgment side. Interesting. For me, it’s actually ease of access, because I used to be — I’m really embarrassed to admit this publicly — I used to subscribe to the Harlequin romance on demand service, where you’d get, like, the books a month, and you’d pay, like, $11 or — I can’t remember what it was. Because I’ve always been a huge reader of romance novels as a very nice, lightweight thing to do. But what’s the analogy to podcasting? What’s the connection?

Nick: To me, I think it’s more ease of access around better hardware.

Sonal: On demand, get it quickly. So speaking of the data — and you mentioned that the Edison Research study came out today. And that’s, sort of, the definitive and longest running survey of digital media consumer behavior — in America, at least. But I hear a lot of mixed messages. I see, like, people cite this stat and that stat out of context. So, why don’t we just do a quick pulse check on what are the key stats. And Nick, maybe you could recap for us what the key stats or big trends to know are here.

Nick: Sort of, I think there are a couple of big takeaways here. One is, when it comes to the familiarity of the notion of podcasting — and this doesn’t mean people who heard the word actually know what it is — it’s officially hit 70% of all Americans. And when it comes to the number of people who’ve actually tried out podcasting — you know, maybe they didn’t stick around a bit but they just tried it, at least — it’s gone over 50%, so about — an estimated 144 million Americans. Retention rates are, sort of, like, really interesting. Like, monthly podcast listening is also going up. It’s now 32% of Americans, up 26% from last year. That’s a pretty big leap.

Sonal: I mean, just, that’s one third. That’s a lot.

Nick: Yeah. And there’s also a really interesting slide in here attributing some of the increase to Spotify. There is a stat here that shows, among Spotify listeners between the ages of 12 to 24, monthly podcast listening went up to 53%. And so, there’s a lot going on. I think, currently, it’s such a moment of flux. It’s a little unclear what the structural pillars are anymore. And I think this is one of those things where we’re just going to have to, like, look back at this moment to figure out where we turn.

Sonal: So, what’s a high-level recap on that summary of the stats?

Nick: The high-level is that this past year has seen an unprecedented growth. For the longest time, podcast growth has been steadily and slow, and now it feels like it’s taking some sort of a leap. And so, I feel like this past year has been the moment where it’s tipped into some form of mainstream.

Sonal: That’s fantastic. So, potentially, an “inflection point” as people like to say in the business.

Connie: The usage of podcasts and the consumption of it has risen dramatically in the last year or two. But what always shocks me is that the revenue that podcasts generate is still such a small amount, given how many hours people are spending consuming this kind of content.

Nick: So, there is a study out there from the IAB — the caveat being, it was funded and financed by a constellation of podcast companies — that puts the number at around 600 million-plus-plus this past — last year. And it’s projected to keep growing, of course. Monetization is a severe issue. And it largely has to do with the fact that podcasting, as a technology, hasn’t quite caught up to how the rest of the internet, kind of, works in terms of dynamic ad insertion. And it doesn’t allow, like, heavy increases in inventory and swap outs in inventory, in a way that a lot of advertisers are now accustomed to getting from, you know, marketplaces like Facebook.

Connie: And then, even that, like, from an advertiser’s standpoint, you’re paying per download, because you aren’t getting, like, these per-listen metrics back. So from the advertising standpoint, it’s still really hard for them to measure the ROI from sponsoring a podcast.

Sonal: Yeah.

Nick: Yeah. And that’s why, historically, we’ve seen a bunch of the activity among advertising from direct-response advertisers, because they have a secondary metric of conversions on their promo codes and whatnot. And what they’re able to find is that the conversion rates are good. But when it comes to something like a brand advertiser, or an advertiser that needs to, you know, lay an impression on a consumer over a 5-, 10-year period, they need to know that they’re hitting the people that they’re hitting.

There are a lot of movements right now towards standardizing what even a listen means. And this will become increasingly complicated as Spotify and Pandora…

Sonal: Everywhere.

Nick: Right.

Sonal: I mean, right now, you don’t know, is it a download, is it a click, is it open, is it <inaudible>? I mean, who the fuck knows? It’s, like, a mess.

Connie: Or like how long did you listen to it, right?

Sonal: Right, the engagement. So that’s actually what I care the most about as a creator. Because when I was at WIRED, Chartbeat changed me as an editor. And I need to know where people drop off. That is a number one thing. So I don’t know if you even know this, Nick. We were in the launch set for when Spotify launched their first move into podcasting, in 2015. They selected us as one of their media outlets, because our podcast was one of the very few that covered tech in a thoughtful way. And the reason I was so excited about Spotify — because Spotify didn’t really have much of a podcasting audience back then…

Connie: Yeah.

Sonal: …was they showed me this really beautiful dashboard that showed you the potential, and where people drop off.

Connie: But you don’t get that from all the other places…

Sonal: No, you don’t.

Connie: …our podcasts are distributed.

Sonal: It’s still limited because not all of our listeners are listening on Spotify.

Connie: Right, right.

Sonal: They’re on SoundCloud, they’re on iTunes.

Connie: Right.

Sonal: They’re in a bunch of different apps. And iTunes, by the way, also announced this — I think, what, last year? James Boggs announced that you can actually have drop-off…

Nick: Yeah. They rolled out more granular in-episode analytics.

Issues with monetization

Connie: Another thing I would push back on those — like, I don’t actually think advertisements are the only way you can monetize podcasts.

Sonal: Yes, I agree wholeheartedly.

Connie: I feel really, really strongly about that. Because even as someone who consumes podcasts, ads are extremely annoying to listen to. And this is where I look at other business models that are working in Asia for podcasts that I think could, very much, translate here.

Nick: Yeah. So a couple of points on that. And so, a situation which — there are behaviors in internet usage, in gaming, in media consumption — in China, Japan, and Korea — Australia, Malaysia, Singapore — that doesn’t occur here. Maybe through path dependency reasons, maybe through, sort of, technical habituation reasons. And, yes, so we’ve already seen, like, a really healthy growth of the number of podcasts using Patreon as — maybe not a primary, but a strong supplementary business model. “Chapo Trap House” is an example of this. There are a bunch of podcasts collectives that rely on Patreon for this. And there’s also, like, Slate Plus being a, sort of, a central model to Slate as a digital media publisher that also heavily indexes on podcasting.

But, you know, I think I’ve always found this “lack of data” conversation a little interesting, because whether or not advertisers feel confident in the measurement, and what the data is, sort of, trying to reflect in terms of reality, the world continues to spin, and, like, people do end up paying — like, converting as a promo code. And so there is a strong sense that podcasting is a very powerful driver of consumers. And it’s a powerful advertising driver <Oh, yeah!> even though we’re not able to tell specifically how many people that get hit in terms of just the analytics of it. And so, there’s this fear, I think, among a lot of people that, you know, the analytics side will end up driving way too much of the conversation — and ends up dictating the behavior of creators and publishers in a way that might end up being, you know, unhealthy or counter-intuitive to the relationship between the listener and the creator.

Connie: The problem with that, I think, is like — yes, analytics may skew what kinds of content they put out and how they engage with their audience. But, like, really, analytics is just a nicer way of saying revenue. Because at the end of the day, your analytics are a reflection of how many listeners you’re getting, right? And this is where I think, like…

Sonal: I don’t agree actually completely. I agree with you from a business perspective. But as a creator, the analytics tell me about community. And one of my favorite talks on the early days of resurgence of podcasting was — Marco Arment gave a talk. I was at XOXO in 2013. And it was basically about the resurgence of podcasting — the early signaling of that — and podcasts as a movement. Because what’s really unique for the first time, when you think about the first wave of podcasting with all the indie bloggers, we now have brands podcasting. And sometimes they’re not actually looking for direct revenue through that, it’s a way to really connect intimately with your audience. I mean, it’s essentially a movement brought live in audio form.

Connie: Okay, fair. So, I mean, there are types of content where it’s not about monetization. But for a lot of creators, I do think revenue is one kind of proxy for…

Sonal: Absolutely.

Connie: …how much value they’re providing their listeners. And I also think that, like, we’re in such, such baby phases of how podcasters should be able to monetize. Like, honestly, they shouldn’t be having to ask their listeners to go to other sites to pay them, like, a monthly fee.

Sonal: Oh, yeah. You can’t do it in-app.

Connie: I mean, this is where the platforms are going to start rolling out subscriptions. I think some are going to roll out, like, other ways of paying for packages or bundles of content. And I think that’s when you’re going to see creators really unleash, like, much better content, where they don’t have to focus on mainstream audiences. But they might focus on smaller audiences that are willing to pay for that.

Nick: So, actually, I’m like, really fascinated in terms of the concept. If analytics is being the, sort of, like, proxy for revenue here, it’s strange because I’ve always, sort of, viewed analytics as, you know, a certain kind of representation of reality. And it just so happens that advertisers, at this point in time, are really reliant on a certain expectation of a kind of analytics, in order to discern whether a media product is effective in a way that they want it to be. And there’s this larger conversation about platforms in general. You know, switching metrics, or tweaking metrics or, you know, in some cases, ballooning them in order to control and manage that narrative and relationship with the advertiser.

Connie: No, I completely agree, analytics matters for an advertising model. But what I’m saying is, like, the advertising model is actually not a good model to monetize podcasts.

Nick: No, that, we completely agree with. But it’s a situation in which, like, it is the revenue that a lot of people — a lot of publishers and creators feel most comfortable with because that’s all they know right now. And, we, kind of…

Sonal: I think it’s actually also a legacy. This is where I think we need to think, again, very native in a new medium. This is where we do ourselves a huge disservice. Like, the early days of the web when media outlets would put, like, a fricking, you know…

Nick: Banner ad. Yeah…

Sonal: …home page analog on their website. Right. Exactly. Like, we need to think very natively in this medium. And we have a huge opportunity for the first time because we have such an intimacy, a slipperiness, a connection with podcasting that’s visceral. That’s — I mean, personally, I think it’s unlike any other medium I’ve ever seen. I feel like I’ve found my voice on this medium quite honestly, but — so, I do think that we have an opportunity here, because we’re so stuck on the legacy of — and, in fact, this goes back to something we started with, which is what is the definition of a podcast?

So, I think that the thing to revisit here is that — the underlying pipes and infrastructure. And I know people don’t expect this when we’re talking about an episode about podcasts, but I think it’s really important because it informs this conversation. It is RSS feeds. It is literally an ecosystem of pipes that are connected by feeds, talking to feeds, talking to feeds. This is both a structural, huge limitation causing major fragmentation in the industry, major limitations on what’s possible, with what creators can do to even connect the dots — because the unit of analysis is limited to what you can actually send in a feed.

Connie: Right.

Sonal: And that has certain trade-offs to it. And this actually reminds me of container ships — like, physical, large shipping ships — like Maersk, etc., that you see in the ocean. And one of the novel things about container ships is about what they did to creating trade across the world. And because they’re multimodal — they go from airplane to ship, to truck, to yard — they allowed so much collaboration and connection around the world. That’s what feeds are doing for the podcast ecosystem. What’s missing, however, is — just like a container ship — containers are rectangular boxes that are very limited in what you can actually fit into them. And people, therefore, need to fit the shape of their goods to fit in those boxes. And the entire ecosystem for physical container ships is architected around being able to lift things out and in.

That is the same thing that’s happening in podcasting right now. The containers are connecting all of us in this feed ecosystem, but they’re also dictating what information travels where, and in what form. And I just want to point this out — no matter how wonky it seems — because that structure dictates so much of what the current batch of tools can and can’t do when it comes to analytics, the discovery, and more — all across the board. And it’s where platforms and tool builders have a huge opportunity to cleverly address, or even bypass, those containers once we get past this phase of where the podcasting industry is structurally right now.

Connie: Yeah. I just think, like, we are in such early, early, early innings of what podcasts can be.

Sonal: Yes.

Connie: Because if you think about it. Again, this is not using the technical definition of a podcast, but using this cultural definition of, like, audio recorded content, right? Most of the time you’re consuming that kind of content on an internet-enabled device. It’s not like you’re downloading it onto your computer and then, like, using a USB stick to transfer it to your phone, right?

Sonal: Mm-hmm.

Connie: And so therefore, like, we are not monetizing this stuff, or even creating features on top of it that are internet native. There’s just so much stuff we’re not even tapping into. And it’s such a shame, because we’re consuming these things on internet-enabled devices, and yet we’re using the same business model as televisions…

Sonal: Where you can’t even do anything.

Connie: …which is not meant to be interactive.

Sonal: Yeah.

Connie: And there’s, like, right now, very little interaction with the podcast which I think is such a shame.

Seasonality and bingeing

Sonal: So I want to ask you guys, kind of, lightning-round style on a couple of neat things that are artifacts of the existing world of content, and how we think they’re going to play out with podcasting. So let’s just — I’m gonna throw out a phrase…

Connie: And I think we should get your take too…

Sonal: I will.

Connie: …because you have more expertise on podcasts than anyone in this office.

Sonal: You’re right. I forget to do that as the host sometimes. Okay. So, I want to ask you guys about seasonality. Like, what do you guys think of this trend of people dropping podcast seasons?

Nick: So, I love seasonality. Like, it gives me a feeling of momentum. And also, we’re currently living in a moment where there’s all things happening all the time, so many things to consume — I would like things to have definite ends. And I’m a big fan of seasonality personally.

Sonal: Yeah.

Connie: I think it also makes it easier for bundling…

Nick: Yes.

Connie: …and different pricing down the line.

Sonal: Oh, fascinating. So for me, seasonality is — so, when I think of the long tail of content — and Chris Anderson wrote the fundamental piece and book on this — it’s this idea of an infinite shelf space. And to me, things being in software and being digital, it’s unbounded to the point of being pointlessly infinite. And forcing a false scarcity is my favorite thing that, like, box-in-a-month companies do — like Stitch Fix and makeup, whatever. It’s a way of curating and creating scarcity in a world of abundance. And I think that’s a really interesting packaging thing for any kind of content across the board. And especially for podcasting. Because there is no — you’re essentially in an infinite scroll in the audible world. You don’t know where you are, you have no context, you’re not plugged into a specific thing, because you’re living in this weird ecosystem of voice and show — or episode depending on how you’re listening. So that’s my quick take on seasonality.

Connie: Okay.

Nick: Love it.

Sonal: Okay. So binge-watching. This is related to seasonality. One of the most fascinating things about [the] Netflix phenomenon in the space of visual content is, they realized, like, “Wait a minute, we don’t have to do weekly things, we can drop everything at once. Not release it as a season that spreads out once a week or whatever the pace is, and allow binge-watching.”

Connie: I think binge-watching is great, and it’s natural human behavior for any kind of content. I suffer from it myself. Like, I was the kind of person — I would watch the series “24” — I would watch a season in, like, 30 hours.

Sonal: I did that too with “Stranger Things” and everything.

Connie: Yeah, yeah. And it’s just natural human behavior, and so I think it’s great.

Sonal: That we want to just be addicted and go deep all at once, and we can’t stop ourselves?

Connie: And, actually, in terms of — for the creator, I think it’s a good thing, because you don’t want that listener to, kind of, forget about it.

Sonal: Yep.

Nick: I binge-watch all the time so I’m just going to take, devil’s advocate, that I only, like, believe about 80% of. One is, I actually think that binge-watching or binge-shopping has actually caused attention to a given show to deteriorate, right? It used to be the case where, when a TV show drops weekly, there was, sort of, a positive conversation that is drawn out over a longer period of time if that show has hit. I thought about…

Sonal: You mean, like, the water-cooler conversation?

Nick: Absolutely. Like, “True Detective,” “Game of Thrones,” basically, everything that HBO — like that sort of structure of it, I really liked that water-cooler conversation. And I like to be on the same, sort of, page as other people when I’m having that conversation. And that’s something I’ve never gotten with a binge show. I loved the “Russian Doll.” I can’t find a single person to talk to about it who, you know, follows it around the same time. And like, I can guarantee, in about a month, I’m going to forget about that show.

To use a tortured metaphor, the thing about binge TV that I enjoy really doing, but I feel a little bit sick of doing it afterwards — it reminds me of, like, you know, that thing when, like, parents say that they’d do to certain kids where — if they catch that kid smoking one cigarette, they’d make that kid smoke the entire packet in one sitting?

Sonal: Oh, yeah.

Nick: That’s, kind of, how I feel after when I binge a season. I feel like I don’t want to watch TV for, like, a month.

Connie: But it’s, like, inevitable, you know? I feel like this is a behavior you can’t stop.

Sonal: So my whole thesis about this, which is similar to screen time and kids — because people always have these stupid religious debates over it — it’s not so much the act of doing it or not doing it, it’s why you do it. So, if you’re someone who is binge-watching because you’re depressed, that’s not good. But if you’re someone who is binge-watching because you just can’t stop watching the show, that’s great.

I will say, to push back on your point, Nick — because I know you’re taking the devil’s advocate — but I think that what you’re describing, this problem of the, like, water-cooler thing that, Connie, you’d labeled — it’s actually an artifact of technology not quite being there. Because there is a movement of second-screen technologies that are allowing more — there’s forums online, like Reddit, that aggregate.

To give you a perfect example of this. When I finished “The Three-Body Problem,” the first thing I did was go trawl the web to find all the forums and all the people talking about it, so I could find my people and talk about it, and find other people who loved it. And so there are tools that are emerging that allow conversations, to then, to your point — the water-cooler — to be aggregated asynchronously. And there will be, I think, a second-screen phenomenon happening with pod listening and binge-listening, as we start having the technology ecosystem grow.

Connie: I can see how, you know, you don’t want to spoil the ending. So you won’t actually go to that forum until you finish your book.

Sonal: You’re absolutely right. And, actually, I like that you can have a choice. Because in spoiler-alert culture, which Nick is slightly hinting that he misses, at least on the devil’s advocate mode…

Nick: I do.

Sonal: …there is sort of like a thing where you can actually choose to check out of things, luckily, so you’re not, like, stuck in a room with everyone talking. And then you are screwed, because you missed, like, the closing season of “Dallas” or whatever show it was.

The other point I want to make about binge-listening, in this context is — with binge-watching, new types of narratives are happening, I’m very curious about what will happen — as we start seeing binge-listening of podcast seasons, or podcast episodes — to narrative, and how that’s going to change that category of podcasts — where, would a “Serial” change the way it tells stories because people are bingeing it?

Connie: Well, then it becomes an audio book.

Sonal: Oh, interesting.

Connie: Right?

Sonal: Then it becomes an audio book. Oh my God, I would have argued it to almost the opposite item in the spectrum. Because it’s, sort of, going through a book very quickly.

But the flip side of it is — when I’m thinking the analog with binge-watching — is that you can watch an entire season and it changes the way — you don’t have to have a cliffhanger at the end of every episode. Whereas, even in a chapter, people still have a little bit of these things.

Connie: Oh, I see. I see.

Sonal: Right, narrative.

Connie: I will say, I think “Serial” would have made a lot more money if it allowed people to pay. I think, on the margin, binge-listening helps creators. Because if you can make someone pay for, like, a whole season at once, and maybe give them like one or two episodes for free, it’s better than hoping that they’re going to come back every week, right?

Nick: The “Serial” example is actually really, really interesting. “Serial” itself was an innovation of the form, because it stuck to what podcasting was able to do at that time. Prior to the existence of “Serial,” it was incredibly difficult to tell a serialized story over the radio in the form that they did it. And secondarily to that, they told that story in semi-real time. And that’s something that they, sort of, looked at the structure of what the distribution format was and they go, “We’ll go and try that out, we’ll see what happens.” And so this is a little bit of, like, them playing perfectly to the form there.

And I want to, sort of, go back a little bit to the point about, like, the second-screen experience and the, sort of, the death of the water-cooler. So, I love second-screen experiences. I live for NBA Twitter, I live for Bachelor Twitter. But I’ve got to say, I do like that experience with physical people, and that I miss hanging out and watching TV with my friends sometimes at the same pace. That’s all I got.

Connie: I just think, like, ever since DVR arrived, like, we kind of lost it already.

Sonal: I think you guys are both being very falsely nostalgic for a past that never was. Because I actually think — I mean, yes, there’s a reality to be physically present, but again, we’re in the early innings with all of this. We’re investors in a company called Bigscreen, where you can essentially share in this ambient intimacy — like, hang out in VR. Like, when there is a digital overlay over the physical world. Just like people connect on Twitter for ambient intimacy — the cocktail party of the web — there’ll be a physical, like, experience, that you have — similar level of satisfaction in hanging out in real time with your friends. And it’s just an artifact of technology that we’re not 100% there yet. That’s what I would argue, at least.

But back to the binge-watching thing. I was going to add that when a season drops all at once, I add it to my playlist, but I never watch it. Because what’s also missing in this space — and this is, again, why I love the idea of binge-watching/listening for podcasting — is the concept of virality. Viral hits don’t happen instantly unless you’re, like, a Joe Rogan Experience, an Elon Musk smoking pot on air.

Connie: Yeah.

Sonal: Like, it’s, sort of — or a cult of personality show. It’s slow-burn type of virality. And so seeing what people are talking about and what resonates is hugely important for creators. Not because you freaking want to crowdsource what you want to say, but you do want to know it doesn’t go in a black hole.

The need for better analytics

Connie: I would love a world where, in the future, you’ll know which parts of the podcast the audience…

Sonal: Resonated.

Connie: …liked the most.

Sonal: Right. My proxy for that, by the way, is — I do Twitter searches all the time for the commentary, so it’s a very skewed sample, but it’s helpful and I push the editors to do this — to close this loop, even, if they’re not active on Twitter, because there is no other way to see what resonated. And as soon…

Connie: But can’t…

Sonal: Yeah.

Connie: But can’t you see, like, a platform just like saying, “Tap your screen if you like this part?”

Sonal: Oh, totally. Well, I don’t know if this is public. Do you know this, Nick? But <redacted> is doing screenshot — audio shots of podcasting?

Nick: Yeah, I’ve heard about this. Yeah.

Sonal: Yeah. Is it public, do you know?

Nick: Not yet.

Sonal: Okay. But there will be podcasts screenshotting, and audio clips. I’m curious to see, with or without the transcript, Connie — to your point, about the importance of that — whether those will go viral.

Connie: It’s crazy to me that these things don’t have automatic transcription on the top hits. Like, that’s such an easy technical thing to do. And for a listener, that would mean that I don’t have to just pause and say like, “Oh, yes. Remember, like, go back to the 1 minute 30 seconds mark later on and take notes.”

Sonal: Well, I actually love that, too, because one of the biggest limitations of podcasting is the lack of a “screenshot equivalent.”

Connie: But that exists in China already. Not only can I see the transcript, I can then comment on it. And I can make it so only my friends can see it, or I can make it so the entire public can see it. And then there’s a discourse…

Sonal: That’s amazing. Right now, we have to manually upload transcripts.

Connie: And you basically have threaded conversations around parts of your podcasts. And so it’s okay if the listener doesn’t even get to the end, because you can have a highlights feed — all kinds of stuff right now that we just are not doing. And so I think this is, like, where the platforms can get much better at creating. Like, even if they, like, just chunked up the best clips, right? Or maybe you, as the creator — you can, like, throw out which clips you think are the best. Make it easy for them to repost on other social mediums, or make as, like, background music to whatever. And I think…

Sonal: Yeah. You can do that, actually, now on some of these tools. But to your point, it’s fragmented, it’s not centralized on a single user experience.

Connie: Fragmented. And I think, like, the main platforms don’t allow that, right?

Sonal: Mm-hmm.

Connie: And so…

Sonal: Currently, no. Spotify, and iTunes, and others don’t. In fact, this is, again, where the ecosystem is so fragmented, because the side players — there’s a whole budding ecosystem of tools that are doing this kind of thing.

Connie: So, again, it goes back to — you know, like likes, and comments, and payments, and tips — that’s just like a form of showing how much you like something. Creators don’t know which pieces of their podcast were the best parts of the episode. They don’t know where the highlights are.

Sonal: They don’t know any of it. It’s a black hole. But on the metrics, I do want to say that one of my favorite analytics for podcast success — because I do think that we need to think about what you’re measuring for, for the type of show you are — and in our case, what I care about as editor for the show is insights per minute. And this is the same thing…

Connie: Cool.

Sonal: …as insights per inch, in terms of like going down a verbal post.

Connie: Yeah.

Sonal: Because when you have a brand collective and not a cult-of-personality driven show — this is, again, where the metrics for the type of show need to vary as well, in my view. For our kind of show, if you’re not, like, a famous personality, then the insights per minute matter a lot to get people to stick and stay. And then secondly, when you think of audience discovery — audience and movements of people and fans aggregating around a piece of content — then I care about — if a show has, say, a drop-off halfway, as a drop-off point, if the first half are people who are mainstream interested in learning about quantum computing, and then they drop off 50%, I consider that a huge metric of success. And if the remaining 50% that stick around — a much smaller subset of people who are developers in quantum computing, are interested in building quantum computing, are physicists — then that’s a huge metric of success. So for me, again, this is, again, another granular way of thinking about the type of show, the type of content, etc.

Now we can’t do any of this right now. But as we introduce new storytelling and forms in podcasting, I think we’ll be thinking a lot more differently than the obvious on those fronts, too, and about podcast engagement. Which, by the way, one quick factoid for you guys — the number one thing I hear from all of the publisher network. Because one of the things that I did when I came here was reach out to various people to beg them to put their authors on the podcast — this was before authors became — like, going on podcasts became the thing to do.

Connie: Yeah.

Sonal: And there’s nothing that moves books the way podcasts do. I’ve heard this over, and over, and over again from all of my publishing industry friends.

Nick: I heard the exact same thing. The way that the podcast experience is currently constructed, it drives sales. But the question is — is that when other platforms — or when the experience changes due to technical innovations or new features added, would it fundamentally change that relationship? Will there be the same kind of sales push that we experience right now? It’s an open question.

Sonal: I do think it’s an open question.

Connie: I think it could totally work. I mean, like, to me it’s like the same way QVC is a great way to sell stuff, like, podcasts is a great way to sell content — written content that people want to read. But I think this is a bigger problem with the book publishing industry, meaning that they’re not selling books in an internet native way.

Sonal: Right.

Connie: There’s no great way to figure out the highlights of a book, there’s no way for me to read the first chapter for free, there’s no way for me to, like, get a sense of, “Do I want to pay for this entire book?”

Nick: I do that all at a bookstore by just skimming them. I mean, like, it’s… <laughter>

Connie: In a physical bookstore, yes. In a physical bookstore, you can do all these things, but on Amazon, you still can’t.

Sonal: Right. This is another way where I think we’re not thinking of the native medium. Because, it’s crazy to me that books, which are self-contained, with no context, are still decoupled in audio book form. And it’s equally crazy to me, that podcasting, because of the structural limitation of the feed pipes, don’t actually have context built into them where you can actually tie a podcast into the context of a broader show, more by this author, more on the topic — to your point about PDFs, and show notes, and related materials. It’s crazy to me that there isn’t a web-linked ecosystem for podcasting yet.

Connie: Because none of this stuff is being sold in an internet native way. I just think, like, that right now, the way we sell books, it’s like — if you had no movie trailer and you only had the movie poster.

Sonal: Yeah. <laughter>

Connie: Right? Like…

Sonal: Yeah.

Nick: It depends on the movie poster.

Connie: You’re, like, buying the book based off the cover and maybe some quotes by people who’ve read it, but you don’t get to even see the trailer. And this totally actually skews the creator’s incentive for what kind of content to create. So, like, for a book, like — are you going to pay $20 for like a 20-page book? Or will you feel better about paying $20 for like a 170-page book? And then authors might have to write extra words for the sake of selling a, you know…

Sonal: Oh, that reminds me of [the] early days of Charles Dickens where he was paid by the word, and that was, like, a funny artifact of the way the monetization was happening. But I would argue on the flip side of that, on the creator side, I think it’s more important to find your community. Because the beautiful thing about — again, podcasts are movements. Groups of people following either a show, or an episode, or a topic, “Serial” fans, whatever it is. And so, when you have “1,000 true fans,” in the Kevin Kelly phrase, that are following a particular book author, or a particular topic, or a particular podcast — in our case, what we’re doing is, we’re mobilizing the fan base. Not because of that author, but because of the way that we do our take with that author. Like it’s, sort of, the a16z take on it. So when we did Yuval Harari, it was me and Kyle talking to him about all kinds of random stuff that was probably not even related to his book.

Connie: Right.

Sonal: The point is that it’s a way to mobilize your movement, your fan base. And this goes to Nick’s earlier point about Patreon and fan bases, or Marco Arment’s point about brand as intimate connection.

Nick: So, my theory on this, sort of, notion of, like, what people would pay for — people will pay as much for a thing based on how valuable they think the thing is. And so, it’s equally plausible that a person looks at a 20-page book and thinks that it’s worth $20, as it is that a person looks at a 170-page book and thinks that they will pay $20 for that. It really depends on how that person — or how it’s messaged to this consumer, what value it is, right?

Sonal: Yeah.

Nick: And so this ties back a little bit to the notion of advertisers and analytics. Analytics, as constructed by a technology company, by a platform, by a data team — is an effort to tell the advertisers, “This is how valuable you should think this is.” And in the art world, value is constructed in a whole different amorphous way.

Sonal: Yes.

Nick: And so I think it’s, like, a one-to-one objectivity of — what is the right metric, or how do we find the truth of the value of a certain thing? These are socially constructed things. And so I think that should be a consideration when it comes to when we think about — even the book publishing industry. I guess, we should argue that celebrity books should be priced a lot higher than it is. But, you know, that’s just me.

Connie: Books is just one example, though. Like, if you think about, like, a YouTube video. Like, the creator is incented to make it long enough so you don’t purchase one pre-roll ad, but also put, like, another ad in the middle. Which means the video has to be long enough to have enough gap time between the ads, right?

Sonal: Not really, because the most popular videos on YouTube that do really well are the short, quick takes, or tutorials. Or, like, in those cases, that’s another example of — I mean, I think that’s the reason why tutorial culture has taken off because people are self-selected into, like, learning about X, Y, or Z.

Connie: But, like, some creators will lengthen their videos so they can put in a second ad.

Sonal: Yeah. I think those, to me, are the more old school creators that are doing that to monetize in that way. They’re not the ones who are the influencer creators, because the influencer creators have their eye on a much bigger ball game. They’re looking at moving their own freaking makeup lines, or like — you know what I mean?

Connie: Yeah, yeah.

Sonal: Or, like, other things. But, yes, that is sort of like the early phase of every platform and medium — is that you have a quick way to, kind of, game it to get what you need. But I don’t know if that works for the long-lasting players.

Nick: YouTube in that situation is the arbiter of the data that tells advertisers what to value. But it’s also the arbiter of the data that tells creators how to value the way that they’re creating something. It also becomes a situation where YouTube is the thing that interprets human behavior, and makes assumptions based on those interpretations through what people are valuing. And so this is, like, YouTube, sort of, defining that reality and pulling levers in a bunch of different ways. And they may be correct, they may not be correct. In any case, it’s all a proxy of reality that may or may not be aligned. We don’t know necessarily.

Sonal: I agree. I agree it’s socially constructed and value is created. And a lot of it is limited by the tools people have for thinking about pricing. And they have heuristics for doing that based on those structures. I would also say that there’s a really interesting opportunity, especially with podcasts, to flip the model — where fans get paid. And in fact, Kevin Kelly made this really interesting argument in his book “Inevitable” about how, when you swap your paradigm for thinking about attention in an abundant software world, which is what we’re talking about here, abundant digital world bits are infinite…

Connie: Yep.

Sonal: …there’s no limit on airwaves in this context, you can actually flip the model where fans can monetize their attention. So you actually reorient. And this is actually the premise of crypto, right? Or one of the premises of crypto. At least in the notion of crypto networks, where right now, the locus of data controls the platforms. With crypto, you can actually invert that, where the user is the container of the data. So if you think about this in the context of media creation and podcasting, how interesting to think about a fan monetizing their attention? Because if a fan is a sum of all the shows they watch, maybe an advertiser wants to buy that fan and the fan directly monetizes that attention. I know that sounds crazy, but I don’t think that’s impossible in a world like this. You guys are both looking at me like I’m nuts.

Connie: I think if platforms can do that, like, there’s all the stuff they need to experiment with before they even can get to something like that.

Sonal: Yeah, yeah. That is if you believe it has to go step wise. Because sometimes, technologies can leap. I agree with you, I think it will be incremental.

Connie: I’m like, “If we can’t even get subscriptions or tips of, like…”

Small bites of content

Sonal: We can’t even get downloads, for fuck’s sake. All right, I’m going to do another quick — I want to hear you quick lightning round take on interstitials and podcasting. Any thoughts on that? The idea of, like, you know, title slides, or breaks, or segmentation, etc.

Nick: I’m pro interstitials. It’s like, you know, it’s really important to orient your audience and to teach them how to listen to the thing. It’s an important creative tool. That’s my view on that.

Sonal: Connie, I feel like you have a lot of thoughts on this because it feels so China native, like, what people do and…

Connie: Describe more what you mean by interstitial.

Sonal: I mean, more, just like, it’s kind of to your point about there being granularity. Like, you can actually break up a show into sub-parts by having little breaks or…

Connie: Oh, yeah, yeah, yeah. I think interstitials [are] great. Because, again, it allows me to show you which parts of your episode I value the most and which ones I’m willing to pay for.

Sonal: Yeah, for me, I will say that we tried some early experiments with segmentation. Because I got this funny feedback from people that they’re like, “I listened to the podcast on the road, and my commute is 10 minutes. I wish they were 10 minutes long.” And then someone else is like, “My commute is 20 minutes. I wish they were 20 minutes long.” And then someone else is like, “My commute is 30 minutes,” or 40 minutes. And they have this ideal time. 

For us, at least, 30 minutes has been the sweet spot in terms of, like, the ideal podcast size. But I don’t think there’s a rule of thumb. Like, some of our most popular episodes are an hour and also 20 minutes, so I don’t know. But I did, because of that — I wanted kids on campuses, like, at Stanford or wherever, to have a way of listening to an episode and, kind of, have like a nice natural stop off point. Because when you’re watching a show, the ability to, kind of, pause — so to me, interstitials are a way of creating a little bit of those moments and breaks. But then what I realized is that as an artifact of this industry, all the tools save your spot in where you were playing last in your player.

Connie: Yeah.

Sonal: And so it, kind of, became a moot point. So that experiment didn’t really work. But the driver for it is this thesis that — and, you know, Dixon says, the internet is made for snacking?

Connie: Yeah.

Sonal: And podcasts can be beautifully long-form. But I also think that there’s a consumption mode and very short, micro waiting moments, to use a term from a Park paper on this concept — that when you’re waiting in line, can you listen to a quick bite of content? Not just watch something on your thing, not just listen to it.

Connie: Super interesting.

Sonal: Yeah.

Connie: Yeah.

Sonal: And I wonder if we can fill micro waiting moments. And so I wonder if interstitials would play an interesting role as, like, a micro waiting moment.

Connie: To do that, I feel like you need really good discovery.

Sonal: Oh, yeah. Or following a show, right?

Connie: Because the likelihood of me, like, hitting something that I don’t like causes, like, this fear in the listener.

Sonal: Of course. Unless you are then — which currently is a model — of following a show or a personality.

Connie: Yeah, you just have to have so much trust…

Sonal: Yes, yes.

Connie: …that it’s going to spin up the right thing.

Sonal: Yes. Because, right, because in the cult-of-personality model, people are following the person, not necessarily the guests.

Nick: I’ll just say that the notion of short-form audio is one that is constantly talked about. This also, just as another reminder, like, what Anchor essentially attempted to do at the very beginning of their journey, and what Odeo tried to do. And it’s one of those things where it didn’t — both of those iterations didn’t quite work.

Sonal: No.

Nick: We don’t know if that has anything to do with what people want, or if it’s the case that people were not ready for that yet.

Sonal: I would argue the last one, because we have seen over and over with technology, there was, like, five Facebooks before there was a Facebook that works.

Nick: I subscribe to the view of the world in which human beings are generally plastic, and so you could force a human being to accept just about anything. And so, it’s a question of whether the right startup — or the right platform — executes the right experiment, or the right time, with the right group of people. That’s just, kind of, how these things work.

Sonal: Yeah. Human beings are creators of emergent behaviors, because this is where you can never predict the second order effects of new mediums, right?

Connie: Yeah.

Sonal: Like, Twitter spawned all kinds of interesting emergent behaviors. And that is the fundamental truth of the evolution of all kinds of technologies.

Connie: But it’s all technically — I mean, this is not like cutting-edge science or technology that doesn’t exist yet. It’s just the platform hasn’t put all of these things in place.

Sonal: Yeah.

Nick: But the fact of the matter is, is that stuff like social audio, stuff like Anchor’s initial bid to be the Twitter of audio — this stuff like Odeo, which is what Twitter was before Twitter became Twitter, which is essentially…

Sonal: Oh, right.

Nick: …Twitter for audio — is that we need proof that the consumer side will lead the way that it will stick with them. So…

Connie: But I think that’s the problem, right? If we’re waiting to have, like, survey data to see if this works, then no platform is going to experiment on it. And this is why, like, new startups and new platforms need to experiment with how to engage with podcasts. I think it’s, like, a given that everyone would prefer to have no ads in their podcasts. And that’s why it’s up to all the platforms to figure out how to create the tools so creators can still make money, and make better money than I think what they’re making now. I actually think creators are vastly underpaid in podcasts. And it’s up to the platforms to figure out how to help them monetize so we can get ads out of the podcast itself.

Nick: I don’t think we’re disagreeing. I think we’re, sort of, like, coming at it from opposite directions here. Because my number one principle when I’m thinking through these things is that no matter what happens in terms of feature development, no matter what happens in terms of whether certain platforms or tools ends up innovating on these fronts — is whether creators themselves end up controlling their destinies in this situation, whether they control the means of distribution. 

Like, the entire wave — the entire learnings of what happened with YouTube and YouTube creators — really harms a lot of the people that I speak to when I report week in, week out. Does the nature of the platform being capricious and altering the way that they expect their certain revenue projections over time? And so, I’m personally all for the ability to create better tipping structures, to streamline Patreon and direct revenue, sort of, pathways straight into the listening point. But the fact of the matter is, like, all of these pieces connecting the listener to the creator are all going to be controlled by other people. And I think this is the nature of things that brings the most anxiety to the creator class right now. And, of course, the creator class would change over time with changing expectations of how these things will work.

Sonal: Connie, I’m hearing you say that there’s huge experimentation that’s already happening in China that we’re not even remotely seeing here?

Connie: Mm-hmm.

Sonal: That is also a case, however, where we have platforms, because to the point of tipping, as an example, Nick also mentioned Patreon as a good thing but, you know, clearly, one of the big structural limitations in the U.S. is that people don’t obviously always have their credit cards linked in the way that you have in WeChat, or that we’ve talked a lot about on the podcast.

Connie: Or like Apple Pay, right? Or, like, in-app payments.

Sonal: Right.

Connie: Like, people, oftentimes, will say, like, “Oh, our payment infrastructure is why none of this stuff would work in the U.S.”

Sonal: But you’re saying that’s not true?

Connie: And I don’t agree with that.

Sonal: You’re saying that’s a cop out. Okay, that’s fair. So, then, maybe tipping needs to be done at a more micro level?

Connie: It’s not even just the money — it’s also helping creators see who their real fans are.

Sonal: You want the 1,000 true fans.

Connie: And right now it’s, like, a one-way conversation. Like, why can’t the platforms that allow you to listen to podcasts also allow me to record a quick message back to you? And then also, like, use algorithms to figure out which comments are valuable or not.

Sonal: Yeah, I think we agree in that sense. Like, platforms should basically do more for their users and experiment. I also agree with Nick, though, on the point that he’s raising. I don’t like the assumption going right to platforms as the default owners of this, and the default aggregators of this. And this, kind of, goes to Ben Thompson, who writes about aggregation theory a lot — which is just a fancy name for network effects in a lot of ways. I mean, he’s much more nuanced. But it is, at the end of the day, the tension between centralization and between bundling and unbundling, and these cycles that constantly go back and forth in waves.

Competition and centralization

Connie: Especially with the YouTube platform, like, you look at how the influencers who started YouTube channels 10 years ago, they have massive followings now. They’ve continued…

Sonal: Yeah. And they’re dependent on YouTube, which is Nick’s point.

Connie: Yes. But also it makes it really hard for a newcomer to come in and create a YouTube channel and get to that 1 million subscriber count, right? And in the similar way, like, even now I hear about so many friends even starting podcasts.

Sonal: Oh, yeah. And it’s very competitive. Like there are people who barely get to 10,000 listens per episode and that’s insane. Like…

Connie: And it’s gonna get more competitive, right?

Sonal: Yes, very crowded.

Connie: And so that’s why I think all these new platforms are, kind of, interesting because as they try and pick off creators to have them exclusive to their platform, this dynamic may change. But it’s really interesting. Because, like, for video, it was like winner-take-all.

Sonal: Which is not true in podcasting. So I’m curious then for your guys’ take, because back to the point of centralization — is to give people a better user experience, and choice, and variety, and ease of use. What do we think about the moves of Spotify and Apple in this space, especially given Spotify’s news a few weeks ago of acquiring Gimlet?

Nick: So, I think the necessary background here is that for the longest time, Apple has been a primary distributor of podcasting. It used to be somewhere upwards of, like, 80%. We believe it’s now somewhere between, like, 60% to 75% maybe. But with today’s Infinite Dial, so, studies — it suggests that Spotify has grown their particular share. But we’re nowhere seeing like 50/50 parity or something. We’re just not seeing that just yet. 

And so Spotify — the business case for Spotify going into podcasting, or spoken audio writ large, is pulling their business model away from being completely tethered to the dynamics of the music industry. Which is to say, a music industry that’s been very costly for them to play in. And it’s been very costly for a lot of music platforms to try to come in and take over, essentially, distribution power from the music labels. And so, Spotify looked into the situation and [goes], “We see a category of content here that is significantly cheaper, that is still unwieldy, and it’s still untamed. And we can try to figure out our place in that world and, sort of, push us off the narrative of just being a music company and giving ourselves other avenues of growth.”

Connie: And that impacts, like, the company’s branding and positioning, right? It’s no longer seen as just a music company, but, like, an audio destination for all kinds of audio?

Nick: Absolutely.

Connie: And in that same way, that, like, Spotify was also known for helping you discover stuff you’ll like, I think this is also a reflection they’re realizing, like — podcasting has gotten so large in terms of how many new creators are jumping in.

Sonal: Can you guys address the exclusive shows angle?

Connie: I actually see both models working really well. I think if you have a platform where anyone can submit a podcast, that can be great. You can have long-tail creators. But I also think a podcast that says, “Hey, I’m going to curate the top 200, 300 podcasts,” can also work really well, too. Both have great monetization potential if they want to be niche or just long tail.

Nick: Yeah. And so, I mean, we have a couple of situations that’s pretty interesting right now. So there’s been a paid podcasting attempt for quite some time called Stitcher Premium. It’s a, sort of, exclusive layer on top of a fairly popular third-party podcast app called Stitcher, which is part of Midroll. And earlier this week, we saw the formal announcement of a company called Luminary that’s attempting to be — they literally use the tagline, sort of, “Netflix for podcasts,” which is going to be difficult because the primary challenge there is that they’re trying to build a catalog of things that, you could argue, has free alternatives almost everywhere else. And I have made this argument a couple of times before, and I don’t think it stuck yet but, like — I think we should be looking at Headspace as a really interesting, like, comp here.

Sonal: What do you mean by that?

Nick: So, Headspace, essentially, is an on-demand audio app that performs a very specific function that provides a very specific genre of on-demand audio content. It fits into one’s life in a very, very specific way. You know exactly why you’re paying for it. And you can’t find quality alternatives elsewhere off that platform, generally speaking. And so we’re in a situation where there is some lane here to build a paid podcasting platform. The question is, like, will there be a really, really big one, or will it be a series of smaller ones that ends up being bundled over the long run? And I think we are at the very beginning of being able to answer that question.

Sonal: Yeah, I agree. I would also say, for people in the know in terms of the history of podcasting, in the recent — past five years, I think I’ve seen versions of Netflix for podcasts. And one of them, I remember —I don’t even know if you remember this, Nick, is 60db?

Nick: I do. Acquired by Google.

Sonal: Right, they got acquired by Google, and I don’t know what Google is doing inside.

Connie: But the problem is, like, it’s still a subscription, right?

Sonal: Why is that a problem? I would love a subscription service.

Connie: But I think I would rather pay for a specific podcast.

Sonal: Oh my God, yes. So my number one complaint — so, everyone at a16z has heard my whole thesis on this a million times. Which is, first of all — podcasting is such a homogenous word. We’ve defined it technically, and in user experience. But when I think of the content side of podcasting, I like to split it into a simple taxonomy of three types of shows. There are personality based — what I call cult-of-personality based shows. You know, like “The Ezra Klein Show,” “The Tim Ferriss Show.”

Connie: Sure.

Sonal: And my God, by the way, most of them are named after male names. Let’s just not go off on that one. Then the next category besides cult-of-personality shows is what I call, like, more collectives — or like brands, or voices of groups of people, which is what I would consider the “a16z Podcast.”

Connie: Yeah.

Sonal: And then the third show is a much more produced, serialized, like, “Serial” or a narrative type of podcasting show. That’s a very loose, broad taxonomy. But if you think of these three categories, discovery for each of them — it is so frustrating to me. Again, going back to this containerization model — that discovery is limited at a show level. Again, structurally, it’s terrible. I keep bringing up structure because while everyone is so caught up in talking about discovery and monetization, they’re missing the big opportunity here, the bigger thing — which is defining a new unit of analysis of episodes versus shows. And possibly even more granular units within that. I hate that we’re still stuck in the legacy ways of thinking about this, when we can bypass things with software. We don’t have to have the CD stage first to get to the individual song stage.

Then I also talk to analytics people all the time about how feeds limit what tools outside the big platforms can do — like not being able to tag podcasts by topic. Because I believe we all need the ability to find episodes, not entire shows. [If] I like birds and birdwatching, I should be able to find any episodes on those topics regardless of show. Connie, you like real estate and crafts, you should be able to fucking find those topics and discover every single episode on those.

Connie: But see, this is where transcription, and tagging, and, like, just a much smarter internet native way of displaying podcasts makes all of that, like, automatic. There is no technical reason why we cannot automatically transcribe all the top podcasts. And again, like, I think subscription for, like, an entire platform doesn’t necessarily make sense for podcasts. Like, maybe it’s a good starting point.

Sonal: It makes sense if you have a collection of shows you like.

Connie: It’s a decent starting point. But, hey, maybe you’re a podcaster and you’re only going to create, like, a couple episodes, but it’s really, really good content. Right, like why can’t you let people pay for that? And, again, I think it’s not just about the money that’s getting transferred. The problem right now is, like — there are certain podcasts that I would happily pay for and a bunch that I would not pay for.

Sonal: Yeah, exactly.

Connie: And right now these platforms don’t give you that option, to say, “Hey, these are the ones that I ascribe more value to.” Much less even just say, “I liked this one, or comment, or anything.

Sonal: I mean, right. Well, you’re also alluding at, when you talk about the transcription of shows, though, is like — and this is obviously another key point of discovery — is it goes, again, parallel to the web. There was a curated links phase that preceded the portal phase, that preceded the search phase.

Nick: Just give it a couple of months because Google is working on that. And they are beginning to beta test all of that in terms of transcriptions, in terms of whether a podcast shows — or audio, writ large — shows up in the search engines.

Connie: But they’re not even going to have all the podcasts, right? The exclusive podcasts on Luminary, Google is not going to have.

Nick: Well, then that’s Luminary’s problem at the end of the day, right? Like, I think Google’s situation is, is that they’re going to pull in the RSS feeds, or they’re going to pull in podcasts that exist on the open, sort of, ecosystem. And they’re going to transcribe it and they’re going to index it within the search engine.

Connie: I guess what I’m saying — like, rather than rely on Google as the search engine to do it, at least very basic transcription and search, all the platforms should be able to do it themselves. And like, imagine all the other stuff you’d like to tack onto it. Like, hey, maybe in addition to the podcast on podcasts today, you have, like, five links that the listener can go in and click on…

Sonal: Click while you’re playing.

Connie: Yeah.

Sonal: I would love the ability to embed a link natively, instead of in the show notes.

Connie: Or a PDF that you can then charge more money for.

Sonal: Right.

Connie: Like, hey, to read more.

Sonal: Right, right.

Connie: Or maybe, like, all the, like, parts that you cut out.

Sonal: Yeah, yeah.

Connie: Like those special clips, maybe someone pays, like, a dollar to un-tap it, right?

Nick: I agree, I would love to pay for stuff that I want. But, I mean, look, I’m just a normal person that has, like, normal finances. I don’t think I’m going to spend more than X amount of money per month on entertainment goods.

Connie: I agree that people aren’t going to spend, like, tons and tons of money on podcasts. But I think the better creators would get more rewarded for their content, which means new creators that don’t have, you know, crazy followings to begin with can still get paid.

Nick: No, I agree. But the question is like, I’ve heard the line of argument that it’s really hard to become a Patreon supporter, or to find a way to give money to a creator that you really support. And I do wonder — the nature of that assumption. There’s only so much frictionless — so much attacking of the friction that we can introduce to that layer — that we find what the most efficient point of, you know, listeners supporting creators ends up becoming.

Connie: Okay. But that is assuming that I want to support that specific creator. Maybe I only wanted to for that specific episode.

Sonal: Yes.

Connie: Maybe I don’t actually want to give the tip to Sonal, but I want to give it to Connie and Nick, right?

Sonal: That’s fucked up, but okay.

Connie: I mean, like, no seriously. Like the way that we are thinking about paying, it’s not necessarily the same person who’s speaking even on every podcast. And the fact that we aren’t able to more directly indicate and tie our money to the products that we truly, truly value — I just think that’s [a] really lost opportunity.

Nick: Well, so, let me push back on that a little bit, right? So the assumption here is that the show is — this show is made up of you, me — and, let’s say, a producer, and let’s say, you know, a couple of people behind the scenes. But I think the reality is that most of the production structures constitute a lot more people than the listener can ordinarily see. So who a listener is moved to tip doesn’t necessarily translate to who is actually creating the content, because there’s an entire, sort of, conversation over here in terms of like how listeners value the creators, how they, sort of, make assumptions about what they want to support, how they want support, why they want to support. There are a lot of gaps of information there to give all that power to the listeners, I think. There still should be some middle point there, in terms of how support works.

Connie: I’m not saying it can’t go to a show. But a show is — even then, supporting a show is different than supporting a person.

Sonal: I’m hearing both of you guys. I also hear that there is a lot more granularity you can do because we have an infinite web. And the fact that we define things as containers of a feed, or a podcast, or a show, or an episode — these are all things we can redefine in this new era. And I agree it’s very early innings. I also agree so wholeheartedly that a thriving content ecosystem has to support its creators. And I know you’re arguing for that, too, because you’re arguing in this framework that people have more comments, [that] they have more ability to interact with their top fans. You’re saying the same thing from a different angle. But from a pure business perspective, in terms of being able to run a business that is based on podcasting, there does need to be a middle layer where creators can get the value they need.

And for me, the open question, quite honestly, is whether the assumption or thesis that happened with blogging — and this is actually the initial premise of Anchor, as well, which Spotify also acquired — is whether there will be now a new wave of mobile podcast creators who don’t have tools. And again, with tools like Descript, which democratize editing, with tools…

Connie: Right.

Sonal: …like, just being able to record a podcast in your phone, without having to have, like, a fancy Zoom recorder or mics. Like, that is an open question to me. And I don’t know if people are really going to listen to that, because we have this discovery problem in the ecosystem. And yet there are a few centralized choke points that are coming up now — particularly iTunes, Spotify, Pandora, etc. By the way, on this notion of growing the podcast ecosystem and the total addressable market size, what do you guys make of radio here? Because that has its own set of structural, and policy, and regulatory considerations. I’m curious for your guys’ take on that aspect of it.

Radio and fragmentation

Connie: Well, I think the market size for podcasts is, you know, multiples larger than what it is today. And I do think it’s tapping into radio, but it’s also tapping into other things that do really well in the audio format. So, like, audio books that are self-published for example — things that are related to the knowledge-sharing market for adult learning…

Sonal: Oh, interesting.

Connie: …I think can really, really work well for audio formats. There’s a lot of stuff where I don’t need to watch someone talking on YouTube with, like, a whiteboard, because, usually, they don’t even really need the whiteboard, honestly.

Sonal: Yeah. Although, there is a funny argument to be made which is that people also listen to audio [on] YouTube. And, in fact, Chris Anderson was telling me his son watches entire movies on YouTube in audio mode only, which I think is fricking fascinating.

Nick: I also just listen to movies on YouTube all the time.

Connie: I mean, yes, YouTube also works for audio. But, I mean just imagine topics around business, topics around finance, topics around parenting — even, like, meditation and how to, like, improve your life — all of that stuff works really well in the audio format and doesn’t necessarily always require video. So, anyways, those kinds of podcasts, at least today, are not the mainstream podcast, right? Because today mainstream podcasts are, again, around shows versus individual pieces. Instead of being, like, you know, a TV show, why can’t you be, like, a movie? And it’s, like, this one-time thing that goes really deep, which is really valuable content? And I think if you take that kind of definition for a podcast, it is so massive.

Nick: So, let’s begin [with] the whole notion of terrestrial radio, right? Like, it is an industry completely, utterly defined by the nature of the distribution points. It is antennas going out. It hits you in the car, it hits you in the radio. And it commands billions and billions of dollars. My interpretation of that industry and its sort of strange persistence has a lot to do with advertiser relationships. It is still the medium that has the most easy reach for — and that hits the most Americans, and has the most, like, history behind it. And so if you’re an advertiser, you feel significantly more comfortable, because that is your default industry to buy into. And I feel like that feeling of safety and confidence is something that should not be understated. And it’s something that all digital media, sort of, sectors — including podcasting and beyond it — should, sort of, be cognizant of, like, that’s one of the primary things driving that situation.

Connie: And I think another reason why ads work so well on radio — and it works well on podcasts too sometimes — is it comes in the voice of the creator, versus the voice of the brand or like some other random voice, right?

Nick: One hundred percent, yeah. The, sort of, buzzword that podcast industry executives use all the time is intimacy, right? And that’s why we, sort of, hear the host-read ad being the pinnacle of the podcasts’ advertising experience. And it’s also its most valuable, like, ad slot, ad type. And so, you know, that’s why like a lot of the genres that you pointed out when you sought to build the taxonomy of a podcast — it’s very personality driven, it’s very people driven. That’s why there’s a little bit of trickiness when we talk about something like fiction podcasts, or non-narrative podcasts, and how you monetize that, how you build that relationship.

Sonal: Yep, I agree. It’s, very much, native to the content of the storytelling and the medium in that context.

Nick: Absolutely. And at some point, we will see innovations in business models, innovation in distribution, in the structure. In the sort of, like, you know, container of it that will alter the advertising assumptions here, or the monetization assumptions here. But I still want to go back to — to tie it back to the very first thing we talked about. The definition of it, what we think about it, how we think about it — our assumptions of it being personality driven, or show driven, or episode driven — it needs to fragment at some point. It, kind of, needs to break up because it needs to be a universe that can hold a bunch of different kinds of experiences. In the same way that when we think about television, we’re not just talking about “Breaking Bad,” we’re talking about “Wheel of Fortune.” We’re talking about, like, so many different kinds of styles…

Sonal: We’re talking about, like, “American Idol,” which is such an important movement around the world when you think of the future of content and TikTok and challenge-based things.

Connie: That’s why you need polling, right?

Sonal: Right. But the point is that there is a whole — that was a huge — reality TV, like…

Connie: Or things around holidays…

Sonal: Right.

Connie: …or like the Super Bowl…

Sonal: Right, special events.

Connie: …like once-a-year type events.

Sonal: Right.

Connie: Like, this is, again, like, we have to break away from show culture.

Sonal: Exactly. I agree. And to your point just on the terminology thing, Nick, I would say — the word “fragmented,” we use that in the context of industry fragmentation. To me, it’s more, how to make a homogenous term more heterogeneous and have more diversity embodied within it.

Nick: Yeah. And so I think the question here is sort of like, do we think about the spread as — on the one hand you have prestige TV, and on the other hand you have reality TV? Or do we think about the spread more like — on the one hand you have Netflix, on the other hand, you have Twitch? Like, is that the way we’re going to think about the ecosystem writ large, or are we going to be a bit more specific when we use the term, when we do our coverage? I think that’s also — you know, what we talk about is just as important about how we talk about it. And so…

Advice for starting a podcast

Sonal: Do you want to say one more thing and then…

Connie: No, I want to ask you questions, because there’s so many of my friends today who want to create podcasts. And you created the “a16z Podcast” from scratch to what it is today.

Sonal: Well, to full credit, it was actually created before I joined. And I took over three months in the production and then hosting it a year later.

Connie: Okay. But I know, like, the user base massively — the listenership massively grew under your care, so I think you should talk about, you know, what are your tips for someone who just wants to get started on podcasts?

Sonal: Oh my God, that could be its own episode and I’d love to do that someday. So I guess maybe in the spirit of creation, which is the theme of this episode, I’ll just say some very quick high-level takeaways. Which is, one — and I do this when I give a lot of talks and talk to founders about how to start their own things for their companies…

Connie: Yes?

Sonal: …I think the fundamental thing people need to ask is where they are in the taxonomy of shows that I outlined, because that is, sort of, a flow chart for what your next step is for either how to hire, build, or just what tools to use. If you’re a cult-of-personality show, the things you can do are very different than if you’re doing a brand show, than if you’re doing a serialized narrative show.

So the first thing I always ask people is, what is your goal and what kind of show you want? Because it’s a very crowded environment. So then the next thing is — attention is scarce. With podcasting, maybe less so, because you have a bit of a captive audience in a phone, or a commute, or a workout — or, you know, a situation where they are on a hike or a walk, where they’re only going to listen. But even then, you are competing with other shows, so the number one thing is how you differentiate your show. And one of the number one ways to get a lot of listeners is to have a lot of episodes — a variety of episodes. And so the other way to do it, then, is to enforce seasonality, where you drop a season of episodes — and then just, like, drop them. Like, you know, record 10 and drop them.

Connie: So, basically, if you want to do it, it’s like a long-term commitment?

Sonal: I don’t think it has to be, because — as you’ve also talked about — there’s a lot more tools emerging and startups emerging that will allow, like, experimentation and sharing.

Connie: But for now, it has to be a long-term commitment?

Sonal: I think Ben Thompson said this — “headcount is the biggest predictor of how much people invest in something.”

Connie: Yeah.

Sonal: And I think if a company has people dedicated to podcasting, then you know they’re serious about podcasting. I would say it’s as simple as that. So you do have to invest in it to make it happen.

Connie: Yep.

Sonal: But on the simple mechanics, one of the most beautiful things is the thing that I complained about — which is the very thing that also is the best thing about podcasting — is the feed ecosystem makes it so easy to simply record an episode, distribute wherever you want. And then it’s about using the feed ecosystem to then freely put your feed out all into the world because it’s as simple — all iTunes is doing is taking a bunch of feeds. All we had to do when we got on Spotify was, like, feed them our feed.

Connie: Yeah.

Sonal: And people can self-select the feeds into different apps, so you can use that to your advantage. And there’s a ton more about the content side. But the one thing I do want to say is that the editing process is now becoming democratized, because there’s a huge gap. I would often put it as the analogy between design and manufacturing, where there is a design phase and a manufacturing phase. And you need to close and tighten that feedback loop to get the best content out. And what’s happening with tools like Descript — you tighten this feedback loop between design and manufacturing, where you no longer have to separate creators and writers from the technical skills of actually editing a podcast.

Connie: Yeah.

Sonal: So that’s really important, because there’s a whole bunch of tools now, though, on the analytics side that will — and there are new — a bunch of distribution tools that are now connecting all these pieces and supporting creators. So it’s a very quick answer. There’s so much more I can say on this.

Connie: I think we need to do another podcast on how to create podcasts.

Sonal: Well, that would be fun. Thank you for joining the “a16z Podcast.”

Nick: Thank you so much for having me. I really enjoyed this talk.

Connie: Thank you.

• 

  Nick Quah
• 

  Connie Chan is a general partner at a16z where she invests in consumer tech. She's well-known for her deep knowledge of the Chinese consumer tech landscape and spotting those trends moving from east to west.

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• 

  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

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The writer-showrunner is a relatively new phenomenon in TV, as opposed to film, which is still a director-driven enterprise. But what does it mean, as both a creative and a leader, to “showrun” something, whether a TV show… or a startup? Turns out, there are a lot of parallels with the rise of the showrunner and the rise of founder-CEOs, all working (or partnering) within legacy systems. But in the day to day details, really “owning” and showrunning something — while also having others participate in it and help bring it to life — involves doing the work, both inside and out.

This special, almost-crossover episode of the a16z Podcast features Billions co-showrunner Brian Koppelman — who also co-wrote movies such as Rounders and Ocean’s 13 with his longtime creative partner David Levien — in conversation with Marc Andreessen (and Sonal Chokshi). The discussion covers everything from managing up — when it comes to executives or investors sharing their “notes” aka “feedback” on your work — to managing down, with one’s team; to managing one’s partners (or co-founders)… and especially managing yourself. How to tame those irrational emotions, that ego?

Ultimately, though, it’s all about unlocking creativity, whether in writing, coding, or other art forms. Because something surprising happened: Instead of TV going the way of music à la Napster with the advent of the internet, we’re seeing the exact opposite — a new era of “visual literature”, a “Golden Age” of television and art. Are artists apprenticing from other artists virtually, learning and figuring out the craft (with some help from the internet, mobile, TV)? And if we really are seeing “the creative explosion of all time”, what does it take to explode our own creativity in our work, to better run the  shows of our lives? All this and more in this episode of the a16z Podcast… as well as some Billions behind-the-scenes (and light spoilers, alerted within!) towards the end.

Related Stories

Hallucination vs. Vision, and Selling Your Art in the Real World: Brian Koppelman Interviews Marc Andreessen [written Q&A]

a16z Podcast: The Internet of Taste, Streaming Content to Culture with Ted Sarandos and Marc Andreessen

a16z Podcast: The Business of Creativity — Pixar CFO, IPO, and Beyond! with Lawrence Levy and Sonal Chokshi

a16z Podcast: Belief — An Interview with Oprah Winfrey with Ben Horowitz

a16z Podcast: Principles and Algorithms for Work and Life with Ray Dalio, Alex Rampell, and Sonal Chokshi

Show Notes

• Brian Koppelman’s background and first film project [1:26]
• Balancing the input of others [10:26] and the writing process [14:00]
• Getting a movie made [15:20]
• Managing the producers of a project and advice for talking to powerful people [19:49]
• Shift toward writers being showrunners [31:08], working with a writing team [35:56], and breaking into the business [40:33]
• The current golden age of television [43:58]
• Koppelman’s decades-long creative partnership [47:20] and how he deals with stress through meditation [52:54]
• Discussion of “Billions” [58:46]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. Today we have a unique sort of crossover episode with writer, director, producer, Brian Koppelman — who, with his partner, David Levien, also wrote some of the most popular and still discussed movies like “Ocean’s Thirteen” and “Rounders” — which we’ll also touch on in this episode. But currently, Brian is a co-showrunner with David on “Billions,” which airs on Showtime, and the newest season actually drops this weekend. 

The reason I’m calling this a sort of a crossover episode is that Brian also interviewed Marc Andreessen for his podcast “The Moment,” which you can listen to on iTunes and elsewhere — if you wanna hear more of their thoughts on the difference between hallucination and vision, putting your art or products and yourself out into the world, and more. We also put the written Q&A version of that conversation up, if you wanna read it on a16z.com. But they’re two separate conversations, so you don’t have to have listened to either to follow both.

Today’s discussion begins with Marc interviewing Brian, and I jump in in between here and there as well. Starting with the business of creativity and the creativity of business. Then going into how to speak to power, speak to one’s team, speak to co-partners — as well as managing the emotions and ego around all that. And finally, ending on some specific moments about “Billions” the show, in the last 10 minutes, where I’ll signal a light spoiler alert warning beforehand.

We’re here to talk about the business and making of film and TV, and startups, and tech, and the parallels and whatnot. Take it from the top, Marc.

Getting started as a writer

Marc: Fantastic. So, Brian, thank you for doing this. So, I’ve always been fascinated — I’m deeply fascinated by the process of creative expression and success, you know, for sure in technology, and we think of what we do up here as fundamentally trying to find the most creative entrepreneurs and trying to help them build, you know, enormous — both creative and professional and business success around what they do. And it struck me for a long time that there are a lot of similarities between how the Valley works and tech works, and how entertainment works — film, television, other forms of entertainment — works. 

There’s big similarities. There’s also some big differences which hopefully we’ll talk about. You know, <inaudible> has obviously been super successful across both film and television for a long time, and even before that in music, but I wanna focus on film and television. Let’s start with this — what was the first project that you, and I think it was you and your partner, David — the first project that you and David were responsible for creating, selling, and making?

Brian: It was “Rounders,” for which we wrote the screenplay. And today, there are people online arguing about that movie, which is incredibly satisfying, because, as you know, when you make these bets, it takes a long time to know if you were right very often. And “Rounders” was rejected — it was incredibly difficult, the movie wasn’t a big box office hit. But 21 years later, people are in ferocious online arguments about the most microscopic moments in the film, which back then, of course, I would’ve said two things. I would’ve said, we were trying to make a movie —.write a movie that would have the effect on people that movies like “Diner” had on us, which is that we would watch them over and over again and quote them. And so the fact that that happened is really rewarding, and it was kind of in our minds. But when we set out to do that, we knew that there was only a needle in a haystack chance of success.

The doing it — we knew right from the beginning, and I think this is something that has been really important to our ability to continue to do this work — David and me, for this long — is, from the beginning, it was only about us getting in a room, or going separately in our individual rooms before we would come back together. And doing the work itself, trusting that if we found a way to do the work itself well enough, some rewards would come. Some have been really delayed rewards, and some have been much quicker. We never seem to know which it’s gonna be.

Marc: So, let’s start with, for people who haven’t — for our listeners who haven’t seen “Rounders” maybe a thumbnail description of “Rounders”.

Brian: “Rounders” is a movie set in the poker underground of New York, and Matt Damon and Edward Norton and John Malkovich are the stars of the movie, John Turturro. And it’s about a character who’s faced with a life decision, which is, is he gonna pursue his passion — this thing that he believes he’s great at, even though he’s had setbacks, and in fact these setbacks have threatened his stable life. And so, he’s at a point where he has to choose— the stable traditional road, or the road that his heart is telling him to pursue. And that’s the central question. I mean, the movie has a lot of, sort of, heightened dramatic — you know, you wanna choose a heightened dramatic construct in which to hide the theme, because the last thing you wanna do — if you wanted to talk about the themes, you know, be <inaudible> and just write essays. If you’re gonna tell it in a fictional construct, make that construct compelling, so that only later people are wondering and feel what the themes are.

Sonal: Show versus tell, kind of thing.

Marc: So when you say that you do the work, like, what was the “do the work” part of “Rounders” for you and David?

Brian: First it was about researching. So I walked into a poker club one night, heard the way that people spoke, saw what it looked like, and immediately recognized, “Nobody has made a movie about this. I can’t believe this exists, this should be a movie.” I called Dave. He said, “That’s great. Who are the people in the world that we’re gonna write about? Who are the characters? Who are we gonna care about?” So we started going to this poker club, most every night, taking notes surreptitiously. And then, at a certain point, we felt we had enough of those notes. We started really figuring out what the character’s question would be, who the character would be, what the important relationships would be in his life. 

And then we had to — so then we started outlining it, and then we had to just decide, “Okay. Starting tomorrow, we’re gonna meet every morning.” One mistake I see people make when they decide they have to do some kind of artistic work, is they think it means they have to grab that identity so hard that it has to shut out the rest of their identity. But what I found was, you don’t have to do that. I didn’t want to put all the pressure on myself of quitting my job and saying, “I need a beret and an easel and I’m an artist, so that’s all I can have.”

Marc: So, what was your job at the time?

Brian: I was working as an executive in the music business. David was bartending. And so what we do is, when he would come off bartending he would sleep a couple of hours and I would get up extra early and when we would meet in a storage locker underneath my apartment that had a slop sink in it, because it was like an institutional little room. Had barely room for both of us to sit. I sat on the floor a lot of the time. And we met everyday for two hours in the morning to write the script.

Merc: And this was purely on spec?

Brian: Completely on spec. In fact, this is — I think a piece of this puzzle that I never told before, which is that when we had the idea, David met a young producer, and told them the idea and the producer offered us $5,000 and said, “For five grand, I’ll be your partner. I’ll give you five grand, but then we’re gonna share, and if we sell it we’re gonna share in the writer’s fee, and I’m gonna be your partner on the thing.” And we were tempted because it represented, “Hey, wait, someone is paying me to write. We’re professionals.” But we asked some advice — a woman named Rachael Horovitz, who was at Fine Line. She happens to be the sister of Adam Horovitz of the Beastie Boys.

Sonal: That’s awesome.

Brian: Rachel was a great executive, and I knew somebody who knew her, and we went and met with her and said, “What should we do? Someone is willing to pay us $5,000.” And she said, “I don’t need to hear the idea, but if someone is willing to pay you guys who have no credits $5,000 now, write the thing and you’ll have a much better chance of success.” And we’ve taken that lesson to heart, still to this day, to write unencumbered. We like to go in a room and let our idea come to fruition fully, let ourselves — let us work out all of the complicated parts of it without outside interference.

Marc: So let me ask, because a lot of professional — one of the adages, I think, of professional writers is, never write for free. If you write for free, you’re a sucker. You’re being…

Brian: Well, that was like Samuel Johnson said that, right?

Marc: Yeah. You’re a sucker or you’re being taken advantage of, right? Never write — you know, a doctor wouldn’t do surgery for free, a pilot wouldn’t fly a plane for free, writers shouldn’t write for free. And I know you’re not writing for free, per se, but, like, there’s an element of this of, like — like, it feels like a lot of your peers need the deal before they’ll write, is that right?

Brian: Well, but it depends where you put EV, right? You know, right…

Sonal: The expected value.

Brian: Right. Where do you put the EV? By the way, look, the way I view the need for personal expression. I actually completely disagree with that quote. I understand what the quote is, it’s talking about don’t be taken advantage of — and it’s also kind of making fun of the artistic impulse. It’s saying, “Are you a professional or not?” But I would assert you can be a professional — you can act like a professional before you’re paid as a professional. It depends how you’re gonna approach it, and it depends on what your expectations are. But our expected value, even though it might have been foolhardy to think so, was that there would be something on the other side of it. And I’ll say this, the expected value of not doing the work is zero. Like, there’s no question about the EV of just thinking I’d like to write and not writing.

Marc: Well, if you had shown up, and if you guys had just gone and tried to pitch, tried to get an agent — at that stage of your careers, would you have been able to do the project?

Brian: No, probably not, other than someone would’ve paid us five grand. But then later we did make the mistake of pitching at various times, and, I mean, occasionally a pitch has become a movie for us. But for whatever reason, we’ve found that our strongest work is done in private, and then we take it out and show the world, and that’s — for us, we find that when you pitch an idea. As you know, when someone comes to pitch you, you’re entering into a dialogue about this endeavor. And inevitably, what we found is, a smart person would say something in the room — because let’s assume for a moment that the people across the desk aren’t idiots. Someone says something smart. You can’t help but have that in your head when you’re then going to do the work. And that might be a smart thing, but it really might not be the right thing, because maybe I’ve only explained this feeling that I have about what this thing could be. Maybe I’ve explained it in a way the best I could at that moment, but left to my own, it would take all sorts of different turns, but I have that phrase that the person uttered to me, and I have to keep returning to that for some reason because I’ve already let them inside this process.

Sonal: I have a question about this though, because, you know, when we go back to this idea of — you have the confidence to do this in private and then put it out into the world — and even with “The Rounders” there was sort of a long staying power that came about with that. It wasn’t, like, an instant, like, box office hit in one weekend.

Brian: That’s right.

Sonal: What’s the timeframe that you sort of, A, gauge the success, and B, how do you sort of balance the sort of impetus from executives and other people in your life who care, who are producing and paying for these products, with sort of keeping the creative process intact without over-rotating on data?

Working collaboratively

Brian: So, let me back up to answer that question. I have to tell you where I was before we wrote the first thing, and where I was was in a pretty decent state of misery. Because, although I had a job that was well-paying, and on the surface seemed creative — and although I was lucky enough — even having Amy and then our first child was not a salve for the way I was feeling. Which was, like, I wasn’t doing this thing that I knew I had to pursue. I wasn’t doing the work, I was blocked. And I have this notion that when you’re a blocked person, when you allow this creative impulse to be kept down, it dies. And like any other kind of death there’s toxicity that’s attached to that.

And the toxicity I knew would leach out, and would actually, you know, leach onto the people that I loved because I would become a bitter person. And I want to be the kind of person who would come home and tell my kids that they should chase their dreams with rigor. You know, people often just think of it as a relic of the ’60s and it’s like, “Hey, pursue your dreams. Do your thing.” But it’s like, “Well, wait. If you have a dream, work with incredible rigor and discipline to pursue it.” And so, I finally got to the place where I knew — and it wasn’t about, “Can I have a movie in the movie theaters?” What it was about was, “Can I find a way to have the courage to do the work that I’m worried I’ll fail at, the work that I think is gonna be meaningful?” And so, I decided to follow my curiosity and my obsessions.

And it’s not merely following your passion. What it is, is figuring out — if I’m obsessed, I’m incredibly curious — if I can get to the root of that and I can somehow create something out of it that is worthy. First of all, in the doing, I will change and become better. So, to answer your question about success. The moment that I was in there for two hours a day, I was charged the rest of the day. So the job that had seemed mundane and bitter, and sort of annoying to me, was much easier to get through, because I had spent two hours already firing on all cylinders. And so, that in the beginning — and of course, along a career, you can hold onto those things and you can let them go. Because we’re all human, which means that we’re all prey to — we can all fall prey to being judged by a standard that isn’t our own, and we have to find a way to remind ourselves that our own standard is the standard that matters.

So, of course, I’m not gonna say that the whole time I’ve been doing this I only cared about what I felt like when I was doing the work. I will say that each time I have reframed and refocused, to remember that what matters is what I feel like when I’m doing the work, it immediately makes me feel better, and that I immediately don’t care about the rest of that stuff. Easier to say — you might think [it’s] easier to say, because we’ve had this success, but I know I can point to a movie like “Solitary Man” which was a commercial failure, but I mean — it made its money back, but it was not a big commercial success. But I know it’s the best movie we ever made. It got these incredible reviews, so — I wasn’t crazy. 

That’s how I know — you know, this question that I’m really interested in is delusion vs genius, or delusion vs capability — but I wouldn’t change anything of the four-year struggle to write that movie. And then we directed the movie because, as an artist, if you get to express the thing you wanna express and then you get to make it, you’ve kind of won. The odds against are so great. Even the odds against completing something, right? Even the odds against actually showing up. “I wanna be a writer,” is way different than “I am a writer.” “I wanna be an artist,” is way different than, “I’m an artist.” And we decide when you get to give yourself those designations. But I was so sad, so miserable — and it immediately changed upon doing the work. So I’ve had to force myself to have that be the standard.

Script-writing process

Marc: To go back to the state. So, do you ever suffer from writer’s block?

Brian: No, because I have rituals.

Sonal: Like morning pages…

Marc: Could you describe that?

Brian: Yeah, I meditate every morning, and I do morning pages every morning.

Marc: What’s that? What’s morning…

Brian: Morning pages is, like, out of Julia Cameron’s book “The Artist’s Way.” I do three long-hand pages — a real brain dump, where I just let the pen move for three pages no matter what. And it has this incredible effect on me. It’s self-hypnosis. It’s a brain dump, so that you’re putting all the dross — just gets out there on the page. Also, it has the effect of, “I can’t be blocked. I’ve already written three pages.” So you’re in a state of flow. You’re in a state of movement. That is the tool I used to become unblocked when I was 30. And when I was that unhappy, and I said I had to try to write something, I had given Dave “Awaken the Giant Within” and Dave gave me “The Artist’s Way.” And the combination of those things made me realize, I had to figure out what it was that I really wanted to do and be. And then “The Artist’s Way” gave me this tool to try to actualize — and as soon as I started doing those pages, I was like, “Oh, I can do this. I can write. I can actually make good on it.” And I’ve done it for 23 years.

Marc: Do you keep the pages?

Brian: My kids have instructions to burn [them] upon my death.

Sonal: <laughter> Upon your death.

Marc: So I was gonna say, you know, decades or centuries later these get published as the notebooks.

Brian: I really can’t. I’ve read Camus’s notebooks and Somerset Maugham’s notebooks, and I’m happy that they exist, but that probably wasn’t their intention.

Marc: So, what did you get — when you guys sold “Rounders” or got whatever you wanna say — the trigger got pulled. What did you guys have when you walked out of the room to do that, at that point?

Brian: Well, so we finished the screenplay. It was first rejected. I mean, it’s my favorite story, and I tell it in detail on my blog — which is not a very active blog, briankoppleman.com. But we were rejected by every single agency in Hollywood. One said it was overwritten, another said it was underwritten. I still don’t know what either of those terms mean. And I wrote down everything they all said, and this was an incredible Hollywood lesson because — you know, in the beginning, every rejection feels so personal. Every rejection also feels so final, right? In the beginning. So I wrote down what everyone said, and then we sold the thing, and that Monday — so we sold the thing over a weekend, on a Monday, and by Tuesday, every single agency that had passed called us to try to sign us. And I read them all their comments. I had it on a yellow legal pad, and I just read them. I said, “Well, but you said that thing was overwritten.” I did, I read it to them all.

Marc: And it wasn’t that the movie had gotten made and they liked it. It wasn’t that the movie was a commercial success, it was simply that you sold.

Brian: Nothing had intrinsically changed in the work itself, and they all — nobody owned it. Not one of them said, “You know what, I guess I’m…” They all said, “I didn’t read it. It was my reader, it was my assistant. I meant to read it. I read the wrong script that was about poker and I thought it was your script.” It was incredible. But it immediately framed the question for me for the rest of my career about who knows what. So then it’s bought by Miramax, which is something I used to say with pride. And David and I were just the writers, we weren’t the producers on the movie, we weren’t the directors of the movie — but we, and this has to do with continuing to work with rigor.

There was a moment where they were gonna hire a director who we thought would fire us off the movie, and we thought would do a bad job. We’d met him, we didn’t like him. And so, even though it wasn’t in our billet, we decided we’d better find a director who they would hire, but who would be someone we felt we could work with. And it was really overstepping our position. And I think part of it is — and this gets into — part of it was that each of us were raised in environments where we saw people take these kinds of risks. And my dad was an entrepreneur, and I saw a lot of the time, the way that he would just overstep his position to achieve a result. And so we found out, through some sources, who [the] directors were [at] that the movie company — who they were interested in making movies with. We triangulated that with people we could get to, and found out that our agency represented John Dahl, who was really high on our list.

And we said to our agents at the time, “Listen, we’re gonna stay in California until you can get us a meeting with John Dahl.” And they were like, “Well, how are we gonna do that?” We said, “We’ll send him the script with a letter that we write, and we’ll just wait around.” And they had all just competed to sign us, right? So this was the very beginning of this relationship with the agent, and in a way, he had to prove himself to us. So we were able to leverage the newness of the situation, even though, often, people in that situation think that they work for the agents. The agents do a really good job of making people feel lucky to have them. But we were aware of the actual leverage in the situation. 

He got the script to John. John read it. Luckily for us, he really liked it. He came over and met us at our hotel. We all shook hands on it. We knew he was an honorable person. We, then, got to have this incredible moment — which now when I think back on it I kind of can’t even believe it happened — which is, we then called the producers and the studio and we said, “John Dahl is gonna direct “Rounders.'” And they all went, “Well, that makes no sense. He’s supposed to direct this other movie for — how could you do that? You overstepped.” And we all said, “Well, do you want John Dahl to direct the movie?” And they all went, “Yeah.”

And what was really great about that is — then that allowed us to be on set every day, because when you’re the one who brought the director in and you have this relationship — plus, John has no ego and he knew we understood the world of poker. Also, this incredibly lucky thing was, we were the same age as Matt and Edward, and so there was a relationship that developed right away — which was, we were gonna take these guys and show them the world of underground poker. We were gonna be the experts about this. John Dahl gave us our limits. He was like, “You have to really think carefully about what you say to actors. You can’t contradict me. You have to — we’re gonna work together, but there’s a chain of command.” And with that, he gave us complete freedom. Within that, he was like, “Now help me make the movie.” But none of it would have happened if we would have pitched the movie we would have been powerless. We had ownership because we’d written the whole thing and we’d proven we were experts.

Talking to powerful people

Sonal: Can I ask you a quick question on this notion of ownership?

Brian: Yeah.

Sonal: David Levien and you guys are both the showrunners for “Billions.” I’m dying to know how — because when a studio buys your show — someone is producing “Billions” — it is your show as showrunner. Like, what if there’s a conflict, and you guys have like a huge falling out — and I’m thinking of the case of, like, the Sherman-Palladinos and “Gilmore Girls,” and they had to exit before the last season, and it totally changed the last season of the show, and then they came back to remake the thing. Is there this thing where you’re owning this thing that other people are now sharing in, and then you have to kind of give up your baby? Like, how does the ownership work?

Brian: I’ll tell you, it’s so analogous to the way a founder will work with the investors, right? The VC, the board. It’s up to you to manage that relationship. It’s up to you to set the terms. And look, this does get into questions of privilege. Like, as two white men growing up with — David’s grandfather and my father were pretty successful. We learned at a young age how to talk to powerful people. Most people don’t get an education in talking to powerful people.

Sonal: You’re so right about that.

Brian: And that —when people ask about advantages, yes, getting college paid for it was a huge advantage — meaning that I knew I could take certain risks that other people couldn’t, because I didn’t have massive debt. But much more important, or certainly equally important, was — from a young age, my dad would, like, put me in situations where I would have to deal with powerful people, and I would have to find a way to get the result I wanted. He would let me be in a recording studio when he was making records, and sometimes ask my opinion in a room full of incredibly scary, powerful people. He would let me be in meetings and he would leave and then I would conduct stuff.

Sonal: He really set you up for that.

Brian: And so I understood from a young age how to interact.

Sonal: How do you talk to power actually? Give us the advice, for our listeners.

Brian: Well, the main thing is, don’t treat them as — most of the time don’t treat them with the sense of awe and that their station makes them better than you, but also don’t try to condescend to them as though you’re the smartest person in the world.

Sonal: You’re better than them, right.

Brian: And, you know, the biggest thing? Make them laugh once in a while.

Sonal: That’s actually great.

Brian: I mean, right? Walk into a room, make them laugh, make them feel like you have the answers to their problems, and that you’re comfortable in your own skin. I mean, so much of what I’m talking about is an ingrained sense of comfort in your own skin — is being able to just continue to grow. You must always continue to grow, continue to better yourself — but find a way to sit there in the room relaxed and understand that you’re not sitting there with the all-knowing, all-powerful oracle or Oz. Which is to say, to answer your question — it’s our job to make the show, to make the actors comfortable, to make the crew feel empowered, to make sure the show is written, edited, and shot, right? It’s also our job to make the show on budget, to communicate with Showtime if there’s gonna be, “Hey, guess what? This next week it’s gonna look like we’re over, but here’s how we’re gonna solve that the week after.” Also, make them feel heard when they’re talking about the show.

Sonal: You’re so right.

Brian: If they’re giving notes, make them feel heard, make them know that you actually are listening. Then it’s really important that we only take the notes that’ll make the show better, and that we do that in a way that makes them feel good about the process.

Sonal: That’s fantastic advice. That’s so great, I feel like that can apply to any business.

Brian: It does. I think that applies across the board.

Marc: You know how I coach people how to do that?

Sonal: How do you? Yeah.

Marc: From “Larry Sanders,” from Artie.

Sonal: So, tell us. I don’t know Artie…

Brian: Well, we both love — “Larry Sanders” is like my third favorite show of all time. So, yeah.

Marc: So for people who haven’t seen it…

Sonal: I don’t even know what that is.

Marc: …you must watch it immediately. So, Artie — the producer, played by the legendary…

Brian: Rip Torn.

Marc: The legendary Rip Torn played Artie the producer. So, typically, we see this with young people a lot here, which is like, you give somebody — in your world it’s called a note, in our world it’s, like, feedback or, like, you know, “Here’s an idea.” And you give somebody an idea and they immediately get the back up, right? Well they do one of two things — they either take it way too seriously and they, like, try to do everything you tell them — or they get their back up and they get offended, like, “How dare you question my vision?” kind of stuff, and then that sets up a weird dynamic where you feel like you can’t talk to them, right? And both of those are bad, right? One way, you basically hijack their creative vision, usually to bad effect. The other way is you end up with a hostile relationship.

And so, Artie’s whole approach to dealing with the network executives — and “Larry Sanders” is a show inside a show. Basically it’s a show about a show. His was of dealing with the suits from the network was basically that, you know, they’d say, “Well, I don’t know, you know. I think that, you know, the curtain at the talk show is red, we really think it should be purple.” And Artie would literally say, “That is a really interesting idea. I am really gonna think hard about that one.” And he would write it on his legal pad, and like, “Okay, you know, what else do you have?” And then of course, you know — then in the show, the suit leaves the room, he rips the paper.

Brian: Yeah, rips up the paper.

Marc: And the suits are on their way out, and they’re like, “That was the best meeting ever.”

Sonal: Because it’s a feeling of feeling that you’ve been heard.

Marc: And so that’s like — what I’m telling people is like, “That’s the baseline.” Like, if you can just do that, you’re better than most. And then to your point, if on top of that you can actually consider and actually absorb some of the feedback…

Brian: And sometimes listen…

Marc: …that might be good.

Brian: …nobody’s perfect. So, there are times I’m working 17 hours a day, and somebody gives me a note I really disagree with, and I might say — you know, as a human, I might once in a while say…

Marc: That’s the dumbest thing I’ve ever…

Brian: …”Listen. That’s…”

Sonal: I tend to say kind of like, “Fuck off. That’s the stupidest idea I’ve ever heard.”

Brian: Sometimes I say that’s a stupid idea. But here’s the thing, if you have the right kind of relationship with the people with whom you work, you can say that — because they know that’s not your default position and they understand — because you’re in dialogue with them, but not operating from a — no one’s operating from a place of fear, hurt, or misunderstanding. And by the way, if you say that’s the stupidest fucking note I ever heard, call them the next day and say, “Let me tell you what was going on yesterday. Here’s the way I’m gonna think about addressing it.” Or, “Read this and tell me if you still think so.” You constantly have to remember, if you’re in our position, that you’re grateful to be in this situation, but that you’re not an indentured — you’re not so grateful that you’re gonna prostrate yourself and ruin the thing in the process.

Sonal: Of course.

Brian: And if you remember that, you’re in okay shape.

Sonal: The part that I always struggle with, here, and I wonder if a lot of people have struggled with this — is that, I have always had this belief that competency is a thing that will always get you ahead. The result will speak for itself. How do you sort of play back the results to tell the story that you want — because oftentimes, like “The Rounders” example, like — this is the conversation that’s happening around the movie. Because people have ways of defining those things. I think that’s a really big challenge. How do you sort of define it so that you can make sure that the narrative you want told your way — is that part of the point? I mean, in terms of how people perceive your work?

Brian: Well, when you’re a showrunner of a going concern, you’re gonna get to prove it out or not prove it out because you’re making the show. And I will say, certainly in the relationship we have with Showtime, all their notes are suggestions, and so, Dave and I are getting to prove it out every episode. I will say we did — so, okay, there are a few other things. It’s not a bad thing to learn the mistakes people have made ahead of you. It’s not bad to do research and know, well, what is the third rail in this situation? Right? So if the third rail on the situation is, don’t go more than 3% over budget on a given episode without having conversations. <Then you should know that.> That’s the third rail, then don’t go — then, you know, don’t be a jerk. You’re in an incredibly lucky situation to find a way to do what you have to do. But there are many other non-budgetary examples.

So, here’s how a pilot works. And when I lay this example out, there will be parallels to your world. So, a pilot gets greenlit. They give you this amount of money to go make the pilot, and you’re in — they’ve already approved the script. You cast the show together. So, that’s another one of these things where you’re trying to find a way to express your opinions, make sure you have the cast you want, while understanding we’re in the real world — you’re not gonna cast a complete unknown to play the lead, unless you have a bunch of other ways to say, “Well, that’s okay because in these three spots we have people who aren’t.” 

But then, once that stuff’s done, “Guys, go off, make your show.” Right? Because once it starts going, and before it’s edited, there is no feedback they can really give you. You’re making the show. You go in the editing room after you have all this material. You know the show is gonna fit in an hour-long slot, but most people when they cut their pilot, because they don’t actually have the real limitation of an hour, will turn in a 67-minute pilot, because every idea they had, everything they want it to be in there. Now, David and I, because by the time “Billions” had come around, we’d been doing this for a long time. And what happens when you give the 67-minute thing is you’re inviting a bunch of people to tell you how to get the thing to fit the 57 or 58 minutes.

Sonal: That’s exactly right. The crowdsourcing problem.

Brian: And suddenly they’re giving you their opinion on it. Also, by you not having to have rigorously— and with discipline — make those decisions, you’ve inevitably left in a bunch of stuff that you shouldn’t have. So, Dave and I decided, and no matter what, we’re turning something in that’s 57 or 58 minutes, maybe 56, if we could do it. We’re gonna take all of those questions off the table before showing it to the people who put up the money. And I’ll tell you, we gave them this cut, and we’re realistic people so we knew all the flaws and the things we would wanna reshoot before it would go on the air. But, you know, they’re gonna make it as to — maybe some of the audience doesn’t know. 

When you shoot a pilot there’s no guarantee you’re gonna have a series, right? They’ve invested a bunch of money. Showtime’s known for if they make a drama pilot, it’s very likely they’re gonna put it on the air but you don’t know. And so we turn over this pilot and the first thing they said to us when they called us was, “You guys have already done all the stuff that normally takes a month for us to work through with showrunners — which is, you’ve gotten the thing into show shape.” And that’s because we looked ahead at best practice, true best practices. And by the way, it’s hard, right? Actually, when you’re in the situation, you understand why everybody turns it in at 67 minutes. Because you have to — it’s much easier to not have to make those decisions, right?

Sonal: Totally.

Brian: It’s much easier to hand those decisions…

Sonal: It takes a lot of confidence actually, quite frankly.

Brian: It’s easier to offload those decisions to someone else, the people who are paying for it. Instead, we said, you know, “We’re gonna make these choices and we’re gonna show them that this is the vision we have for the show.” And our structure, I think I’ve put the pilot script online — I think I’ve put it online at the blog. And if you go look at it — I put “Rounders” up there too, which people have really been reading a lot lately. But if you look at it, structurally it’s quite different than the pilot that got on the air. A different scene starts it, because when we got in the editing room we decided, “Well, now we have the opportunity to make the show be the best version of itself.” We were able to gain objectivity, even though it was all of our hearts in there.

Sonal: It’s only in the edit that you get that arc, totally.

Marc: And then the one message you’re delivering is like, here’s an incredible product. The meta message which I think you’re delivering is, you guys are professionals.

Brian: And they said that to us. They explicitly said, “We know you’re showrunners who can make the show.”

Sonal: You’re the pros.

Brian: That was what gave — so this goes to your question of the relationship. How do you establish a relationship with them that makes them, “You’re a professional we can trust.” And by the way, as you know, all you want is a founder, CEO, who can not make it your job to run the company and just take the best of your ideas — and you want them to discard the worst of your ideas.

Marc: Go knock it out of the park. Go do your thing.

Brian: By the way, those are hard-won lessons over a career, you know what I mean? We were 20 years in by the time…

Sonal: No, right. You learned that.

Brian: I think we sold “Rounders” in 1997 and we made the pilot of this in 2015. So, that’s a long period of time over which we figured this stuff out.

The origin of showrunners

Marc: So, for people who are unaware, there’s a very interesting kind of split in how movies are made and how TV shows are made, at least these days. Which is, movies are made — generally, the writer writes the script, turns it over, and then other people run with it — and other people being presumably the producers and then particularly the director. The director ends up actually running the project in a lot of ways, right? Maybe with a line producer or something. For TV shows, especially, it seems, like in the last couple decades, you have this concept of a showrunner — and the writers are often, or usually, at this point, the showrunners. And I’m picturing, I don’t know, Louis B. Mayer, or, you know, Jack Warner or somebody, you know, being told that the writers should run the project, and probably screaming and being very upset. Like, that would be impossible. And so, two-part question. What was the left turn in the industry that caused the writers to get in a position where they could be the showrunners? And then, what did you guys do as writers to make sure that you specifically were able to do that?

Brian: So there’s this great book called “Difficult Men” by Brett Martin that’s about five showrunners — David Simon, David Chase, Vince Gilligan, Sean Ryan, and one other I’m not remembering right now.

Marc: And this is “Breaking Bad,” “The Shield,” “The Sopranos.”

Brian: That’s right.

Sonal: “The Wire.”

Brian: “The Sopranos” and “The Wire.” But he goes into the history of it, and “Hill Street Blues” is when this first — because they were making this kind of serialized show, and Steven Bochco started having meetings with the directors. When the director would come in, he would start having meetings saying, “Let me set the tone.” He was executive — nobody named him showrunner, but he decided that he was going to — had to, because of the nature of that show, exert upon the situation a kind of tone — a control of the voice and tone of the series.

Marc: Because most shows, the successful shows had been more like, “Law and Order” was like, the apotheosis of the other way around — which is, each episode is independent.

Brian: Yes.

Marc: Right. More or less. Before “Hill Street Blues.”

Brian: “Hill Street Blues” was one of the first shows that sort of combined these elements for a cop show, I think, for sure. But the answer to your question is, about Dave and me, and about anyone who wants to be a showrunner — which I’m happy that showrunner’s officially in the dictionary now. Like, two years ago it became — in the dictionary because it’s a real…

Sonal: I’m so glad. I love that word.

Brian: Yean, because it’s a real — yeah, it’s a real job title now. Like, what do you do for a living? Showrunner. It’s learning to be a producer, and we have 150 people who will work with us, but we’re in charge of. And it is quite different, but, you know, as you know — David and I directed movies and we produced movies, so, for us, it was quite a natural thing, because we’d already — you know, “Rounders” was as good an experience as you could have as a writer, and there were still areas in which we didn’t have enough control over the the voice. And what we also knew was, we’re probably never gonna get that exact situation again, so we’d better learn how to do these other parts of it. We better learn how to gain control of the, you know, mechanisms of production.

Marc: The means of production.

Brian: The means of production, that’s exactly right. And so, we realized that we ought to do that. But, again, that goes back to this question — often a writer takes solace, while they’re whining about not having control, they take solace in not having control, because, if you don’t have control, you don’t take the blame.

Marc: Somebody else just will.

Brian: So, if you’re comfortable, if you can find a way to be comfortable with failure — which as a writer you have to, or comfortable in your mistakes — then you can be comfortable in wanting to be the final voice on what the product is gonna be. And we very early on decided — and I’ll say this, when we work with Steven Soderbergh, we are so glad to have his voice. If he’s directing the movie, man — what a thrill to work with a genius, right? And what a thrill to have Soderbergh make us better. To this day, like…

Marc: This was “Ocean’s Thirteen?”

Brian: Yeah, but also “The Girlfriend Experience” and then he produced “Solitary Man.” I mean, if Steven called tomorrow and said that he wanted us to just be screenwriters on a movie he was directing, we would jump at it because he’s gonna make our stuff better. But if you’re comfortable taking the blame, if you’re comfortable in a position of control, it makes you incredibly comfortable to then cede that control — or to share with somebody else. And so you can pick your spots then and decide. And also, because we’re able to make our own stuff, being in a situation where we are not the final voice doesn’t make us chafe against it. But I have plenty of that over here, so I don’t have to chafe against it over here. I’m happy to play this role in this situation.

Sonal: Fantastic. I love this.

Brian: That’s why we’re good producing other people’s movies, when it’s someone else’s vision — we’re great at just helping them achieve their vision. Like, Neil Burger, who’s an incredibly successful director. Directed the pilot of “Billions.” We produced his first three movies. And I was like, “Hey, Neil. We’re here to advise, counsel, help. It’s your movie, go run with it.” We’re comfortable in any of those different modes creatively, but I think the reason for that is that we got comfortable early on with just doing the work and failing.

Working with other writers

Sonal: That’s right. We’ve been talking a lot about kind of managing up — hierarchically, so to speak. Now, turning it the other direction, like, managing down in the writers room. You’ve got like a lot of writers working with you, so how do you now navigate debates with all those writers in the writers room? Like, essentially, you’re the showrunners — how do you make it collaborative yet not a democracy at the same time?

Brian: Well it isn’t a democracy. So, different showrunners approach the question of the writers room differently, and some who’ve come up through a writer’s room rely on it in a very deep way.

Marc: You have to describe a writer’s room.

Brian: A writer’s room is, you get, let’s say, six people in the room, plus a showrunner. There’s a white board on the — and you start at the beginning of the season and it’s like, “Where are we and how do we fill that in?” And then each — but then it’s really hard to describe a writers room, Marc, because writers rooms become extensions of the way the showrunners see the world, and the way they see the world of their shows.

Marc: In theory, it’s a team of people writing the show together in some form.

Brian: In some form, meaning maybe everybody will write an episode. Almost all shows, the showrunner does the final pass on all the episodes, no matter whose name is going on.

Sonal: Yeah, like the top edit.

Brian: On our show, though, David and I end up writing most of the show, and we have a great room of men and women who help us really break the story arc of the season, and that is an invaluable process. Tons of stuff comes out of the room about how the big arc of the season should occur, about the twists and turns, about where characters — and that’s a months-long process of talking. We haven’t yet found — and then, when it comes to writing the scripts, David and I — and then we have a writer named Adam Perlman, who’s now a co-executive producer — he’s our number two person, and Adam writes a good amount of the show, too. But the truth is, it is mostly us writing it. And I’m not saying that’s the way it should be on every show. The voice of our show, the way that our show is — whether you like our show or not, our show is canted in a certain way. It has a very clear voice that somehow the two of us can do. Now, that said, when someone else —if someone on the team starts a script, their name goes on and ours does not.

Marc: So you got a young hotshot writer and they have an opportunity to write on a show that’s maybe not as, let’s say, critically respected or whatever, but maybe it’s like they know that they’ll actually get to write scripts and…

Brian: Yes.

Marc: What’s your pitch to them of why they should come work for you given that it’s a more constrained environment?

Brian: I’m not sure. Well, Adam was somebody who had a lot of job offers when he came on our show in the second season. He started in the second season. Came into the room as just a producer-level, which is kind of a low level position, in terms of the hierarchy. He wasn’t helping to be a showrunner. But he came in the room. He had incredibly good ideas. He then wrote — his first script that he wrote was very strong — strong enough that when someone’s script came in that was not that strong, and David and I had to work on three other things, we called him in and we said, “Hey, take a shot at rewriting this. Here are the things that matter. We made extensive notes. Adam, go try to rewrite it.” He rewrote that script. We then sat with him and talked about how we were gonna now rewrite it, but he did a really good job. We kept being able to go to him, and by the next season, season three, he was running the room when we weren’t there. We bumped him three positions — we bumped him up to co-executive producer really quickly and said like, “Look. You’re our creative partner now. Like, help us do this.”

So, if you’re really great — if you’re great in the way that our show requires. Someone may kill it on another show and just not kill it on ours. I mean, the other thing is, they get to be on set, watch how our show is made and be a part of it. I’ll say one thing though to answer — another thing to answer your question, which is, some people have come into the writers room, talented — and I found out they came into the writers room because they like my podcast. But I’ve had to say to them, I’m this incredibly nurturing and encouraging voice on the podcast, and I want you to know, like, I am that for you in your life, and I’ll, like, help you get the next job and I’ll be — but you’re gonna turn in a script and you’re not gonna get the voice on the podcast.

Sonal: Oh my God. Totally relate to this.

Brian: You’re gonna get somebody saying to you, “Here’s what doesn’t work.” And so you have to know that this is now you’re entering — we’re in the major leagues here, we have no choice because we’re playing the Red Sox tomorrow, so we have to be ready to get in there and play the Red Sox. That has happened twice.

Marc: So, one more question about “Rounders” which goes to the kind of current state of the of the industry. So “Rounders” was made in when, what year?

Brian: ’97.

Marc: ’97. So, that was the heyday of, kind of, the high-status independent movie, like, medium budget but like super high status.

Brian: Yeah, 14.5 we made that for, yeah.

Marc: Okay, yeah. And then as you said, like, you know, it wasn’t a huge commercial hit out of — but then it had this long life, you know, kind of, you know, plays out through now and probably long into the future. If that movie had not gotten made, and if movies like that had not gotten made — and just nobody had made, kind of, the definitive poker movie, and you and David entered the industry today at age 25 or 30, or whatever it is, and decided to make that movie or that project today, what would be different about the process?

Brian: People constantly ask me how to break into the business, and my answer is — I have no idea, I did it 23 years ago. I can’t help you. I wish I could help tell you how to break in. The conditions on the ground are entirely different, and the last thing I wanna be is some general, back in [the] thing, ignoring what the sergeant says. Like, I have no idea. I do know that — what I know is that — well, I think it would resemble a movie that I love and that launched many careers which is “Margin Call.” But whereas “Rounders” was a 14.5, I think “Margin Call” was made for $1.2 million, and scraped together by a commercial director and they had limited sets. Because “Margin Call” has a lot of similarities to “Rounders.” It’s set in an insular world with a language of its own. It doesn’t spell anything out for you. Like, you have to be willing to roll…

Marc: We should describe — it’s kind of the definitive movie of the September 2008 financial meltdown. It kind of takes place overnight, effectively in Lehman Brothers, and it’s like a very fictionalized version of Lehman Brothers. And it’s actually a very chilling — the people in finance look at it and say…

Brian: Goldman. Well, it’s Goldman, right? Because they survived. I think it’s set at Goldman, and it’s about willingness of Goldman — and they never say it’s Goldman — it’s about the willingness of — it’s about a decision that Goldman Sachs made to get rid of their toxic assets. But I think that movie is really analogous to “Rounders” because it is doing a bunch of the stuff that we did. It’s — you have to just, like, catch on to the lingo and you have to understand what the stakes are, but you had to — look, they made that movie for a tenth of what we made “Rounders” for.

Marc: They had Kevin Spacey, they had Jeremy Irons, Zachary Quinto was in it and he was starting to become famous.

Brian: Yeah. That’s right. Yeah, that’s right.

Marc: So they had top-end.

Brian: They put the top-end people, but it was still they had to make it for, like, a million and a half bucks, a million two maybe. It’s much harder to make those sort of mid-budget, $14 to $25 or $30 million dollar movies, though Netflix does it, right? You can do it at Netflix now, which is probably where it would happen. Or you would try to tell the story in a novelistic way, you know…

Marc: That was my question. So would you pitch today, young David and young Brian show up. Would you pitch “Rounders” for television or for a film?

Brian: No. You would pitch the world of the underground card rooms for television.

Marc: Okay.

Brian: Because I think a lot of that — that’s where this stuff lives and that would have been I think a fascinating thing to see also. David and I grew up watching movies. We loved television, but our shared language, our lingua franca, was movies. We were quoting movies at each other from when we were little kids. We would watch movies 20 times, you know. We watched “Stripes” together at least 20 times, and “Diner,” and many more movies where they became the way we communicated. And so, it made sense to us to go make movies. Since then, you know — things like “The Sopranos,” “West Wing,” “Larry Sanders,” “Mad Men” showed up and showed us the way. They lit the way, sort of, for us to think about television.

Sonal: Yep, that’s actually huge. We always talk about this, Marc and I. Television is so much better than movies, it’s unbelievable.

Marc: Well, I think it’s actually — the best shows, they are novels.

Brian: I think we all think of it…

Marc: …or series of novels.

Brian: You think of them that way.

Sonal: I call it visual literature.

Marc: The movie is still more like a play, whereas these shows can actually — these shows are like thousand-page novels.

Brian: We definitely think of it that way. We’re trying to tell novelistic stories, deepening characters in challenging situations.

Sonal: I call it visual literature, it’s exactly what it is.

Brian: I love that term.

Golden age of television

Marc: So you came up in the music industry. You know, I was involved in the — <laughter> the internet, and then, you know — I wasn’t involved in Napster, but I knew the other guys really well. And so, we both watched, you know, from various professional perches, kind of — the music industry confront digital distribution and basically just, like, implode, right?

Brian: Oh, yeah, get run over. They didn’t confront it. Unfortunately they didn’t confront it. They just stood there — they just got run over.

Marc: Kablooey, right?

Brian: I mean, like, France. They’re in the deuce man, you know. They were like, “Should we pick up our guns and rifles?” “No, let’s just lay down.” <laughter>

Marc: That’s it. That comment <inaudible>.

Brian: No, Marc, you signed off. You laughed. You completely laughed.

Marc: So, I fully — I’ll just confess, I fully expected the same thing was gonna happen to TV. Like, you know, you use Napster for music, BitTorrent for TV, and it’s just like, it’s just obvious — same thing’s gonna happen to TV. It’s just gonna get run over. And then the most, like, amazing thing in the world happened, which is — the exact opposite thing happened. The opposite happened, which is, like, the creative explosion of all time. And you’ve probably seen — you know, John Landgraf who runs FX is always talking about that…

Brian: He’s a brilliant man.

Marc: Brilliant man, great programmer. But, you know, he talks about the content bubble, the TV bubble — and it’s like, I don’t know, every year now it’s like 500 original scripted dramas are getting made.

Sonal: I think it’s 560 or something insane.

Marc: Yeah, and he’s been calling this a bubble the whole time, but, like, it keeps expanding and I mean, we all get to, you know — you get to make it, but like we get to watch it, and it’s just like — I, like, routinely see shows now where I’m just like, you know, 20 years ago this would have been the best show in the entire history of television.

Sonal: Yes.

Brian: The fact that “The Mindhunter” and “The Crown” came out, like, in the same year on Netflix is amazing to me. Those would have been the best show of an era…

Marc: Ever.

Brian: …ever. Like, “The Crown” is as good as you can make something.

Sonal: I keep trying to make Marc watch it. He hasn’t…

Brian: I can give you the language by which to watch it. So I’m totally not interested in monarchy. I hate it, and nothing about that is interesting to me. The show is just the most beautifully written and shot and acted show that there is.

Sonal: I agree with you. He doesn’t believe me.

Marc: So here’s my question. Let’s assume it’s not a bubble. Let’s assume it is the medium of our time, and let’s assume it kind of keeps expanding so this all makes sense. But the amazing thing is, it seems like the more shows get made, it seems like the average quality level is rising. And you would expect, I think, the opposite. You’d expect the average quality level to fall because you’d expect to run out of talent at some point.

Brian: I agree.

Marc: And so, where is all this talent coming from?

Brian: I have no idea.

Marc: So, were there just all these geniuses out there who just never had the opportunity to do it, and now they do? Or is there something happening in the industry where people are being trained in a different way or…

Brian: Or maybe it’s the love of television, so it perpetuates itself, and we might be in a golden age where artists are apprenticing in some way for other artists, and learning and figuring it out. You know, I have the luxury not to think about the 560 shows. Or to appreciate what Landgraf says, and know he’s a brilliant guy, without having to be cowed by that. Or feel any way about it, because I just wanna — I still go back to the same thing, I just wanna get in the room and get the feeling I get when I’m making the thing. I wanna be able to walk on the set and see Damian and Paul and Maggie and Asia, and be able to work with them. And, you know, we’ve just found a way to make decisions still based on our curiosity and our obsession. So, if we’re interested in the U.S. Open in 1991 and Jimmy Connors, we’ll go make a documentary about it, because we’ll really enjoy the process of making it, and we have faith that there will be people who will wanna see it.

Sonal: I was thinking of my answer to Marc’s question. I’m trying to make him watch this movie “Gully Boy.”

Brian: I haven’t seen it.

Sonal: It’s a Bollywood movie that’s produced by Nas, but to me the point is that technology has democratized the access to watching all this visual literature.

Brian: I don’t understand — Ben is not able to make him watch something produced by Nas? That makes no sense to me.

Maintaining a partnership

Marc: Ben and I have the kind of partnership where we’re able to, you know, we’re able to complement. Actually, I wanted to ask you — that was the other question I wanted to ask you. So you have been partners now with David for how long?

Brian: Over 20 years.

Marc: It’s an equal partnership?

Brian: Has always been from the beginning.

Marc: Okay. Equal partnership.

Brian: Fully 50-50.

Sonal: Beautiful.

Marc: So how do you — if somebody comes to you and says, like, I wanna have a partnership like that. I wanna have a career where I have a partner like that. Like, how do you do that?

Brian: Well, do you remember when the four of us first met, how funny it seemed? When me, you, Ben, and David — we were sitting there and it was just like, “This is a rare thing to have two sets of people who just…” In the same way it makes sense when someone sees you and Ben and talks to you for five minutes. When someone sees David and me, and they talk to us for five minutes, the whole thing just kind of makes sense. Like, in the ways that we can finish each other’s sentences, but also are different in some significant ways that probably we don’t — like, if someone else heard us talking, we’re maybe very similar, but the two of us understand the ways in which we’re complementary to each other.

The key is to really regard the other person as incredibly smart, to really always know that their motive is to make the work better. So much of this stuff sounds like platitudes, but like — trying your hardest to get your emotions out of these decisions and being rational. I think the key to having a good partnership is not about looking for the partner — it’s about how can you make yourself be the best version of yourself in a way that complements this other person, who you respect and whose work you admire. And so, that’s all hard work in life, right? It’s the same thing in a marriage and any kind of a partnership. 

But it’s about all of us — even the most rational, the smartest among us — have emotional reactions sometimes. And the question is, okay, it’s not to not have an emotional reaction but it’s to not let the emotional reaction dictate your response. So if that means you know that you normally — the worst of you instantly reacts with anger, then find a way to say, “Hey, I don’t wanna react with anger. I’m gonna go take a run, and then I’m gonna come back.” And this is stuff you figure out over a long period of time. But the more you know that the success or failure of a partnership is based entirely on how you comport yourself, the better off that you’ll be.

Marc: It’s not the other guy’s fault. That’s right, it can’t be the other guy’s fault. You have to take the responsibility yourself

Brian: Don’t you think of it that way…

Sonal: I actually am curious what Marc’s take on this is.

Brian: Yeah, what is your take on that?

Marc: No, so, the way I describe — by the way, this comes up a lot in our business. You know, Ben and I have this kind of partnership — lucky for me — but also, you know, there’s a lot of, like, founder and then CEO. Like, sometimes we have founder CEOs, which is like your showrunner model, but sometimes we have a founder and there’s a CEO who’s brought in, or promoted inside the company, and then they have to be — you know, if you want the magic of the founder and the company to be well-run, they need to have that kind of partnership. 

And so what I always tell them — I kind of try to put a point on it, and just kind of say — it has to be more important to each of you that — it has to be more important to each of you that the other one — how do I put it? It has to be more important that the other one gets to make the decision, than that you get to prove yourself right. And you have to both have that attitude. Like, if one of you has that attitude, then that person is just gonna run over the other one. If you both have the attitude, where your reflexive view is, “You know what, this is a debate, it’s an argument. It’s 50-50. It’s a toss-up, which a lot of these things are. We’re gonna do it your way.” If both people have that as their default point of view, then you can navigate through these things. And then you get in the positive version of the deadlock, which is…

Brian: Yes, you’re totally right.

Marc: Let’s do it your way. Okay, now we have a healthy conversation going, right?

Brian: You’re totally right. Sometimes there’ll be emails back and forth about a thing in editing, where one of us will have an idea and the other one will say, “My instinct was to go the other way with it, but you know what, let’s do it that way.” And it’s not even — it has to not be a move, I think, you have to actually be like…

Sonal: You have to really be into it.

Brian: …well, all right, let’s — there was a thing yesterday where I saw something, and I had a notion about it, and David sent me back — well, there are a few different things that are good. So normally, when we’re doing edits on — when we’re making notes on a cut in order to do edits, our two assistants — we share two assistants, it’s not like one’s his assistant and one’s mine — we have two assistants who help the two of us. Normally they’re on the conversation, so that they can then collate the notes and give them to the editor before we go talk to the editor. But if there’s something that suddenly is gonna — we see really differently, we just immediately take it to a private communication, right? We take the audience out of it. We never talked about this, but we just do it. We take the audience out of it because we’re not performing and we’re also not worried about being judged.

But so, yesterday was one of those things. We just saw one little tiny moment slightly differently. I wrote this thing, like, I think we should do this — and then Dave wrote me separately and said, “You know, I don’t see the scene that way. Here’s what I think is going on.” And I still saw the scene the way that I saw it, but I just immediately went, “No. Yeah, let’s just do that.” And it makes total sense. Like, let’s go through the next bunch of iterations of the cut with it in like that, in the hope that I’m just gonna come around to seeing it that way. Or let’s show it to some other people this way and let’s see what comes out of it. It would have been very easy, and I see a lot of people fall into the trap of trying to argue.

Marc: Well, I look for as many — by the way, I think about it as — I look for as many chances as I can to let him make the decision, right? And then, to your point, like, if I really feel — and as a consequence of that I build up so much trust.

Brian: That’s right. That’s what I’m saying.

Marc: That if I feel strong about something…

Brian: Well, that’s a really great point. This is important to attach to that, which is, because all of the time Dave is willing to say to me, “Let’s do that.” When he wrote me and said, like, “Hey, I think this is different than you think it is.” It was just so easy to go, “Well, of course, dude. Let’s do that thing because you’re always looking to let it be the way I want it.” I would say I’m certain none of that is a tactic or a strategy with Dave and me. It just so happens to be the way that the two of us interact.

Meditation and dealing with stress

Sonal: A quick question on this though, just from, like, an advice point of view, because you talk about this. How do you manage your own personal psychology around anger and creative impulse and ego, kind of in this process, even beyond the partnership?

Brian: Well, meditation helps. I mean, I know, as I said before, some of this stuff sounds so reductive, and so much like platitudes — but, you know, I love that Tim Ferris has said, out of the whatever thousand people he’s interviewed who he views as highly successful creatives — like, 92% of them meditate. And I don’t think that’s just buy-in. I don’t think it’s just that everyone’s decided to buy in.

Marc: So I’m in the 8%.

Brian: Yeah, I know.

Marc: I’m like mister anti-meditation.

Sonal: I’m not into meditation.

Brian: You’re anti-meditation?

Marc: Well, I’ve never. I’m not philosophically anti-meditation, I’m personally anti-meditation. I cannot imagine sitting still with my own thoughts for longer than about 30 seconds.

Brian: I couldn’t either originally.

Marc: So this is my question. So, talk to me as a practical person who’s interested in performance, and not particularly interested in introspection, like, how would I…

Brian: Well, I do the simplest kind. I do transcendental meditation, so it’s the easiest one, because it’s just quietly saying a mantra to yourself for 20 minutes.

Sonal: Yeah, define transcendental meditation.

Brian: Well, transcendental meditation is you — because I — ADHD person, I can’t sit still, I have to check my — all that stuff. Except I really do this twice a day, 20 minutes. And what I found — and it’s just personal, but what I found was it, like, reduced the physical manifestations of anxiety by a lot. And for me, when I — getting anxiety out of the equation, I just think more clearly and more creatively. And it’s not — I would say, the other thing is people build it up too much, right? It’s not some magic pill. It doesn’t, like, immediately make you…

Sonal: In a state.

Brian: You’re not suddenly becalmed, but it just kind of takes, like, a little bit of the tumult out. And a lot of forms of meditation require you to force out the thoughts, as you said, require you to be introspective, or require you to focus on your breathing. Transcendental meditation — all you’re doing is sort of allowing this mantra to be said over and over, and if thoughts come in, that’s fine, you just kind of let the thoughts come in — and then you kind of return to this mantra. And I would say the results for me — so I was hugely skeptical, but I was at a point where I was feeling like I needed something. I had too much agitation. And so in reading — I read David Lynch’s book “Catching the Big Fish” and a couple of other books, and it made me interested enough. And I went and sat down with Bob Roth who runs the Lynch Foundation and I said, “Look. I think you’re probably a cult. I’m an atheist. You know, I know these are like Sanskrit words that have some holiness to them. So, none of that stuff works for me, so talk to me about why I should even be sitting here.”

And, you know, Bob was like, “Well, why don’t you read this book, and why don’t you read this study, and why don’t you look at these EEGs, and let’s talk about what this tool does in terms of affecting the loops in your brain and your brain waves.” And through that conversation, I was like, “Well, okay. I’ll learn.” And within — I’ll say, like within two months I noticed, and my family noticed, that I was just in a much better place. And, again, it doesn’t mean I’m never a dick. Like, we’re all a dick sometimes. It doesn’t mean I’m never short with anyone, or that I’m never worried. Of course I am, I’m a human being. But it means that I can manage it in a much better way, and if the only thing I got out of it was, I was sitting and meditating — and when you’re not trying to think of ideas, but like — I’ve solved many tricky story problems. I’ve come out of a meditation, and just kind of had the answer show up. Now, that could just be a function of, like, I turned everything off and I consciously wasn’t thinking about it, and so I allowed…

Sonal: Your mind went to work.

Brian: That’s great. Perfect, whatever it is. It’s not surprising to me that so many of us who are high achievers, aggressive in going after what we want, willing to take risks — that finding some tool that gives you some enforced break from that — it’s not surprising to me that then when you then come out of that, you’re kind of firing again, right?

Marc: So recharged, reset.

Brian: That’s just what makes sense to me about it.

Marc: So who’s Bob?

Brian: Bob Roth runs David Lynch Foundation. David Lynch Foundation is, like, at the center of transcendental meditation. Lynch had decided — the real David Lynch.

Marc: The director, David Lynch?

Brian: David Lynch is the reason transcendental meditation is popular in America. Lynch credits TM with making him the artist that he is.

Marc: David Lynch just for — Twin Peaks, Blue Velvet.

Brian: Oh yeah, all that stuff. He started doing, like, 40 years ago or 50 years ago, and he wanted to start a thing that would give it to kids, and post-traumatic stress people, so he started this foundation and the guy who runs it and who’s like sort of the kind of the head of TM in America is this guy, Bob Roth.

Sonal: The best part of that story, by the way, though, is that you’re literally arguing — to Marc’s point, about this — because Marc essentially set it up as a tension between performance and introspection, and you’re essentially arguing that introspection leads to better performance, which is what I love about it.

Brian: Well, no I would argue that it’s not introspection. Like, my journaling is definitely a certain kind of introspection, it serves me. But meditation is, like, the calming of the thoughts, or the stilling of it. Or it’s just a respite, in a way. It’s a respite from the perpetual thinking machine thing. I think the idea is that you have these thoughts, these pattern of thoughts, and there are some thoughts that you know you have. But then there are these, like, patterns of thoughts that you have that are probably a little bit disruptive, but they’re a loop. And when you start to say this mantra, you’re interrupting, right? Suddenly, that’s what the sound is and the other thing just dissipates, and you get calm. I’m not trying to think about my life when I’m meditating, I’m just trying to take a break.

Talking about “Billions”

Sonal: Yeah, okay. Let’s spend the last few minutes just talking about “Billions” specifically. Podcast friends, we’re about to go into some light spoiler alerts — particularly from the last and early seasons — so if you haven’t seen them already, you’ve been warned. I have to ask this question, because you know that scene from “As Good As It Gets,” where there’s a female character that goes to Jack Nicholson and…

Brian: Yeah, I take away honor and — what’s the exact line?

Sonal: Well, actually I was thinking of another thing…

Marc: You guys gotta — I have not seen this movie, so.

Sonal: Oh, you haven’t…

Marc: You guys have to describe.

Brian: I thought you were gonna say the one where, “I think of a man and then I take away reason…”

Sonal: Yes. Well, that was his response to her, because the question that I have is how do you write women so fucking well?

Brian: Well, that’s his answer.

Sonal: And that’s right.

Brian: I disagree — wildly disagree with his answer.

Sonal: Which is good to hear, but the best characters on “Billions” are, quite honestly, the female and transgender characters of Maggie Siff, who plays Wendy Rhodes, and Asia Kate Dillon, who plays Taylor. I mean, I want to ask you, how do you do this incredible character development for these female characters?

Brian: You know, the hardest questions to answer are the “how do you do the thing.”

Sonal: I know.

Brain: Because that’s the part that’s not — there is no intellectual answer to that question. That’s the part of it that either makes you someone who does this, or doesn’t do it. The most fun part for me is when I’m sitting on my couch, actually writing the scenes, right? I have music blasting, able to put the computer — the laptop actually on my lap — and I’m able to sort of fly. And that’s the part that isn’t intellectual at all. It’s the result of all the intellectual work you’ve ever done. It’s the result of your curiosity, it’s the result of everything you’ve read, of everything that you’ve watched, of everything that you’ve been a part of. And then you want to just allow it to happen. And so, we honor these characters — and Wendy Rhodes, when we, you know — invented that character and then wrote her, we certainly know who that person is very well. But you have to make these fictional characters feel incredibly real to you, and you wanna write them smarter than you are, and that’s the only thing I can say is — we want every character in “Billions” to be smarter than we are.

Sonal: So, a quick question about Taylor as a character, because “Billions” — the next season is now dropping. You ended the last season with a tension between the head of Axe Capital and his protégé, Taylor, starting their own firm. And I so relate to Taylor’s character like you won’t believe. There’s a sense of, like, unbounded ambition.

Brian: Are you trying to tell Marc something right now?

Sonal: No, no, no, not in that sense.

Marc: This happened before.

Sonal: There’s an unbounded ambition with Taylor, and Axe initially nurtures it and then essentially squashes it. I’m dying to know, like — Taylor is a really interesting archetype actually. Both that Taylor is transgender, and that you have this essential universal archetype in every organization. Tell me how you think about Taylor as a character.

Brian: Well, Taylor’s just the most highly competent person, and is a brilliant person — and, like, if this is a long novelistic piece, we’re still sort of at the middle — the beginning of the middle of the story. And so, that kind of person has to be tempted, right? Has to be tested. If you don’t test the morality of those kind of characters, how do you know whether they’re really moral or not? If they don’t get lost for a little while, how do they become found? And so, that’s where we find Taylor in this season. I don’t wanna spoil anything.

Sonal: Okay, I have another quick one I’m just dying to ask — and we’ll lightening round these and then we’ll wrap up. I wanna ask you about some of the music choices you make, and one specific one. Last season, one of the most compelling, raw music choices you made is in a scene — for those who haven’t caught up all the way I’ll just give a little teaser — where Axe essentially is let out of a situation where he was in trouble, and he’s coming back to his pad, and it’s literally — you guys portray it visually as a completely raw bachelor pad — and the song was “Street Punk.”

Brian: Vince Staples, yeah.

Sonal: Oh my God, I fucking love that moment. It so stripped him bare, down to just he’s a street punk. Tell me about that decision and that choice.

Brian: I mean, David and I choose all the music for the show together, and we’re both music fanatics and trade music all the time. And we put music in the scripts. So when we’re writing that script, we’re going back and forth about what it should be. Is it hip-hop? If it is, who is it and why? We had Vince Staples on the list since the end of the first season I think, when his first record came out. “Norf Norf” is what I thought we would use from the beginning. 

But at that moment, you know — that moment people really understand what happens when Axe gets in that hot tub. And, again, that was in the script, that was what our goal was — and then we had to work incredibly hard with our brilliant editor who figured out how to make that sequence work the way we’d had it in our heads. Marnee Meyer, who edited that episode, really worked incredibly hard to build that sequence so that it matched and then exceeded what we had written. And Marnee’s been with the show from the very beginning — she and an editor named Naomi Geraghty have been with the show from the start, and are really and truly our creative partners. They’re the guardians of the tone of the show with us.

Sonal: That’s great. All right, I’ll ask one last one and then we can wrap up. So, in season one — does this count as a spoiler alert because it’s so early in the season? I’ll just give it a high level.

Brian: We’ll decide.

Sonal: Okay. There’s a scene where you essentially set up Axe. The entire audience thinks that he’s gonna cheat on his wife, and I spent that entire episode on the edge of my seat worried that he was gonna cheat on his wife.

Brian: This is an acceptable spoiler.

Marc: This is a spoiler. This is totally a spoiler.

Sonal: But it’s an acceptable one.

Marc: 100%, I don’t know how you could conceivably think it isn’t.

Sonal: It’s season one. Okay, fine, guys, but just quickly on that, like — that was obviously deliberate. Like, tell me about the decision making behind that.

Brian: So, when I was saying the thing about sitting on the couch writing, and how that is this incredibly free process. Then you have to rewrite, and then you have to think about how it fits into the whole. So the whole gag is to write with total freedom, and then rewrite with total clarity. And so, when we’re thinking about whether a character will behave in way A or way B, we’re thinking about what they would do in the moment, and then we’re thinking about the ramifications of that. So, if the character did decision A, well, what does that then say about that character as we go through the rest of the series? Which will leave us in a place where there’s more optionality? And it’s clear in that case which one would leave us with more optionality.

Sonal: That’s great. Okay.

Brian: Oh, can I say one thing though? One of the great things about something like this is that, someone like Marc can do the work he does, and then I can do the work that I do, and if there’s some sort of a mutual sort of fascination with the work, you get to connect with people on that. And that is one of the, sort of, unintended joys of the work that I get to do. And so, that’s why I was happy to fly out here and do this podcast, because we’ve gotten to know each other over the last few years and it’s been a real pleasure. Thanks for having me here.

Marc: Thank you, Brian.

Sonal: Thank you so much for joining the “a16z Podcast,” Brian, and for coming out here. We really appreciate it, and “Billions” the next season is now out.

Brian: March 17th.

Sonal: Thanks, Brian.

Brian: So happy to be here.

Sonal: Thanks, guys.

Marc: Thank you. And by the way, people may not know — I actually play on the show. I actually play Wags under a rubber mask, and so, that’s why you never see me in a cameo.

Brian: I thought we weren’t supposed to advertise… 

Sonal: Oh, my god. Wags is one of my favorite characters. Well, thank you…

• 

  Brian Koppelman
• 

  Marc Andreessen is a cofounder and general partner at a16z. Marc co-created the highly influential Mosaic internet browser and cofounded Netscape.

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• 

  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

  Follow Twitter

One of the toughest challenges for founders — and especially technical founders who are used to focusing so much on product features over sales — is striking “product-market fit”. The concept can be defined many ways, but the simple definition shared in this episode is: it’s when you understand the business value of your product.

And that comes down to users, which is where the concept of “product-market-sales fit” comes in, observes Jyoti Bansal, founding CEO of AppDynamics (which was acquired by Cisco for $3.7B the night before it was to IPO). Bansal shares this and other key milestones and frameworks for company building in conversation with a16z general partner Peter Levine; enterprise deal team partner Satish Talluri (who was a director of product and growth operations there); and Sonal Chokshi.

So in that shift from product-market fit to product-market-SALES fit, how much should you optimize your go-to-market for product… and even the other way around? What does this mean for product design and product management? When should companies offer services? As for pricing, how do you know you’re not leaving value on the table? Again, it comes down to product-market fit: If your business case is strong, you will not be leaving money on the table, argues Bansal in this special podcast series on founder stories and lessons learned in enterprise go-to-market.

Show Notes

• Discussion of product-market-sales fit, and developing products that can be sold [1:26]
• How product and marketing strategy need to be aligned [6:52]
• When a product has no existing market [8:55], and the importance of ensuring engineers understand the sales process [11:54]
• AppDynamics’ approach to sales (top-down vs. bottom-up) [14:36]
• Discussion of company building [19:33] and selling new products [24:28]
• Prioritizing products, managing growth [31:15], and pricing and packaging [35:00]
• Advice for assigning roles and responsibilities [45:28]

Transcript

Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. Today’s episode continues our enterprise go-to-market podcast series. And the theme of this episode is for founders and product managers to consider the tight relationship between product and go-to-market, one informing the other in both directions. What are the key milestones that go into both, and in different phases of company building — especially pre to post product-market fit? The conversation features special guests Jyoti Bansal, founder and founding CEO of AppDynamics. He’s also a co-founder at Unusual Ventures and co-founder of Harness. Joining me to interview Bansal, we have general partner Peter Levine, who also put out a series of 16 short sales videos for founders, which you can find at a16z.com/16sales. And then we have a16z enterprise deal team partner Satish Talluri, since he too came from AppDynamics, where he was last a senior director of product and growth operations pre-sale to post-sale.

Speaking of, we go beyond the typical discussion of product-market fit into the concept of product-market-sales fit, and what that means for product design, to services, to pricing and packaging, to product management, and more. But first, we quickly began with the fundamental shift in mindset for technical founders. The first voice you’ll hear is Jyoti’s, followed by Satish’s, talking about the initial insight behind AppDynamics, which was acquired by Cisco last year for $3.7 billion, the night before it was set to go public.

Product-market-sales fit

Jyoti: I was working as an engineer in a company. And this was before the phrase you guys coined, on “software is eating the world.” This was 2008, right? But it was clear that software is eating the world, right? And to me, it’s like, okay, if everything is going to be software, something goes wrong in software, someone needs good tools to troubleshoot and fix it. So that was really the insight. AppDynamics was building, monitoring and troubleshooting solutions for complex software apps. So if you are on online banking and something goes wrong in your online banking, you will use AppDynamics to figure out the root cause and fix it. Or if Delta reservation systems are down and everyone is stuck in the airport, someone needs to find tools to troubleshoot what’s the root cause of the problem and fix it. 

That’s what AppDynamics built, those troubleshooting tools. So now it’s like, when I jumped into it, I didn’t know anything. I didn’t know how to raise capital. I didn’t recruit anyone before AppDynamics. So you had to go and figure that out. I didn’t know how to have lots of customer conversations, or even find customers to talk to.

Satish: At least during the pre-product-market fit, a lot of engineers — even including myself — we get obsessed with the technology and not so much about the user. At the end of the day, if the user adoption is not there, it’s no good.

Sonal: I mean, there’s no market without the user.

Satish: Exactly.

Sonal: You got the product side and not the market.

Satish: Exactly. I feel a lot of engineers, to be honest — struggling about understanding the customer and user adoption and the engagement metrics without that good UI, UX. And really, [whether] it be the open source strategy or the closed door strategy — doesn’t matter — but user adoption is what should be driving the pre-product-market fit.

Jyoti: Now the challenges completely change after you have your initial product-market fit. They become all about sales and learning sales and scaling sales. And it’s almost like the companies go through that journey, right? The pre-product-market fit, the challenges are different. Then after pre-product-market fit, the challenge becomes about selling and scaling sales organizations.

Sonal: You’re saying on one hand that you have to sell after product-market fit. But on the other hand, I’ve heard that for a lot of enterprise businesses, part of the act of selling is finding those users in the first place. It’s a bit of a chicken-egg thing.

Peter: Well, a lot of us start our careers as engineers, and a lot of our construction of a business is around the features, and around what the product does. It’s all technically oriented, right? Because what we often say is, “Okay, well, if we add these features, then people will come and buy it,” and I find that some of the go-to-market is an afterthought. Once you’ve built something, and I would argue, in today’s day and age — if you’re going after small businesses versus large enterprises, or self-serve, or whatever — thinking about that up front, along with the product requirements and technical requirements, may be a good thing to go and do. Like, I think, to sequentially order those probably results in an efficiency issue, right? We go build something and, oh, like, who knows how to go sell this and all of that. Might it be useful to say to technical entrepreneurs, “In order to do this, you got to go figure out the go-to-market as well as the product features, and don’t eliminate that or push that off?”

Jyoti: I would totally agree. The way I mentally think of this is, two phases of product-market fit. The phase one is really even figuring out where your target market is. So for that one, you really want to start broad and then segment. Like, if you don’t know <Yeah.> where would your idea or your product fit the most — is it large enterprise, is it SMB, is it financial services — then I would just go and interview all of them, and not narrow yet. And start building the product, which is a little bit wider.

Peter: And how did you guys come to that? Where did you start? You had this wide aperture, and then it narrowed. So what was the first thing?

Jyoti: To me, it was that people are building these complex software apps, and they need to monitor them well. <Sure.> And I had the technology idea that if you can instrument the code and trace everything, then it will be a good product. But I didn’t know who would buy it. I started like, okay, let me go and broaden it. Let me go and find people in larger enterprises to talk to, let me go and find people in startups to talk to, let me go and find people in midsize companies to talk to, and see where it sticks the most — of where the most pain is. 

And what I found was, okay, the most pain is where there are these, kind of, medium to large companies, which are building these complex distributed Java applications. So let me now focus more on that. So I started to broaden, then we started narrowing down a bit of the focus and — but after that, once you identified, then you — it’s very important that you marry the go-to-market model in your product thinking. Because these days it’s all very tightly coupled together. You don’t have, like, sales is different, then marketing is different, then product is different, then all — it’s all together in many ways, right?

So if you have an open source model, or you have a freemium model, or if you have a — is it SaaS, is it on premise, is it hybrid offered, is it going to be land and expand — and you have to engineer a product with that in mind.

Peter: Right. The features of the product almost have to inherit part of the go-to-market within the product itself, right? And a lot of product design, I think, reflects the go-to-market attributes that need to be considered.

Jyoti: So in AppDynamics, I used to say, like, it’s a little bit misleading to just call it product-market fit. We should call it product-market-sales fit.

Sonal: Oh, I love that.

Jyoti: It’s like, have we found the right…

Peter: Oh, that’s a good one.

Jyoti: There’s a right market, and you have the right product, and we have the right sales or go-to-market strategy that works for it.

Sonal: When you said two phases of product-market fit — the first one was where — like, either the small, big enterprise, different domain or industry — and the second one was the sales motion?

Jyoti: So, the thing of phase one is, like, where is the most pain — and where your product or your unique approach, or whatever it is, solves the pain in a way that people will pay for. And you’re also validating, like, your technology — does it really work? Can you really build the product? Does it really solve the pain? And then you have to figure out, like, what is the sales strategy or go-to-market strategy that will work and scale. And does your product support that? Because if your product doesn’t support it — you know, many times people are, like, we’re gonna build a freemium strategy. But the problem is, if a product is too complex, freemium doesn’t work.

Peter: But just to drive this point home, which I completely agree with — the product — the features of the product need to inherit part of the sales motion itself, right? And that if you’re going after a certain motion, or a certain customer, the product needs to be reflective of that. And I think we often miss there. Like, we build a product, and even if we define a go-to-market, the product features or the interface, the design — may be completely misaligned with the target audience, or target go-to-market, I should say.

Jyoti: And some of it you can also break into, say, revenue goals. Like, I would roughly think getting to your zero to the first million ARR — you are in that phase one of product-market fit. Like if you have a product…

Sonal: ARR, as in the annual recurring revenue.

Jyoti: The annual recurring revenue, which is, like, do you have a product someone will buy and it’s solving something? Then you’re like, a million to the $10 million in revenue — that’s where you’re iterating on the go-to-market strategy and getting the product to be aligned with that. And if you get that right — that, like, at $10 million, you should be there. Like, you got the product-market and sales fit as well. <Yeah, yeah.> And then you can press, you know, the gas — and go from $10 million to $100 million from there. But you got to get that iteration on the sales fit to it.

Products without an existing market

Sonal: So I have a question for you here. So in your case, you had a product where you knew the tool was solving an existing problem. Does that calculus change if you’re creating a category, and you’re going into a market where, “The problem does not already exist?” Because then you don’t actually have the ability to necessarily know where or how to figure out the sales motion yet — or is that not true? Because I think a lot of founders might argue that, “Well, why can’t I be like Steve Jobs and sort of invent — like, create the product that people all go to.” Like, what would you say that?

Jyoti: Well, you’re always creating — you know, either you’re solving a problem significantly better than others have done in the past. And that the dimension of what does significantly mean could be different. It could be you’re 10X more scalable, you’re 10X more easier, you’re 10X more cheaper — whatever it is, right?

Sonal: Right. All 10X better.

Jyoti: It has to be 10X better in some dimension. So in an existing problem, or if it’s a new problem that’s emerging — then it’s, you know — you still have — the problem has to be there. Either there’s a problem with existing vendors, or there’s a problem because there is no solution there. But it has to be there. Otherwise, you don’t have anything to sell.

Peter: And I think in enterprise more than consumer, there’s a budget — there’s a certain budget dollar that you’re gonna go after in enterprise. Maybe it comes out of the development budget, it comes out of engineering, marketing, sales. There’s something for which you can at least start to frame this new thing, new market, whatever. Like, one of the questions to ask is, “Who’s the potential buyer for this?” Even if it’s a totally new market, right? But let’s call it an enterprise product somewhere — doesn’t exist before. Still, who’s the buyer? And what budget does it come out of? And a lot of products, actually, where there isn’t a market yet, may span multiple buyers, in fact — may come from multiple different departments and span budgets. And you need to think about that, like, okay — I’m creating this new market, but perhaps the buying motion and what the customer is used to actually doing, from a buying behavior, is so complicated, it’s never gonna happen.

Satish: Yeah. Even for the product managers, or the founders, it always helps to do a sales kind of play. Wherein, how exactly you’re going to sell, and who is the actual buyer? And who’s the actual user? What are you going to say to the user, what pain points you’re going to solve. And what exactly — how exactly the user is going to use your product. 

I think, working with the salespeople who are actually on the frontlines to go and sell — for the engineers and the product managers, it really helps. And in fact, at your company, you made a lot of engineers to go on those calls, to literally understand — who exactly is buying that product? How much is he going to pay? And for that, what exactly you need to build. So that connection for the engineers — to go on those sales calls — really help them to understand that sales motion, and how to incorporate [it] into that product. That’s one of the best practices I love. So that’s how engineers always got to understand that sales motion.

Jyoti: We had that strong belief is — just that we have to break the barriers between engineers and customers. In the startups I’ve worked at before AppDynamics, as an engineer, people will say, “Engineers don’t know how to talk to customers, so let’s keep them away from customers.” And so we’re selling to engineers — like, our products are technical and, like, you know — so that just doesn’t make any sense to me.

In the early days of finding the business case — the finding, like, you know — where the budget will come from — one of the questions that we always ask — like, my favorite question to ask to any customer was, “How would you make the business case to your boss to buy this?” And that’s when you would start hearing like, this is my business case. Like, every time we have an outage, we’re normally spending six engineers in a room for five hours to try to figure this out. Now, with you guys, I can reduce it down to one engineer for 15 minutes. And that’s my business case. And once you start hearing the business case, then you can know that there is a business case — you can monetize it, and you can convert into dollars at some point, right?

Sonal: How do you navigate that, though, when you have multiple budgets and multiple decision makers inside the enterprise? Different groups or departments have different problems or itches that you’re scratching. And how do you sort of up-level it, so that you’re selling into getting the big bucks — and not just, sort of, the incremental budget?

Peter: I mean, I would say it all depends, again, on this product-market-sales strategy. A lot of companies that start with bottoms-up only go after an individual user — and then they get enough use on individual users and propagation from the bottoms-up. I call that self-serve. So there’s no complexity there. There’s no multiple buying centers or whatever.

Sonal: Right. You just decide.

Peter: So it’s not a foregone conclusion you just — you know, that that is the way to go. Now, after enough people are using the product, then you can come in with tops-down and say, “Hey, did you know like everyone in your organization is already using the product? You ought to have a corporate-wide license so we can private support and all of that.” So that would be an example of bottoms-up and then coming in on tops-down. 

Many other products, though, are designed to be tops-down as a starting point, because it may go across departments, it may be more complicated, <Security needs.> there’s security needs, whatever — where a bottoms-up design just doesn’t work, right? In which case, then, you probably need to start with a more traditional — I’ll say a direct sales organization. It could be an inside sales organization or direct, calling in and actually getting the customer. I mean, complex sales often requires multiple buyers, multiple parts of the organization to come together. And that’s a skill set that a well-honed sales organization will know how to do.

Top-down vs. bottom-up sales

Sonal: How did you guys — what was your sales motion at AppDynamics?

Jyoti: So ours was a combination of both. You know, at AppDynamics we call it the Sandwich Strategy. You go from the bottom, you go from the top, you will go to the developers and DevOps engineers directly. It was done through a freemium kind of model, so that they will start for free, and they can use a light version of a product for free. And then we will start going from the top, where we’ll create air cover and, like — when we have multiple users in an organization, then we’ll go and sell them more. So really, the sales motion was built on — the end users can start for free, then we’ll have — sell them, like, some license of it. We call it “land and expand.” The land deals, which are like, you know — say, $20,000, $30,000, $50,000 deals. On [the] phone, we can sell that. And then we’ll expand into, like, half a million, million dollar, $2 million. You know — now, these days, $10 million deals. So that — you’ll need traditional enterprise salespeople where you will do that.

Sonal: Right. So inside sales versus field sales, basically, in that context. No? Not right?

Jyoti: Yes, but in most of these companies today, you would probably need both. <Okay.> So it, like, depends on, like — if the model is only top-down, you probably need only field sales, and you’re selling into large enterprises. But if a model is this kind of a “land and expand,” you want to do the land through fee inside sales, and you want to do the large — the expand into — [with] field sales.

Satish: Yeah. And of late, we are seeing scenarios in which once you go to the top — and if they are big enterprises, services has become a very important component of it. To be honest, a bottoms-up developer option, great land. But once you expand, and once you get into multiple product portfolios, and into complex integration, services is [an] essential component of the enterprise sales.

Sonal: So tell me the takeaway on services, because I’ve always heard — and disillusion me if this is not correct — but services are the things that reduce your margin. So you don’t want to have too many services. Or, what’s — how do you balance that one?

Jyoti: “It reduces the margin” is from the perspective of you as a vendor. But think from the perspective of a customer — like, if they spent a million dollars on your product, and they’re not getting the value of a million dollars, because they didn’t have enough — the right people in place to implement your product — that’s not good for them. And eventually is not good for you, because you’re building a — likely a recurring revenue business of some kind, right? When we started, we were like, we’re not gonna sell services — not from a margin perspective — because we wanted our product to be easy enough that no one needs any services. And that was true for a long period. For the — actually, for the first four years, we had zero services. And then we started getting into larger and larger enterprises, and larger and larger deals, where people were spending millions of dollars with us.

Sonal: Yeah, you want to save that money.

Jyoti: Yes. And we figured out like — if they don’t buy any services, sometimes no fault of our product — they just don’t get that option that we want. And then we were like, yes, so — like, too much services, then the margins are low, right? But we’ve found the right balance was about 10% to 15%. So like, if in our products — if, like, people are buying — let’s say, they’re spending a million dollars with us on the software, and they spend, like, $100,000 or 10% to 15% on it on services, their adoption is much better and much faster.

Sonal: So ideally, you actually make more money on the upsells and cross-sells and more feature expansion, based off that 10% to 15%?

Jyoti: Eventually if your users are getting adoption and [are] happy with the product, the money will come. The margins will come, right? So you have to figure out, like, people are getting value or adoption or not.

Sonal: Margins will come, I like that phrase.

Peter: If you think about, in that example — let’s say services, in that case, leads the buyer to purchase a million dollars of license, the blended margin on that is extremely high. Much higher than it would be on a $20,000 no-services deal, right? <Right.> So while services from a unit economics standpoint may be, you know, a little more expensive from a margin standpoint, if it drives very large deals <You come out ahead.> with software margins, you come out way ahead. So you have to think about blended margin, and the idea that services are often a leader into a company buying the million dollar, $2 million license. It’s just expected as part of that.

Jyoti: And the renewals. Like, the year two, year three, year four renewal offer, right? <Right.> So if you spend — if for the first year, because you sold services, your margin may be lower — but because of services, the adoption is higher. So your chances of renewing in year two, year three, year four, year five are much higher. So the margins for those will go up.

Satish: At the end of the day, adoption is what counts for a product, right? And services help. And also, keeping aside the financial aspect, even from a product aspect, it’s good in the sense that we hate shelfware. What good is it if some enterprise bought $1 million, and if they’re not using it?

Sonal: Just sitting on the shelf, right.

Satish: It’s really bad. From a product standpoint, there are lots of these minor features which are custom. They don’t fit in the product, they actually fit well for the services. So that’s why having a good combination of what’s going into the product versus what should be left in the services — that’s a good play for the product manager or the CEO to make that call. So that the product adoption goes well. Adoption and the product — services is a necessary complement after sometime.

Company building

Sonal: It goes hand-in-hand. That’s right, I’m really glad you brought that up, because I want to segue to talking about the company building side of this. So, you’re describing the sales motion to customers — and the product-market fit pre-product-market, pre-product-market-sales fit, and post. Let’s spend the rest of the time connecting it back to what happens inside the company. So you’re describing the product — how does this affect the product roadmap? Like, when you get all this feedback from customers, and you have the sales motion in place, how does this then drive back inside your company to further developing more features on a product — making those balancing decisions for what goes into the core, to what goes into the custom, to what goes into the next iteration? Kind of, tell us about those trade-offs.

Jyoti: It depends on different stages of the company. When you are in the very, very early stage of building the v1 product, you really want to use the customer feedback to figure out what you want to build that will sell — that will get your first 10 customers, first 20 customers or so. And, you have to listen to the customers. That’s the product-market fit exercise, the customer validation exercise and all that, right?

Sonal: Are they paying for this thing, too.

Jyoti: Yes. And once you have customers, and then you, like — how you prioritize becomes what you’re hearing from customers, what will it take them to be successful and adopt the product more and buy the product more. And you want to make sure that the product team’s ears are open — listening to customers, listening to customer support, customer success — they are watching the tickets, they are watching, like what’s working, what’s not working. Then sales is trying to expand and get more customers. So you have to work with them as well, because [of] your competitive pressures. You have to, like, catch up to competitors on some features sometimes. 

And so you have to make sure that you’re winning enough in the market, you can get enough revenue, and you prioritize that also. But then there’s a third part, which is, like — you also want to keep expanding your product, which are things that your current customers are not asking for, but you need them for expanding your addressable market for customers, right? And that’s where it’s — from a product perspective, it’s a balance of those three things, right? It’s the — what do we need to win more revenue today? What do we need to keep our customers happy? And what do we need to win more revenue two years from now?

Sonal: So win and keep now, to what do you need in the future to win.

Jyoti: Yes. And the rule of thumb that I followed — that was [that] two-third of our engineering investment should go with our existing TAM. <The core base.> And the one-third of our engineering investment, we should keep putting on expanding our TAM always. So our total addressable market, right? So when we started with, like, let’s say our initial v1 product was application monitoring for Java applications. And that was our TAM. Once we had that — like, we’ll start putting one-third of our engineering on expanding it to the next addressable market, which is application monitoring for .NET applications. After a year, that became part of the .NET — our product became Java and .NET. Now we look, okay — what is the next addressable market where I can put another one-third of my engineering. And then we kept doing it systematically for seven, eight years. And we just kept expanding our TAM.

Sonal: So the two-third, one-third rule.

Satish: Yeah, but the interesting aspect, even in — during that expansion, is that the target buyer — because we had an existing sales motion, target buyer, and user — we didn’t change that drastically, because the sales motion is already oriented towards it. So it’s like those agencies — be it .NET, or the end user monitoring, and so on, so forth — still, it’s targeting the same buyer and user, so that you can leverage your existing go-to-market sales motion. That didn’t cause too much of — distractions on the go-to-market side. That really helps expand your product portfolio, but at the same time, leverage your existing sales motion to go and attack and expand the market. So understanding that if you change both product and also your sales motion, suddenly — then it’s almost like, again, building from scratch, and that causes lots of disruptions in the company.

Peter: That’s exactly right. I mean, if I go back to the sales videos that I did, there was a concept in there called the sales learning curve, which says that at different stages of building out a sales organization, there’s different people you need. When a new product comes out inside a company, you often need to start a new sales learning curve. It’s not just the old one that you follow, <Mm, interesting.> but you may have a new customer, it may be a new market motion, whatever. 

And the old organization may not be — because they’re at a mature level of selling an existing product, and now you start out with a different product. You may have to have the evangelist salesperson start that new sales motion, and not have the bigger sales organization take on that product in a new market. They might not be able to do it, and a lot of companies fail at that — because they assume just because they have scaled with one product line, that they can introduce another one — let’s say, for a completely different market in there — and nothing happens, right?

Jyoti: And that — we learned that at AppDynamics the hard way.

Sonal: Tell us why, how it was the hard way.

Peter: Yeah. A lot of companies do.

Jyoti: Yeah, because we built our first product, and it was selling, and the sales process was mature. We were a mature sales organization. Now we started building our second product. And, sort of — you have a mature sales organization, [so] let’s give them the second product to sell. They started selling the second product and they failed at it. And I was, like, these people are so good [at] selling — they’ve been so successful at it. But the challenge is, like, when you have 100 customers and you have like 50 references and you have — like, you are in the Magic Quadrant for something, everything is well refined. And how you sell is different than when you’re a brand new product with zero customers. So they just started struggling. 

And they say your product sucks, and this new product is not good, so let’s just throw this away. We should not build any new product. And I was, like, if you’re not going to build new products, our growth will slow down. So we have to learn how to make [it] and sell it. So we internally structured as like — if we were good at selling a new product, so what changed? So maybe we should build a model which uses the same thing that worked for the very first product. So we reorganized ourselves in a model — like, all startups within a startup. So, like, we are a startup, but we’ll form new startups inside it. And we’ll sell the same way — the way we sold our first product in the beginning.

Peter: Right. This is a well known problem. Often the second product never takes off because it’s — it doesn’t get the visibility or attention or expertise that’s required when a new product is released.

Jyoti: And there’s a sales compensation aspect to it also. Because the salespeople, they can sell the mature product — which is easy to sell at that point and make their numbers by doing it. Now you give them something — a new product, which is much harder to sell.

Sonal: Because you’re not gonna make your numbers. So how did you adjust the compensation accordingly?

Jyoti: So you almost have to create a separate, almost evangelical new sales team whose job is to do that, like the way you…

Peter: Yeah, just like you did in the beginning. Just like you start out. You don’t even know what the productivity is, you don’t know a lot of things. And you learn that across that new product line, just like you would do at the start of a company.

Sonal: So this connects the dots between the idea of a startup within a startup, the evangelicals or evangelism that you mentioned, and a different sales learning curve for each — they’re kind of all the same thing. That makes a lot of sense. I mean, quite frankly, the analogy that came to mind for me, as an ex-developmental psychologist — is that when you’re doing some kind of a research study, you can never know the effect of variable X if you’re manipulating too many variables at the same time. What you’re really describing is isolating one variable in order to diagnose what problem — so you can then sell, in this case, that is the solution.

Peter: However, it’s expensive to go do that. To have a startup within a startup — like, here I have my sales organization, now I have to go hire more salespeople that are different than the ones I already have, to go sell this new thing. And at what point do you say, okay — we have to — for every new product, do you have a new salesforce?

Sonal: Well, what’s the answer? I’m asking you guys. <laughter>

Jyoti: Well, I’ll tell you what we did. So what I brought into AppDynamics was that we said the sales learning curve has three phases. One is the — my first 25 customers for the product. 25, that’s like phase 1. Which is very, very — almost the founders are selling…

Peter: We call that the initiation phase. Go ahead.

Jyoti: Yes. There’s the 25 to 100 customers. And then there’s 100 — after 100 customers, a mature product, we can — our salesforce can sell it.

Peter: Yes, that’s the execution phase.

Jyoti: So the first 25 customers for the new products, we actually got the product management team <Exactly, yeah.>  to really sell it the way your founders will sell in a brand new startup — instead of hiring a new salesforce for that. But after that, our salesforce could take it. The phase two, they could take it. The same with phase three — they were good at it anyways.

Satish: So for our fourth product line, which we call Real Time Business Monitoring, this is exactly what we observed. The existing salesforce was, like, more tuned to selling the existing product because it was a well trodden path. For the fourth one, we literally constituted what we call a SWAT team. It constituted the product management, a couple of engineers, the best sales engineers, and one solution architect. We literally went and sold some of the top deals and created the sales enablement material, the market positioning. And, in fact, once we created that, then we used it to train the rest of the salesforce — even not everyone. And once we hit that first 10 salespeople, they are cracking it. They’re making more money with better incentives. Then the rest of the salesforce is like, “Oh, there is something big there that I also need to sell.” So we had to do it in stages. But we literally did a SWAT motion for, like, eight months.

Peter: It’s kind of like a flywheel, you have to get it going. And once it has some momentum behind it, everyone picks up on it. I would also say that, as the regular sales organization starts to sell this new product, as managers, you want to make a big deal about it, right? You want to, like, promote it and say, “Hey, did you know in the east region, we just sold new product X, and it was for $150,000, or a million dollars” or whatever. And that gets everyone, like, excited — especially if it comes from the CEO. Salespeople — I mean, everyone loves to be recognized for their success. And if it’s important to the company, then doing something as simple as that, from a leadership standpoint, also has a very beneficial upside for all the other people who want to get that recognition. It’s an easy thing to do, but you often may forget about it or whatever, as a CEO.

Satish: Yeah, literally what Peter said — once we did this SWAT motion and created those initial amazing sales — the big dollar sales, upwards of million, and so on — literally, we did internal sales. We had to sell to the rest of the salespeople. We got our CRO, our CEO — they literally are the brand ambassadors of this new product and say, the message is simple. The best new product — you can sell higher, more, in a short time, and make more money. Now, for our annual sales kickoff, that’s the big message. And we got our customers in there, and we got the best selling sales reps, and the rest of the sales team sees and…

Sonal: They want to get on board.

Satish: Exactly, I want to get onto the train.

Peter: Yeah, one of the things that I have seen on the, sort of, down — the negative side of this, is companies release too many products. And so then, every week, a new product manager is out there trying to promote.<Rally the team.> They’ll rally the team around this. So it’s very important to make sure you’re focused on a few things that are really gonna work well. And don’t let it, from a leadership standpoint, get out of control. Like, it’s great for people to try experiments and all that. But don’t let it get mainstream until you know it’s gonna be mainstream. Otherwise, there’s 50 products on the price list, and everyone’s fighting for visibility and it becomes…

Jyoti: And it’s very distracting also…

Peter: Very distracting.

Jyoti: The salesforce is expensive. So if you take your salesforce that’s doing — and you try to give them too many immature products to sell, you’re reducing their productivity, your expense goes up, it’s not good. So you do want to get to that level of maturity before you give it out to your broader salesforce.

Prioritizing and managing growth

Sonal: Right. So tell me, though, as the leader of the company then — because you have these processes inside, I’m hearing the broader context of the trade-offs of both approaches — how did you strike the balance and figure out what to focus on, and then what to sort of keep off the list? I mean, you have a lot of interesting rules of thumb so far. Steve Jobs, in the Walter Isaacson biography, made the entire team list all the best things that they were learning that they could do — and then they crossed everything else off the list, except for the first top three. Like, what was your process for that?

Jyoti: Our process, I would say, as a startup — most of it in our case came from that two-third, one-third rule. Like, one-third of our engineering investment, we can put on expanding our addressable market. The two-third we put on serving our currently addressable market — which is, like, improving the product, adding features, capabilities, all of that. And one-third, we improve on, like, new use cases, new addressable markets, new addressable users that we are currently not serving. So whatever will fit into that will define that. Another system that we use is working backwards from a longer-term goal. We put in this plan called our path to $100 million revenue. And when we say, okay — we want to get to $100 million revenue. And how would our business look like? And how much we can do at a fast pace without our existing products, and what we will need to add to the new products to get there.

And then we also have, sort of, a rough timeline with it. But once we got there, we put a new plan together, which is our path to a billion dollars of revenue. So it was like — okay, from $100 million to, if you want to get to a billion dollars of revenue, what would our business look like? And we realized, like, when we did the math — and this is, again, a rough math. Like, you never know. That if we want to get to a billion dollars of revenue from $100 million in, like, 7 years, let’s say — or 6 years, our plan was — we need to have, like, at least 40% of our revenue coming from these new adjacent products. Otherwise, our growth would not get there. And then we have to build this. So there was the part of, like, what you can do from a bottom-up investment perspective. Like, engineering the sources and what you need top-down to get to a billion dollar revenue goal.

Sonal: Right. It’s working backward to provide the focus.

Jyoti: And you need to do both. <Right.> Define the intersection of, like, what you can do bottom-up. You can’t build 10 new products, so you — what you can build — and then what you need to build to get to some kind of revenue long-term goal you have.

Peter: And at that point in time is probably when you start to have an M&A function in the company, to start looking at, outside…

Sonal: Why?

Peter: Well, you have organic growth, which is using your team to go build whatever needs to be built. And then you have inorganic growth, which is basically buying or licensing technology in teams that are not inside the company. Because I would argue if AppDynamics was growing to be a billion dollar company, and you had the capacity to support, from an engineering standpoint, $200 million or $300 million of product design — how are you gonna build 10 new products, if that was the envelope that you’re — or even three products, right? So at that point in time, it’s a build versus buy. Do you raise more money and go build a team to go build something? Or do you go buy something and integrate it in? And both have their challenges, but that’s another function inside the company that usually comes about that point in time.

Jyoti: Like, we acquired three small companies. You know, we did that for different things, but sometimes it’s like just accelerating the time to…

Sonal: As I just say — it seems like it comes down to speed to market and what the competitors are doing.

Jyoti: The speed. Yes. Like, if you build from scratch, like, from zero lines of code. It would have taken us two to three years to get a reasonable product in the market. By the time we matured it, and found the product-market-sales fit of it, and all that. <Yeah, for sure.> But if we acquired something, we could probably cut down from two or three years to half of it, right? So maybe, like, maybe even 75%, in some cases. So that’s always a factor.

Pricing and packaging

Sonal: Okay, so why don’t we then just talk a little bit about pricing and packaging, because that’s such an interesting subset of this. So we’ve so far talked about the product-market-sales fit, the go-to-market and the product as a part of that, obviously — because they’re the two things you need. How does pricing and packaging come into this? Because that’s a really top of mind question for a lot of founders.

Jyoti: Pricing and packaging is a complex thing. Pricing is probably more complex than packaging, in some ways. I look at pricing as more a function of, what is the business value? If someone buys your product, is it worth $50,000? Is it worth $100,000? Is it worth $300,000? How would people justify? So that’s definitely one function. Second is, like — the rule that I’ve used for pricing is, can your salespeople describe it simply? Like, a customer is going to ask a simple question. “How do you price your product?” And if you can’t describe it in half a sentence, you have too complex of a pricing. 

And yes, there could be, like, nuances to it, and there could be, like, details to it, but you have to be able to describe. Like, in AppDynamics, we’re monitoring all kinds of different systems, right? So the pricing was complicated. But we said, okay, the simple pricing philosophy that our salespeople can tell us — we price by how many production systems you have. And that was kind of the rough unit of pricing. And we can measure production systems in different ways, but that’s how we price it, right? And that’s at least simpler, that your pricing philosophy is simpler for people. So that was my rule number one.

Rule number two, there was — that whatever the pricing is measurable, because if it’s not measurable, and now the customer says, “Okay, how many licenses do I need to buy?” Our salespeople cannot even tell them very clearly like, okay — this is how you measure how many you need to buy. However, it will create a lot of friction. Or like once they buy it, we can’t measure and track, like, how many are using it. That’s a problem as well, right? So if we can describe our pricing in half a sentence, that’s one. Second is that it’s measurable, that people can measure presale, and people can measure post sale — we have a good pricing system. The question after that is, okay — what is the price, like the dollar price of it on — for that model per license, how much you pay? That really to me — it comes down to business value. And enterprise software, especially selling to large enterprises, I argue to most founders that you should price more than you think you should.

Sonal: So we always say raise prices. That’s our mantra around here.

Jyoti: Exactly. So, price higher. You can always discount. If there’s not value, you can always discount. And customers are not gonna pay more than what the thing they should pay anyways. So you can always discount and then go there, instead of pricing low.

Peter: I love the idea of this pricing framework. A lot of companies try to come up with a new model of pricing. So instead of price per user, or price per application, it’s price for the number of, you know, air vents your server has, right — let’s just say. You have to come up with pricing that the customer is used to actually paying for. If you start to create something that’s totally new, it creates friction in the system. So it’s typically users or capacity, or numbers of something. I love the measurable piece. A lot of companies try to get overly cute, and it gets overly complicated and then salespeople can’t explain it. And even if it’s simple, if it’s not understandable by the buyer, they’re going to be like, “Well, what does that mean?”

Sonal: So I’m hearing you say [to] founders out there, be creative with your product, but don’t get creative with pricing. Like, do what you need to do that makes sense to the buyers.

Peter: Exactly.

Satish: This difference between consumer purchase versus enterprise — enterprises, they need a little bit more certainty. You’re getting it from a budget, right? They’re already pre-planned. That’s one. <Right.> And they want certainty, in the sense that — oh, is it one alert or [a] thousand alerts? And if it’s too variable, then suddenly if it blows the budget, [they] cannot manage it. So that’s why they want that certainty and visibility into that price.

Sonal: So by certainty, you mean they don’t want surprises.

Satish: Exactly.

Peter: But you need to be able to be reasonably predictable on this — to not have surprises at the end. To say, “Well, it’s free, and then we’ll measure it in the future,” but they don’t know how to budget for it.

Sonal: But how do you, as a founder, know that you’re not leaving value on the table, when you’re giving that certainty — or, like, surety that this is what you’re gonna get?

Jyoti: If you put in, like, the — a good ROI process in your — as part of your sales process, that’s how you guarantee you’re not leaving money on the table. We have a very structured sales process. And in the sales process, we would look at, like, you know — what is your current state of doing this? How much is it costing you roughly, let’s say? What would be a new state with AppDynamics, and what would that cost you, and how much money are you going to save? And then price is a little bit of a function of — how much money are you going to save, and what’s your ROI? And that’s — if we are charging more than what it’s gonna save them, they’re not gonna pay for it anyways, right? Most companies, I see the mistake of, like — especially selling into large enterprise, and you’re asking for half a million dollars [from] someone — if you don’t back it up by a business case, people are not going to pay you. <Of course not.> And then you leave a lot of money on the table. If your business case is strong, you will not leave money on the table.

Satish: Yeah, we had a process called Business Value Assessment, BVA. It went along with the sales process in which we always had that premium positioning. And we enabled our sales to convey why we are premium. And, secondly, we had those steering committee meetings in which the big check pair — we literally read out the ROI value use cases back to them, so that they can justify internally as to why they’re paying that premium. So giving that message, so that they can repeat internally and justify it — that’s what helps the part of the process and the premium that we can extract from it.

Sonal: So what I’m hearing you say is that sales enablement created — it smoothed the road, kind of greased the wheels for you. But then on top of it, you played back and made sure to play back the ROI, so that then your internal champion could continue advocating that it has value and keep moving that forward.

Jyoti: And justify that premium pricing.

Sonal: One question I have is, the third element you mentioned, Jyoti, in your framework — the value — that’s the big kind of gray, goosey area, because that’s the least measurable one. How do you know the value to the customer? Did you just say, like, the simple —what the opportunity cost [is] if their systems went down? Or did you think bigger than that? How did you figure that out?

Jyoti: The best way is to ask the customers. And this is something I would do in the product-market fit phase. A lot of people say what is product-market fit, even the initial one?

Sonal: It’s a very philosophical question. What is product-market fit?

Jyoti: Yeah. And such a vague question. My simple definition is, if you understand the business value of your product, that’s — then you know. And so, you know, the question that I used to ask in the product-market fit phase was, “How would you justify the business case to your boss?” So, like, I’m talking to a, say, a director of DevOps. I’ll say, “Okay, well, how would you make the business case to your boss, if you have to buy AppDynamics?” And they said, “We have one outage a month. Every time we have an outage, we put six engineers there, and this is how much it costs us. And because our users have a bad experience, we lose this revenue. This is how much it costs us.” 

And once I start hearing it, I know, like — this is what I would — I would like to teach our salesforce how to make the business case, because this is how the customers are articulating. And unless you understand the business case, you don’t really have a product-market fit because that’s what you have to engineer your product around.

Sonal: Right. So you’re saying the value is defined by the customers. Do you guys have any thoughts on how to define the value? That sort of loosey-goosey, vague thing of — you want to make sure you’re selling value?

Peter: There’s a couple of things, which I’ve used in companies that I’ve run, is — if you look at competitive products, what are they? What’s the chart? How much do those costs? There’s an overall stack of technology. And if you’re providing a certain solution, what is that stack, in general? How do people — how have they budgeted for that? And then I always like this concept of “charge more than you think” in there. And you can always discount back to make sure that you’re not really leaving value on the table. I didn’t say money — I said value on the table, which I think is very important. 

The thing that is — also I learned along the way, is — customers actually like to spend money for value. It’s not a problem. We all do, right? Even as consumers, it’s not a problem. And to come in with the low cost — like, if your value is that we’re lower cost, or whatever, that tends to be as soft as not standing up for the value that you’re actually producing. And if you have the proper go-to-market, and you have the proper product, and you have the proper positioning, then you can, basically, get the maximum dollars that customers are willing to pay. And everyone feels like it’s a very fair transaction, that the value being delivered to the customer is very reflective of the price that they pay.

Jyoti: I think that the fair part is important. <Yeah.> Customers have to feel it’s fair, and you have to help them feel it’s fair, also, by making that case. Yes, the competitive dynamic will also <inaudible> on the price. If a competitor is selling for much cheaper, there may be some pressure on you to sell for that price as well, right? 

In AppDynamics we had a bit of that challenge. One of our primary competitors was priced much lower than us. And they were designed more for SMB. Their product wasn’t as strong as ours for enterprise. And so, internally, sometimes people will come in — hey, our competitor is charging much lower, shouldn’t we decrease our price, also? And I’ll tell them, okay — do we really believe our product is superior? If our product is really superior, why would we not charge higher? So we’ve made a rule that we can always charge higher than them. We actually said that it would be always…

Sonal: So you resisted the downward pricing pressure?

Jyoti: Yes. Because, if our product is superior, we are — the customer is getting superior value, either we — either we are lying about it, or we are misguided about it, or whatever — that we believe it is, but it is not — or we are not articulating the superior value. That’s our problem. If our product has superior value, and we know how to articulate and make the case about it, why won’t we charge superior than them? And we always priced higher than our competitor because of that, and people are fine paying for it.

Peter: And I think that, to further that point, the articulation of value often comes with having a sales organization. That’s what they do. And so when we often think about — hey, let’s don’t have a sales organization, so we can build more product —  often what gets missed in the whole product adoption cycle is the idea of selling value into the customer, where value is not necessarily felt through a self-service product, or whatever. You just can’t see the value or appreciate the value until an organization comes in to actually promote those pieces that may not be self-evident.

Roles and responsibilities

Satish: At the end of the day, it’s all about marketing — getting products to the market, right? And for that, you have the classical four pieces. So, product — it doesn’t go in isolation. Product, the pricing, promotion, and the place. At the end of the day, it’s the customer — with an intimate knowledge of that customer, and what exact pain process [they have] today, and how you want to change it in the future. Understanding that customer dynamic literally helps you define these four aspects. And that’s what a good founder, earlier on, or a good product manager — literally defines these metrics by understanding the customer.

Sonal: So those four P’s.

Satish: Yeah, that’s what a good product manager should be doing. I was running the product line — the newest business IQ product line, both product and business operations.

Sonal: Is that an unusual model? Because you’re an engineer who’s doing product. Like, what is the ideal way to, essentially, architect the product management or product org functions in this framework? Are product managers salespeople, are they engineers?

Jyoti: It depends on who your audiences are. To me, the product managers’ first job is to understand the customer and, you know — the classic definition, being the voice of the customer. So at AppDynamics, our product was technical. Our users were engineers, in many ways. So all our product managers had an engineering background. But if I had a consumer product — you know, I’m building out a fashion app — my product manager probably would be very good [at] understanding my consumers as, you know, someone who’s experienced in fashion. So for any business I’m doing, I would hire a product manager who can understand my end users very well.

Sonal: So, kind of, matches the profile of your target customer?

Jyoti: Exactly.

Sonal: Did you guys have different product manager profiles, though, then — for the one-third of the organization that was doing the more evangelical startup within a startup next product line types, versus the ones that were doing the core? Because I would imagine those are two different sensibilities and they might or may or may not transfer.

Jyoti: Yes, I would say the profile is a bit different. The product managers — once you have a v1 product, kind of, going from there, the profile could be a bit different. But at that point, you need multiple product managers. So you still want the product managers who could, you know, go and help create something — disruptively unique feature set, etc. But you also want, like, you know — product managers who are very good in understanding the, “How is it working out in the market,” and “What’s the adoption curve?” and “Is the pricing working?” So, you really — you know, the product management skill set also has different things to it, right?

Sonal: What are the qualities to look for?

Satish: We typically look for three aspects. During the initial phases — the empathy. To understand that customer, to define your product. And the second aspect is the business aspects of — okay, how is it going to work with the sale? So literally, the product managers, they travel with the salespeople and understand how do you position that value? Okay, now, how do I price it? And so on, so forth. And the third most important thing is execution. Once you define it, product doesn’t come out of thin air, right? You need to work with the engineers, literally attract your schedules, and really execute it and deliver it to the customers, right? So these are the three aspects — the empathy, and those business aspects, and, finally, the execution. So these are the three skill sets that I typically look for in a very strong product manager.

Jyoti: There are very creative parts of product management. Then trying to come up with creative solutions is the second part, and then scaling the operation behind it — which is like a machine that can process the requirements from customers, from sales, figuring out the right pricing, packaging, all of that, right? So you want different skills.

Sonal: It seems like a bit of a unicorn, to be honest, to have all three.

Jyoti: And many times it’s not just one person, right? It’s — your product management then becomes a group at that time, and you want different people with different — like, that balances out the variety of skills.

Sonal: Right. It’s just like a good team, you complement each other’s skills. And that’s the composition of an ideal team — why you have more than an individual contributor. Okay, so any parting takeaways given your — I’m sure you have a million takeaways, Jyoti, but any big message for our founders and other founders out there trying to do this, whether enterprise or not?

Jyoti: It was a good discussion on the product-market-sales kind of fit, but my primary advice I will give to founders listening to this is — don’t overthink too far ahead, in many cases, as well. Like, the skills you need to master, $0 to $1 million of revenue, find the product-market fit, $1 million to $10 million, find the product-market-sales fit, iterate on it — let’s say $10 million to $75 million, scale the sales organization and go to your go-to-market. Then $75 million plus is when this — how do you build out product number two, and product number three, and product number four…

Sonal: That’s a great framework.

Jyoti: Anyone listening to this, I don’t want them to, like, you know — when they are in the $0 to 1 million stage, they’re trying to figure out how to do product number 2. There is no point spending time on that. So the skills that you have to learn and the organizationally — as an organization, and also as a founder — they change as you go. And my advice to people — focus on the thing that you need to learn the most to get to the next milestone and excel at it, then worry about the next one when you get there.

Jyoti: That’s a great piece of parting advice. And it brings us full circle to where we started, in terms of how founders evolve as their companies do. And that’s a fabulous framework. Thank you for joining the “a16z Podcast,” Jyoti.

Peter: Thank you all for this wonderful conversation.

Jyoti: Thank you, Peter.

Satish: Thanks, Jyoti.

• 

  Jyoti Bansal
• 

  Peter Levine is a general partner at a16z where he invests in enterprise companies. Prior, he was the SVP and GM of Citrix, where he joined via the acquisition of XenSource, where he served as CEO.
• 

  Satish Talluri is a deal partner at a16z where he focuses on enterprise companies. Prior to a16z, he worked at AppDynamics, Intel, and BCG, and founded Neptune.io.

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• 

  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

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The period from 2000-2016 was one of the best of times and worst of times for tech and the Valley (dotcom, financial crisis, Google IPO, Facebook founded, unprecedented growth, and so on), and John Hennessy — current chairman of Alphabet, also on the boards of Cisco and other organizations — was the president of Stanford University during that entire time. Given this vantage point, what are his views on Silicon Valley (will there ever be another one, and if so where?); the “Stanford model” (for transferring IP, and talent, into the world); and of course, on education (and especially access)?

Hennessy also co-founded startups, including one based on pioneering microprocessor architecture used in 99% of devices today (for which he and his collaborator won the prestigious Turing Award)… so what did it take to go from research/idea to industry/implementation? General partners Marc Andreessen and Martin Casado, who also founded startups while inside universities (Netscape, Nicira) and led them to successful exits (IPO, acquisition by VMWare), also join this episode of the a16z podcast with Sonal Chokshi to share their perspectives.

But beyond those instances, how has the overall relationship and “divide” between academia and industry shifted, especially as the tech industry itself has changed… and perhaps talent has, too? Finally, in his new book, Leading Matters, Hennessy shares some of the leadership principles he’s learned — and instilling through the Knight-Hennessy Scholars Program — offering nuanced takes on topics like humility (needs ambition), empathy (without contravening fairness and reason), and others. What does it take to build not just tech, but a successful organization?

image credit: Jitze Couperus / Flickr

Show Notes

• The importance of RISC across technology, and how it began with a startup [0:00]
• How the startup grew, and a discussion of changes in the startup space [12:29]
• Discussion of the Stanford Model [17:51]
• The importance of humility [24:20] and empathy [28:19] in leadership
• Interdisciplinary studies [34:37] and the real-world applicability of AI/ML [40:32]
• Academia-based research vs. corporate-based [42:42], and a discussion of talent in Silicon Valley [51:29]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I am Sonal. I’m here today with a16z general partners Marc Andreessen and Martin Casado. And we’re interviewing John Hennessy, who is the current Chairman of Alphabet and was President of Stanford University from 2000 to 2016, which also happened to be one of the most interesting times for tech and the Valley.

So, in this episode we cover everything from the Silicon Valley and Stanford models, to if it’s possible to create other Silicon Valleys and, if so, where and how. And, of course, we also cover education, as well as the tech and economics of education, to what it takes to lead companies.

John has a new book out, “Leading Matters,” on principles for leadership, and he also recently launched the Knight-Hennessy Scholars program for graduate students focusing on both knowledge and leadership.

Finally, we discuss the evolving shift between academia and industry, including the role of universities, big company R&D, and the heyday of famous labs, and entrepreneurship then and now. Which, by the way, is why I asked Marc and Martin to join this episode, given their experiences going from university research to industry — Marc with Netscape, and Martin with Nicira, which came out of Stanford before being acquired by VMware.

But first, we begin with John’s own history as a start-up founder, based on pioneering the microprocessor architecture used in 99% of devices today.

Developing RISC and starting a company

Sonal: So welcome, guys.

Marc: Thanks.

John: Thanks.

Marc: I’d like to point out that Hennessy is also a Turing Award winner, which is unbelievably awesome.

Sonal: That’s like the Nobel Prize of computing.

Marc: It’s the Nobel Prize of computer science.

Sonal: So, you and Dave Patterson won that?

John: Yes, yes.

Sonal: Why did you guys win it?

John: Well, I think we won it because the work we did has reshaped the entire industry. Many times when you find a fundamental breakthrough, its importance may take a really long time to emerge, particularly in the hardware sector, it moves so much slower than software. And in this case, with the explosion of the mobile world and Internet of things, efficient processor architectures became really crucial. And that really changed the world. And that’s why our work has had such [a] great impact over time.

Sonal: Well, actually, break down RISC for us. Like that’s “reduced…”

John: “Instruction set computing.” The way to think about it is building a machine with a simpler vocabulary which can be executed more quickly. If you think about it in English language terms, imagine reading sentences that have giant $5-dollar words and are really hard to parse and understand, you’re constantly pulling out the dictionary. Now imagine a sentence that’s written in clear, precise English. Maybe it has a few more words, but you read it much faster. And we use that same key insight to try to build faster computers.

Sonal: So, you reduce the instruction set in order for the computers to process information faster, and therefore operate faster.

John: Cheaper, faster.

Sonal: And why was that so cutting-edge at the time? I mean, weren’t the dominant players, like, IBM and DEC?

John: IBM and DEC. And this is a time in the ’80s when, if you wanted to go talk to leaders in the computer industry and you were in Silicon Valley, the first thing you did was get on a plane and fly back east. It was a very different environment. They were building machines which were getting increasingly complicated rather than simpler. And they missed the whole importance of the microprocessor and VLSI and how we completely changed the industry.

Marc: So, RISC was invented roughly when?

John: Early 1980s.

Marc: Early 1980s. And when do you think it really tipped to become as mainstream? It’s so mainstream today, RISC processors run almost everything.

John: Yes, almost everything, except the desktop.

Marc: Except the desktop and the server.

John: And some of the servers.

Marc: Some of the servers. But, like, every smartphone, every IoT device.

John: Every smartphone, every IoT device.

Marc: Every camera.

John: You know, you probably own 100 of them that you don’t even know about.

Marc: Right, right. So it’s, like, by far the dominant architecture today.

John: Exactly.

Marc: So how long did it take from inception to kind of when the market tipped to when we knew it was going to be absolutely dominant?

John: You know, there was an early run at the mainstream market in the late 1980s and it almost flipped then. But what happened is, rather than the industry converging on one RISC architecture, they converged on three or four.

Sonal: Oh, interesting.

John: That gave Intel a real lead-up, because they didn’t have to beat any one, they had to kind of beat these little three or four.

Marc: IBM, DEC, Silicon Graphics, Sun.

John: Yeah, and they were all kind of beating up on each other, right? And so rather than getting behind one architecture, which would have made it much easier to build a software stack for it, that didn’t happen. So, there was a period where they were a lot faster, and then Intel really came back. And it probably took until the emergence of the cell phone.

Sonal: What, that long?

John: Yeah. Probably until mid ’90s. So, there was a period where it really wasn’t — it was working in the scientific computing space, but the scientific market is relatively small compared to the general-purpose market.

Marc: But even so, right? The cell phone previous to the smartphone was not that  — yeah, it was a phone, it was great, it was a phone with a RISC chip, but it wasn’t a computer in the sense that we understand, right? So really the iPhone probably is the…

John: Yeah, the iPhone was really the taking-off point. Some of the earlier Nokia phones began to use the technology. But then when the iPhone came along, boom.

Marc: So, 1980-something, 1980, early ’80s, through to 2007 to really have…

John: Yeah, to really have that big effect.

Marc: Yeah. So, I just think it’s a great example of, like, these things are generational. Like, the really, really big things do take a very long time. But then when they tip, right? How many RISC chips do you think are globally today?

John: Well, 99% of the market space. So, you know, it’s much larger than the number of — now, that’s counting processor chips, right?

Marc: Right. But including embedded systems, 10 billion chips worldwide?

John: Oh, more than that. Probably 50 billion.

Martin: So, I worked for years under Pat Gelsinger at VMware, who was the GM of the 486 at Intel, and a longtime proponent of CISC. And he still maintains that CISC is the right architecture and, you know, dollar value, it’s still the predominant market or whatever. Are these different problem statements, or do you think it’s still just dying a slow death and we just haven’t got there yet?

Marc: We should know, CISC stands for “complex instruction set,” so it’s the opposite of RISC and the classic Intel model.

Martin: Right, exactly.

John: Yeah, I think you have to separate out the technical argument from, “Does it have a large, established base and, hence, a large software stack?” I think on the latter point, Pat is exactly right, it has a large software base with large, established software. But in terms of things like energy efficiency, which now it becomes the primary concern. And as we get to the end of Moore’s law, and energy efficiency becomes more important, which you carry around a lot of devices in your pocket, they’re battery-powered. The fascinating thing people don’t realize is that after the cost of the physical servers themselves, the second biggest cost in a large data center is power.

So, you care about energy efficiency even in these large data centers. And when it comes to that measure, the CISC architectures are far behind.

Sonal: One of the things that surprised me is that the chips were used in early gaming systems, the PS4 and all these.

John: Yes, that was one of the earliest breakthroughs for the RISC people in the embedded space, were games, high-end network switches, places where there was really — high-end color printers, where there was really a fair amount of performance demand, but also considerable sensitivity to price.

Martin: Yeah.

Sonal: So, why [were] games, like, the breakthrough then? The reason I think about this is because I think about what happened with GPUs and Nvidia, and how it then became the enabling for, like, artificial intelligence.

John: Right.

Sonal: More parallelized computing. So, I was just trying to figure out what the parallel was with the RISC story.

John: So, one of the reasons was the RISC architectures — MIPS was the first architecture, along with the Alpha architecture, DEC, to get to a 64-bit implementation. And in the games, as in graphics, how quickly you can move data around makes a really big difference. And so, 64-bit architectures were much better at doing that. And that accelerated their — and first with, you know, Sony PlayStation being the first big breakthrough in terms of creating a much more realistic graphics framework for games.

Sonal: By the way, is that why Nintendo is called Nintendo 64, because of the 64-bit?

John: Yeah, Nintendo 64 is called from that.

Sonal: Never connected those two dots. Back to Marc’s question though, what do you think made RISC tip? Yes, it took a long time, but how do you think — especially because in that time you founded a start-up, MIPS Technologies, to bring it to market. You could have just left it as a paper and expected the industry to adopt it.

John: I was a bit of the reluctant entrepreneur. I mean, when we wrote our papers, we thought the evidence was so convincing that industry would just pick it up.

Sonal: Yeah. I mean you said that about Nicira, I remember that.

John: That’s what we thought. And, in fact, Digital Equipment Corporation actually had a research lab out here that took some of our ideas, some of the people who worked with us, and worked on the technology, but they couldn’t sell it back east, and that’s where the headquarters of the company was. You know, IBM canceled their project several times.

So, eventually what happened was a famous early computer entrepreneur, Gordon Bell, who’d been one of the people that built Digital Equipment Corporation, came to me and said, “You know what? If you want to get this technology out, you’re going to have to go start a company.” And eventually he convinced me, although I have to say I was the technical entrepreneur that didn’t know the first thing about running a business, not the first thing.

Sonal: We have so many founders who do that. What was, like, the biggest thing when you went to start a company that was like, “Holy crap, I don’t know what I’m doing”?

John: I thought engineering should get roughly half the revenue. I didn’t realize how important salespeople really were. I thought, if you have a great product, people just buy it. So, there were a lot of things like that I didn’t realize.

Sonal: Yeah.

Marc: So not only did people not go ahead and build the products until you did, you had to start the company and build the products. Once you had built the products, they didn’t even just buy them?

John: What we needed to do was find people who were — you know, companies are always a little reluctant to take a risk on a start-up, particularly with something like a new architecture, which really is a long commitment. So, what you had to do was find companies who felt like they needed a leg up over the other players in order to advance themselves. And that helped, we found a few players like that early on.

Sonal: It’s kind of shocking that you founded your company in 1981, and we’re talking to founders in 2018, and it’s the exact same conversation.

Marc: Yeah, you just described the exact same dynamic we see.

John: But, you know, somebody said to me once, I mean, “What’s the difference between you and somebody else who’s read about technology?” I said, “Well, the people who’ve worked on it, they see the glass as half full, not half empty.” People said to us, “Well, that’s a nice academic experiment, but you’ll never be able to make a real product out of it, it will lose all its advantages when you try to engineer the rest.” Because we’d built a university prototype, it wasn’t a commercial product.

Marc: There’s an old line, I forget who said it, but there’s an old line in the industry which is, “Everybody worries about protecting their idea. But if your idea is actually any good, you’re going to have to bludgeon people to adopt it.” Right?

John: Exactly.

Marc: This was a great example of that.

Sonal: I think it’s interesting that you said that it was, like, a prototype, like research. Do you think that’s changed today where, because of all the systems that we have available to us — you know, AWS, all these different things where you can essentially prototype in the cloud — do you think that people now have more — when they are in a university of research lab, is their stuff more immediately and more easily transferable, because it’s more pre-industry scale or production-ready?

John: Well, I think it’s probably a whole lot easier to transfer a software product than it is to transfer a hardware product. Software now, the students are incredible programmers, I mean graduate students, and you can really build something that’s pretty good shape. I mean when both Yahoo! and Google left the Stanford labs, they were pretty good pieces of software. They weren’t yet scaled up to deal with millions of users at once, but they were pretty impressive.

Sonal: Yeah. Was that true for you guys, actually? I mean, when I think about Netscape, did you have to do a lot more work based on what you…

Marc: Well, there were two things that happened. One is, when we were at Illinois, we started actually getting, like, people actually using our software, and then we ended up getting lots of customer support calls. And so we applied for an NSF grant to staff a customer support operation.

Sonal: Oh, that’s hilarious.

Marc: And the very nice people at the National Science Foundation explained to us that that was not actually the purpose of taxpayer-funded research. Which was a gift, in retrospect, and that catalyzed us in part to start a company. But then the other thing was we actually rewrote…

John: You rewrote everything.

Marc: We rewrote everything. And I actually think at Nicira, you guys did something very similar.

Martin: Yeah, yeah, yeah.

Marc: And so you do end up…

John: You end up re-engineering.

Marc: When you have paying customers, you do end up having to do a set of things that are not…

Martin: Well, I always thought that was really interesting. And so my experience was very similar to yours, which I had these academic papers, the academic community liked it, industry hated it. And I found out it was actually much easier to sell somebody something than to give it away. And I don’t know what the psychology is about it.

Sonal: That’s fascinating.

Martin: This actually happened to me twice, where I’m like, “Oh, like, the paper is done, the research is done, I’m going to do the next thing.” Now I want someone to adopt it and I have the conversation, and then they won’t put the effort in or whatever. And in both cases I ended up just selling it to them, and in the cases of companies.

And I think it does two things. One of the things it does is actually just qualifies. Because if you ask somebody for money, like, if they’re actually not interested, they’ll say “no.” And the second one, if you get a transaction to happen, you actually have some skin in the game, you actually have something behind it.

And so, I actually tell this to a lot of academics coming out of industry now, I’m like, “Listen, like, it’s hard to give something away, it’s much, much easier to sell it, especially if you want to have impact afterwards.”

Marc: What I propose, I propose the third rule from that, which is the more you charge, the more successful the implementation.

Martin: 100%. And it will set the value.

Marc: Right. Because the more painful it’s going to be for them to write it off.

Martin: Totally.

Marc: And so they have to commit.

Sonal: Right. That’s your two-word mantra, is, like, “Raise prices.”

Marc: “Raise prices.” It’s another great example.

Startup challenges

Sonal: Well, you know, Nicira — and before you guys were acquired by VMware, I remember you wrote about how you guys actually had some early adopters, but then you had, like, sort of a hump. And you talked about, too, how you had an initial fast — and then you kind of stall. And so one question I have is, like, when you get to that moment, coming out of academia and then into industry, what sort of tipped you over to sticking it out, and then figuring out how to get over that hump?

John: Well, we had a situation where we had probably expanded a little bit fast and the first CEO — remember, this is a bunch of three technical founders who didn’t know anything about really running a company. He had expanded too fast on the evidence of the first customer and, you know, we had too many people. And we were about to run out of cash. So, we had to kind of do a reset on that. We had to go through a layoff, which was a really tough situation. 120 people, you got to lay off 40 of them, you know everybody. And then the CEO asked me to get up at the Friday TGIF and give the rally call for the company — how we were still going to be a great company and this was a small hiccup on it. But I had to learn from that process and re-energize the company.

Sonal: I mean, your whole book is about leadership lessons. What was, like, the biggest leadership lesson in that moment?

John: Well, for me it was if you have a crisis and you’ve got to take a tough step, do it quickly, get it over with, and move through. Reset the clock so you can then charge ahead. And that turned out, when the financial crisis hit, you know, Stanford lost billions of dollars of its endowment, about 28% of the endowment vaporized in a six-month period. So, there was no way we could continue to spend money the way we were, we were going to have to go through that process again. I realized, you know, that’s going to lead to 5 or 10 years’ worth of small budget cuts that are going to not be very efficient, and we’re going to not be able to do anything new. So, we sat down and said, “We need to do this quick.”

Sonal: So instead of death by 1,000 cuts, you’re going to do, like, one hard stab.

John: Yeah. We did it quick. “We’ll be generous, we’ll be humane, we’ll give nice severance packages, and then we’ll restart and begin to rebuild the financial core of the university.” We had one year that was sort of a down year, and then we’re back.

Sonal: Yeah, that’s great. You started a company in the ’80s. And you started a couple of companies, in fact. And you IPO’ed only five years, I think, after starting your company. And today a lot of companies don’t IPO so quickly, so that’s one big trend shift. What are some other shifts that you’ve seen, especially since you counsel and meet a lot of entrepreneurs, between then and now?

John: I think probably one of the biggest shifts — the space of start-ups has changed dramatically. You know, when we were starting, our goal was to build a product that was more efficient, that solved some particular problem. Now, with so many software companies, the whole big question is, you know, “Will the dogs eat the dog food?” I mean, is it really going to get traction, is it going to go viral? I think that’s a very hard thing to predict ahead of time. I mean, look, I was sitting at Google when Facebook came along. Nobody foresaw how big social media — I mean, some did. Mark did, clearly. A few other people. But most of us didn’t see how big it was going to be. And that happens all the time.

Martin: Yeah, it’s interesting. Even enterprise companies now are having this type of characteristic. So, it used to be the case, you’re like, oh, a consumer company is kind of a popularity contest. You’ll have three companies that all look the same. One will get adopted, two won’t. But the enterprise was kind of core tech, and then you could actually talk to the buyer, and then you could predict somewhat whether it’s going to do well or not. Or at least whether a category is going to do well or not. But what’s happening now is, especially because developers are so influential in the enterprise, and developers are also kind of fickle and, you know, they have their own philosophies and so forth, whether or not a company is going to do well is somewhat independent of technology often, and somewhat independent of the approach they take. And it’s more like, you know, “Do they become the popular one that they use?” So, I think this is something we see across the industry.

Sonal: Yeah. People in the enterprise, it’s not just developers. You guys talk a lot about, like, departmental-level buying even across…

Martin: Yeah, yeah. Vertical SaaS, that’s right. Yeah, yeah.

Sonal: Yeah, exactly, it’s coming from the bottom up.

John: But I think even in complex organizations, universities like to have a very slow, deliberative process. But in a complex organization, all decisions are gray when they get to the top. And so you’ve got to get comfortable making decisions, making calls in that situation. And I learned that in the start-up environment. And I wouldn’t have learned — it would have taken a long time to learn in university.

Sonal: Right. Well, what do you think about — we have this view that professors that are part-time co-founders, I mean — we don’t believe that when a professor is listed as a cofounder in a company, that if they’re a part-time — that they’re actually fully committed. We need to see more skin in the game.

Martin: Having lived through this.

Sonal: Oh, did they tell you the same thing, were you trying to do this part-time thing?

Martin: No, no. I had two part-time professors and I was full-time.

Marc: Yeah, you were full-time.

Martin: Yeah, yeah.

John: Yeah, you had two part-time professors, right?

Martin: Yeah, I had two part-time professors. I mean here’s the reality — start-ups require a tremendous amount of work and effort and time, and you make real commitments to customers and teams and investors. And early on, while you may have a great idea, the investment is in you. And so there’s really a mismatch in expectations between someone giving you money, a team coming to join you, if you’re not going to be there long-term.

And so, we like to know, if we’re investing in someone — whether they come from academia or not — that they’re going to stay with the company for the duration of, kind of, the team and the investment. Now that doesn’t mean that a part-time professor doesn’t come in and help out, right? I had two, and they helped out a tremendous amount. But what we like to see is someone that is fully committed.

The Stanford Model

Sonal: What advice would you give to universities who are trying to do something like the “Stanford model”? Which, I don’t even know if we defined what the “Stanford model” is, but it’s pretty cutting-edge — and we take it for granted in the Valley that Stanford and Berkeley, for that matter, will give away more IP than they hold onto. And I used to see, when we were at Xerox PARC, a lot of university tech transfer offices. And it’s so extractive.

John: Right.

Sonal: And kind of nightmarish, in fact.

John: Right. Marc has the great experience at doing this, but my view of — people think of their technology licensing office as extracting blood, as opposed to being partners with their entrepreneurs. And the purpose of technology licensing, from a federal government’s viewpoint, is the university should get their technology out there. If they focused more on that, that would be great.

And be more flexible with respect to faculty. My experience is, the faculty members I know at Stanford that have gone out and started companies are better researchers, they’re better teachers. They’re all around better, because they have a wider range of experience. And most of the students we educate, they’re not going to become future academics, they’re going to go work in industry. So, a faculty member that has experience from that is actually a better teacher.

Marc: So, let me play devil’s advocate. Which is, okay, that’s all fine and good for you to say, but we only have so many professors. If they go leave and start companies, like, they may or may not come back, they’re distracted, they’re not teaching, they’re not doing research. Then aren’t we depleting the core mission of the university of doing research and education by enabling that?

John: It’s a good question. I think we’re in a tricky position right now, especially around the machine learning/AI area, where there are lots of faculty who are leaving. And that will hurt the industry in the long-term, because that means we’re eating the seed corn. I’m a great fan of faculty members who go out, commit themselves to a company for some period of time, but say clearly that their long-term goal is to go back to the university. That works well. I think if all the faculty leave, then we will have a problem long-term.

Marc: But there’s also some, presumably, benefit to being the place where people feel like they have a lot of flexibility, the place that encourages creativity, the place that encourages ventures, that presumably will play a role in attracting.

John: Right. So, you’re a young person, you’ve got multiple faculty offers. You might be interested someday in taking your technology out. Where’s the place to come? Well, it’s pretty obvious where the place to come is, and that’s a big benefit to the university in terms of recruiting people.

Marc: And so, we all the time get the delegations from, you know, various countries, various cities in the U.S., various countries outside the U.S., and sort of the question is, you know, “How do we create Silicon Valley of X?” It could be “Silicon Valley of Chicago” or it could be “Silicon Valley of France.”

John: Kazakhstan.

Marc: Or Kazakhstan or, right, anywhere, anywhere. And I’m sure they come and see you, as well. And so what is your answer to that question?

John: First of all, build some great universities, because they are a center of innovation, and many of the ideas which build not just a single niche company, but help transform an entire industry and create an entire industry coming out of universities. Build the rest of the ecosystem out. I mean, the fact that venture was out here and people were comfortable with it, the fact that you had legal firms who knew how to work with start-ups and make that work. But risk tolerance is a big part of it. You can fail in the Valley, provided you had a reasonable strategy and a reasonable set of goals, and reboot — and it works okay. That’s not true in many parts of the world.

Marc: So maybe let me polarize the question a step further. So, the cynical view would be you can’t. You can’t create Silicon Valley anywhere else because there’s only a couple areas of technology where it’s even feasible to create a Silicon Valley, and Silicon Valley already has information technology. And then further, the things that you just described, like, they’re just too difficult to do. It’s very hard to create a new research university from scratch, it’s very hard to change the culture of the country that you’re in. That’s why there’s only going to be a handful of these places.

The optimistic view would be, “No, no, no. All these ideas are now spreading, the world is globalizing, technology is globalizing, the knowledge of how to do all these things is globalizing.” And then there’s many new areas of technology that are becoming, kind of, more amenable to this kind of flexible innovation, and many countries that, you know, want lots of entrepreneurship, and many kids worldwide who are growing up watching YouTube videos of, you know, Stanford classes on how to build a start-up, and then, you know, getting out their compiler and getting to work on writing code and starting their companies. And so, in that positive vision of the world, there’s, you know, 80 or 100 Silicon Valleys in 10 or 20 years. Where do you come out on that?

John: I don’t know that there are 80 or 100. So, it is going to happen in China, I have no doubt about it. The government is pouring enormous amounts of money into building their top half dozen research universities. The people are very entrepreneurial, there’s a lot of risk capital available. There may be some issues around liquidity and exits that are a little difficult, but they’ll work that out over time.

It surprised me that nobody in the U.S. has built a real competitor. In fact, just the opposite has happened over time. If you were to ask me 15, 20 years ago, “Will there be another Silicon Valley in the U.S.?,” I would have said, “Yes, for sure.” In fact, just the opposite has happened — the Valley’s lead has gotten bigger.

Now, we may be the victims of our own success, given land and traffic and cost of housing. We may be laying the foundation for some other Silicon Valley area, but it’s got to be a place where people want to live. And that helped bootstrap it. And so, we should be looking and thinking, “Where is that going to happen next, where is that a kind of opportunity?”

Marc: Do you think we’re at risk of strangling our own success by all of the fundamental issues around housing, transportation?

John: I think we are.

Marc: Taxes.

John: I think we are.

Marc: A state government that seems to hate us. A city government in San Francisco that seems to hate us…

John: Yeah, I think we are. Or hates us and loves us at the same time, right? You know, our cities and the state have such dramatic issues. And yet, you pull out the high-tech sector, I mean the state and the city of San Francisco will collapse.

So, we’ve got to think about it. And it really — you know, the younger generation moves to this area, but without that kind of suburban dream of, “Oh, I need the large house with the lawn.” I mean, they’d rather have something maybe a little smaller, not have the big yard, to have some nice parks, have some open space, and, by the way, be able to walk to three restaurants and a movie theater. And that’s a different view than the Valley grew up doing. Then you’ve got to figure out how to make the transportation network. It may be that rather than rely on government, we’ve got to get the companies to play a much bigger, forceful lead in pushing governments to do the right thing.

Sonal: I mean, one could argue that’s what’s already happened with the shuttle system.

John: Yeah, the shuttle system is that.

Sonal: As, sort of, this private tunnel.

John: It’s a patch.

Sonal: Right, it’s like a patch, exactly, into, you know, this public infrastructure. The newest trend that I’ve seen, because I am friends with a lot of 20-year-olds — they are doing a lot of cohousing arrangements, where they’re all renting big houses with like 20, 15, 10, 8 people. And our friends would never have thought of doing that when I was in grad school and undergrad. It would have been, like, two roommates at most.

John: Yeah. I think when I see a lot of the start-ups coming, I mean that’s what they’re doing. They go rent a house and squeeze more people into it than you ever thought were possible, right?

Sonal: Right.

John: But it doesn’t matter because they’re working 60, 70, 80 hours a week, so…

Humility and empathy in leadership

Sonal: One question on the note that Marc was asking about the next Silicon Valley. So, the network effect of it becoming more valuable the more people that are there — the other part of the ecosystem is obviously people who are, you know, like yourselves, ex-founders, ex-salespeople, ex-marketing heads, etc. — who can then help these companies as they grow and get to the next level. That’s the biggest argument I’ve heard for why there might not ever be another Silicon Valley.

John: That’s a great argument. I remember a start-up founded at Marc’s alma mater, at University of Illinois. And — great group of people, they could hire great young engineers, because it’s one of the best engineering schools in the country, but they couldn’t get the kind of middle and upper-level management there.

Sonal: Right, exactly.

John: And so they ended up moving the company to the Valley, because there was lots of depth there.

If you look over history, I mean, Hewlett-Packard was there, then talent from Hewlett-Packard helped build Sun, talent from Intel helped build the first generation of fabless semiconductor companies, and that spread out over time. And that’s one of the great things that happens in the Valley.

Sonal: I agree. And I know this sounds so hokey, but I’m going to say it because I don’t think people really appreciate how unique it is. The generosity of mentorship. And, you know, a big theme of your book is about mentoring and molding the next generation of leaders, so let’s transition to talking about what some of [those] mentoring and molding principles are.

So, each chapter is devoted to a specific principle — humility, empathy, you know, honesty, transparency. There’s different levels of that. But they’re things that everyone says about leadership. So, I’m going to challenge you to convince me — what is the nuanced take on why humility matters? And by the way, on that one especially, I don’t know of that many humble leaders, quite frankly, that are really successful.

John: I think you can succeed while being humble if you’re also ambitious at the same time. Classical person who’s humble and ambitious is Abraham Lincoln. He’s just got to maneuver things over an extended period of time, he has to go to war, but he was a very humble person. I mean, and I think that combination — what humility does for you, is it removes the barrier to asking for help, to admitting that you’ve made a mistake. Which, for many people, that’s a fundamental thing. Look how many of our leaders won’t admit that they made a mistake, right? And won’t ask for the advice of others.

Marc: I think the challenge that leaders confront on that is, “If I show weakness, my people will start to lose faith in me.” And so what do you advise a leader who’s worried about that?

John: I think there’s a difference between being humble and being indecisive.

Marc: Okay.

John: And I think it’s a question of making that decision. You know, when Abraham Lincoln finally drafted the Emancipation Proclamation, the majority of his cabinet didn’t want him to publish it, didn’t want him to release it. And yet he knew that that was the moment — that that was the time he had to do it, that he had to make that decision and move forward. And I think that kind of decisiveness is crucial.

So, you’ve got to take responsibility for making the decision and moving forward, but that doesn’t mean you shouldn’t gather all the input and be open. If you’re humble, then your staff, your team can come up and say, “You know what, Hennessy? That’s a really stupid idea. And if you do that, it’s going to come out bad.” Then you say, “Okay, well, you know, you’re probably right, I need to rethink this.” That’s fine.

Sonal: It’s kind of like our “strong opinions, weakly held.” Which feels like a very a16z value — it really seems to define the place. I love this phrase that you use in your book, “It’s not enough to understand how many people are depending on you, it’s just as important to realize how you are depending on them.” And I thought that was a very neat thing to think about — mentally inverting the org chart.

John: Yeah. I like to think of my org chart upside down. I’m the person supporting the rest of that team and serving them.

Sonal: I always think of how this plays out when it comes to things like equity, though, because you have to share the success. But, you know, quite frankly, some people do more, some people do less, some people are less fungible, others are more, and you have to take that into account. And I think that’s sort of an interesting calculus that people tend to sort of balance.

John: Well, you have to think about the value of the individuals. Everybody’s work has value, but obviously some of it is more crucial to the success of the organization than other work. So, everybody should be rewarded, but that doesn’t mean all the rewards should be equal.

Sonal: Let’s talk about empathy. Because you’re one of the pioneers, in your tenure as president, of the largest increase in financial aid ever, which allows more lower-income families to experience Stanford. And this is incredible. But you talk about how it was hard for you to actually make this happen, because empathy needs to be balanced with fairness. And that really resonated. So, tell us about how you sort of navigated that thorny issue.

John: So, we decided that one of the challenges that people who came from disadvantaged backgrounds faced is just getting through the whole process of applying to a highly selective school. You know the federal financial aid form is 23 pages long? Often you get people — they may not even speak English because they’re an immigrant family. And so that’s a major barrier. We decided we needed a very simple message, right? Your family makes less than $100,000 a year, your tuition at Stanford is $0. The next thing that happened, though, was somebody came in and said, “Well, I make $110,000 a year and my tuition is $30,000 a year. This doesn’t make any sense.”

So, we concluded you had to balance this with fairness. You had to ask the students to have some skin in the game.

Sonal: Right.

John: So, we said, “Even though your tuition is $0, you have to work for the university 10 hours a week during the year, and 20 hours a week during the summer, and contribute that to your education.” And then everybody said, “Well, that’s fair, that’s reasonable.” So, balancing that was really key.

Marc: So, can I ask you the obvious follow-up question?

John: Yeah, sure. Yeah.

Marc: So, how many 18-year-olds a year — how many kids come of age to be 18 in the world each year right now?

John: Oh, a gigantic number. I don’t know, Marc.

Marc: About 100 — I don’t know.

John: Yeah, yeah. A very large number.

Marc: 100 million, some large number like that.

John: Yeah.

Marc: How many undergraduate freshman slots does Stanford have each year?

John: About 1,750 this year.

Marc: Yeah. And how many total university slots are there globally in Stanford-scale institutions, or Stanford-quality institutions, for the freshman class?

John: Well, let’s say — I mean, then you’d have to put all the elite publics in. I mean I’d say, probably there are maybe 200,000 slots in the entire United States.

Marc: So, take 100 million 18-year-olds to 200,000 slots. You know, the obvious question, right? Which is, like, it’s fantastic, obviously, what Stanford is doing for the kids who then end up in Stanford, but most kids don’t, most kids don’t end up in anything resembling a Stanford-quality education.

John: I came to the view that the university had a moral imperative to increase the size of the student body. Now, there’s a limit [to] how far you can increase it before you change the quality of the experience, right? We house all our students on campus, things like that. But we could certainly do more. And the provost and I made an argument.

So, in the end what happened — the financial crisis came along, we had to put that on the back burner. But then it came back later, and we’ve engaged in the gigantic expansion of undergraduate housing so we can house students on campus.

Marc: This does sound a little bit like the Director of the Globe Theatre in, you know, 1550 or whatever, kind of, saying, “More people should get exposed to Shakespeare’s plays. And so therefore we should build a balcony, right? And we should, you know, double the number of people who can come to London and see the play.” But, like, most people in the world are never going to be able to get to London and see the play. Like at some point isn’t the right answer to invent television?

John: No, the right answer is to change the way we educate people. I mean, I think if you were to make an accusation against higher education, it’s that they haven’t really done very much to bend the cost curve. And part of this is understanding what it means to bend the cost curve. Think about Vivaldi writing “Four Seasons” and having four musicians play the “Four Seasons,” right? It takes 23 minutes. It took 23 minutes in, whatever it was — 1790s, it takes 23 minutes today. What’s the big difference? Those musicians get paid a lot more today than they got paid then. So, actually, there has been no productivity gain in the presentation of the “Four Seasons” piece, right? And universities are somewhat in that, it’s still a craft to some extent.

Now, that has to change. That has to change. We’ve got to figure out how to leverage technology in an appropriate fashion to get the cost of education down. Otherwise, it’s simply going to become more and more expensive for American families, we’re going to load up with student debts going through the roof. And part of the reason it’s going through the roof is families are less able to save than they used to be, and so we see student debt going up.

Marc: The one form of debt that is not discharged through bankruptcy?

John: Yeah, correct. But it’s also — look at the default rates. Now, part of this is the for-profit industry, unfortunately, in the higher education space doesn’t deliver a lot of value. So you end up with lots of students who are not able to use their education to get ahead. We’ve got to figure out how to deliver a high-quality education. Not decrease the quality in order to just get the cost down, but hold the quality up while reducing the cost. And the only way I know how to do that is by using technology.

Marc: Have you read Bryan Caplan’s book, “The Case Against Education?”

John: No, I haven’t read it.

Marc: It’s probably not a common book on the Stanford campus. Although he is a tenured professor of economics, and so he is an instance of what he is talking about. And so, I’ll just focus on one aspect of the book that he talks about. The sheepskin effect, if I recall correctly, is basically if you take somebody — if you take an undergrad who’s completed seven out of eight of their semesters, right? So, they’re three and a half years into their program and they drop out. You might think that they would get seven-eighths of the income in their first job as somebody who does all four years, and it turns out that’s not the case at all.

John: Right.

Marc: Which then, basically, means that the value of that four-year education program is primarily in the signal of the diploma, as compared to the actual education. I think statistically, I think, this is in the numbers. So anyway, you might interpret that in different ways. I’d be curious how you would interpret that.

John: I think there’s some truth to this observation. And I think one way of interpreting it is that the drive and the determination to finish that degree is actually the key signal that employers are looking for, not just what courses you took.

Now, I should say, post-bachelor’s degree, this is changing dramatically. But if you think about other kinds of post-bachelor degrees, we’re moving very quickly towards a certification type model, where you take a course, or a sequence of courses, right? So, you go and take the sequence of courses on cryptography and blockchain, and you become an expert on that. And by demonstrating that you’ve mastered three, four, five courses, then that all of a sudden becomes the key to getting a new job opportunity. I think we’re going to see more and more of that as we go along.

Marc: So that’s, like, an alternative to a master’s degree?

John: Yeah, it’s an alternative to a master’s degree, you actually have to demonstrate mastery of the material. I think that’s the key thing, and that’s what an employer wants to know, right?

Sonal: It’s like Udacity with the Nanodegrees to some extent, too.

John: Yeah, it is like that.

Interdisciplinary studies and degrees

Sonal: Actually, on this very note, like, I would love your take on the interdisciplinary side of things. Because to me, the one unique thing that universities can do that a lot of these other institutions cannot do is break down barriers between disciplines. And you guys have tried experiments, or legitimate degrees, like symbolic systems, etc., that cross across, you know, multiple disciplines. But I’ve yet to see examples of true successes in multidisciplinary degrees or entities. Like, maybe Xerox PARC would be the best example, but I really can’t think of any others.

John: Happens a lot more at the graduate level and the research level. Partly because I don’t believe that multidisciplinary or interdisciplinary things are a substitute for some deep domain knowledge. I’m a firm believer that you start with deep domain knowledge, and then you build on top of that.

You know, one of the challenges with these small courses that certify you in an area — those work well for a professional. They’ve already got an undergraduate degree, there’s a clear connection between the value of the education program and how they’ll be rewarded.

Take an undergraduate coming in without some of the advantages that you’d have if you want to an elite high school. They’re not going to thrive very well in that kind of online setting, where they don’t see how that directly translates to getting a job at Facebook, for example, all right? They’ve got a long way to go before they’re there. So, they need a rather different educational system than somebody who’s already got their degree. They see, “If I take this course, I’ll get this new opportunity.”

Martin: I also think computer science is a little bit unique in this, in that, you know, so we call it a science, but, I mean, ultimately it’s an engineering discipline. And while there is, like, pure computer science, almost all of it is applied. And so, when I did my Ph.D at Stanford, we had people that would work in graphics, and they worked very, very closely with, you know, computational physics, for example, solving very real problems. Same thing with biology, right? One of my best friends, I mean, he did some really core work in DNA sequencing. And if you squinted at him one way, he looked like a biologist. If you squinted another way, he looked like a computer scientist.

The thing that I love about computer science, and I’ve always loved, is if we wrote a program that solved grand unified field theory, physics would go away as a discipline, and we’d be like, “Okay, that was more application. Let’s go on to biology,” right? So, in some ways it doesn’t exist without, like, the other disciplines, in another way it really is kind of this meta-discipline. And so I do think it’s pretty unique in that way.

John: It is unique and it is this meta-discipline, I mean, I think. And it’s become the new meta-discipline that everybody needs to learn.

Martin: Exactly.

John: Because algorithmic thinking is such a fundamental thing about how the world operates these days.

Sonal: Right. Like math, reading.

John: Like math, right? It’s just like that.

Sonal: You know, computational literacy should be just one other form of that. I was thinking, there was this debate with Vitalik Buterin — who’s, like, the inventor of Ethereum — and this professor, who’s a former editee of mine. And the debate they were having was whether there should be a dedicated degree for blockchain. So, the professor was saying, “We don’t need this, you should have fundamental basic science, and that’s good enough.” And Vitalik’s point was, “Well, actually, this is a really interdisciplinary, multidisciplinary, unique case where you’re layering economics and computer science and lots of other — finance and lots of other things, in a very intersected way.”

So, I thought that was fascinating, that there was a sort of tug of war. And this, to me, is the wave of the future. Like, I could even see the blockchain as a laboratory for people learning on their own in the future, especially if you think about what Marc mentioned earlier, about all these kids coming online around the world who don’t have access to these universities locally and are learning from YouTube. I could see programmers in my parents’ village in India becoming people who become such experts in this world. I mean, you’ve been the president of a university for 16 years that I greatly respect, but I wonder if it means that maybe the university model might have to really evolve in a different direction.

John: Well, I think there’s about to be a great test of this, because [of] the wide applicability of machine learning to all kinds of problems, all kinds of problems. I mean, you know, you should see breakthroughs in biology, in chemistry, in astrophysics, coming out of various forms of machine learning. So, all of a sudden it becomes this tool that is applicable to a whole range of things and is changing those fields. What do the scientists, the people who think of themselves as astrophysicists or as organic chemists — how much do they need to understand, how do they deploy this technology?

And this is a big gap right now, because the senior people in the field — it’s highly unlikely that most of them are going to take a year or two out and go back and learn a bunch of things about computer science and statistics and machine learning ideas. We’re really going to have to build a new breed of people who, kind of, fill up this interstitial space and become the key innovators in the disciplines.

Sonal: Well, I would argue that it needs to be more applied. We have an executive briefing center with a lot of big companies coming in, and the number one challenge they have when it comes to ML and AI is production-ready, industry-applicable machine learning. It’s actually, like, what’s happening in academia is not at all connected to what they need to actually do.

Martin: Yeah, it’s not only that. Which is as you move to AI and ML, more and more of the value is the data.

Marc: Absolutely.

Martin: And more and more it’s, you know, almost serendipitous understanding of the data prior to manipulating it, right? It’s almost impossible to remove the context of the domain understanding from data. From programs, maybe. From data, almost certainly not. Which is why we’re seeing such, kind of, a confluence of CS, statistic and data understanding, and domain expertise.

Sonal: Right. It also goes to your views about the end of theory. You should share that.

Martin: Or not.

John: So, you’ve got to look at that. You’ve also got to look at how and who establishes ground truth in these. I may have an AI program that can recognize some medical condition, but who decides whether or not it’s right on the basis of that? ML is the ultimate “garbage in, garbage out” technology. Because if the data isn’t good and properly validated and the learning process isn’t — you’re going to get assumptions and outputs that are ridiculous.

Martin: So, this is something that we have to deal with a lot, you know, in venture capital, which is a number of constituencies and entrepreneurs actually view AI or ML as almost, like, the end of theory. So, it’s almost like, I don’t have to know what I’m doing — the AI and ML will figure it out for me. So, like, they’ll come in and they’ll say, “Listen, there’s all of this data in enterprise X or whatever, we’re going to apply AI and ML, and then the net result is going to be value.” And, like, “Well, what’s that value?” “I don’t know, the AI and ML is going to tell you and it’s going to be valuable because we’re going to apply this.”

And so, like, it’s a very important toolset, but I think you have to understand the domain. To your point, “garbage in, garbage out.” You have to have some way of getting the expertise or whatever in the prior to get the answer. It’s not like this has become the end of theory, and we don’t have to know what we’re doing anymore and we’re going to get valuable results.

John: And the space where that works, sort of unsupervised learning, is such a small part of the giant ML space. It’s relatively small. And most of its interesting applications are in the natural science world, not in real-world applications.

Martin: Where there is actually a truth and way to test the truth, right?

John: Exactly.

Martin: And so for me the most difficult thing about moving from academia to industry was that in academia, you look at a problem domain and, kind of, your job is to think very, very clearly and, like, pull out, like, these kind of, you know, global truths, and they have to be very elegant. And very rarely do you write a paper where you’re like, “Here’s this problem domain and here’s, like, my litany of 50 fixes. And read through every one of my heuristics and, oh, look how elegant it is.” Right? It’s almost the exact opposite. What you learn about starting a company is, it’s actually the opposite — which is, almost every solution is dealing with a heavy tail of complexity, and it’s a bunch of patches and the real world and everything else.

And so mentally you’ve got to go from, “I’m going to look at a problem space and extract elegance,” to, you know, “I’m going to deal with all of this complexity and master it.” But where I did find this energy very useful is, a lot of leadership is thinking simply. And so if you start a company and you can extract that elegance, you can use that to really lead a company, and you can convince a customer, and you can talk to an investor — because you’ve really distilled what’s important about it. But you can’t let that constrain you, because ultimately you have to build something that solves a real problem, and the universe is a messy, messy place.

And so, if you can get beyond that kind of ability to have everything be incredibly elegant, I think you can have both the leadership and kind of, like, the actual complexity.

Sonal: That’s fascinating.

Academia vs. the corporate world

John: Yeah, no, I think you’re absolutely right. I think in the academic world, we like things that really look elegant. And we often actually delay publishing a paper or getting a result out there until we get it all gelled just right, right? That doesn’t work in a start-up company.

I think the one thing that is common is — focus really does help in both cases, right? I mean you’re relentless in a start-up company, you’ve got to focus, you’ve got to drive, you’ve got to decide what’s peripheral, and [that] you’re not going to do now. And the same thing is true in academia. If you want to do really great work, you need to focus, you need to kind of — somebody once told me, they gave me some good advice. They said, “You know, you ought to be working on three or four things, but you ought to have one or two of them that are really important, where you’re really putting your energy. And these others are your backup in case those really great things don’t work, and you don’t get tenure for those.” And that was good advice about how to think about a research career, but it doesn’t work in a company. You’ve got to get rid of those things that are not the home runs.

Sonal: When I think of examples like Xerox PARC, which honestly, despite the mythology, they actually did put a lot of repeat successes out into the world. It wasn’t that they had, like, a carte blanche to just invent whatever they wanted. They had a very specific mission, and they invented towards that mission. When you talk about the differences between academia and industry, academia is about ideas and industry is about implementation. And you believe that there’s an interface that VCs and others carry across those two. Do you think, though, that that’s sort of a false divide in some ways? So, it was actually not just ideas versus implementation, it was ideas in practice, in industry settings — because it was for a corporate research lab. So, I just wonder how you’re thinking about this — was then and now, and how it’s evolved.

John: So, I think there was a time when IBM Research, Xerox PARC, and Bell Labs were the great giants.

Sonal: Yeah.

John: What they had — they were not devoid of application and things. I mean the work on the transistor was really begun to solve a fundamental problem that a telephone switch built out of tubes. What they did have was, they had the advantage of a long investment horizon. It’s harder to find that in industry nowadays. It’s harder to find that patience. Partly because of the observation that, if you discover something really big, lots of people have to eventually benefit from it, right? Bell Labs and AT&T were not the major beneficiaries of the discovery of the transistor. Xerox was not the major beneficiary of the discovery of modern personal computing, right? That’s why universities are the ideal place to do this kind of work, because society benefits. Universities do technology transfer in a very natural way. It’s called graduation.

Martin: Marc and I are both dying to jump in. I think historically that’s certainly been the case. One could make an argument that this is shifting, and some of the most fundamental research contributions are actually happening in industry today. And not only that, that — you know, the academic system has actually moved towards short-termism, especially in incremental publishing. Like, I even feel like I’ve seen that dynamic shift in the last 15 years in just my, kind of, professional career. Where I would say Google and Microsoft are doing some of the more, you know, innovative fundamental contributions. And then I still sit on program committees — it’s interesting, they publish a paper, I’m in the PC committee, and then all of the professors are basically trying to do incremental work on top of Google’s work, right? So, are we seeing, like, an imbalance lately, or is this a momentary thing?

John: No, I think you’re right, I think there is a bit of a shift occurring here. It’s driven by not only the amount of resources that are available at Google, Facebook, Microsoft. It’s driven by data, and it’s driven by computational resources that are available in those companies that are much larger than is available to a typical university setting. So, I think we’re seeing a growth of, kind of, [a] new research environment in industry that’s quite a bit different than the old environment, and may be a harbinger of how things get invented in the future.

Marc: I’m kind of the skunk on this topic. So, I think the reason — the skunk at the garden party. So, I think the reason — I mean they did great work, Xerox PARC, Bell Labs, IBM Research. But here’s the thing, like, it’s always those three examples. They’re basically like they were rounding errors on everything. Like there weren’t 10, there weren’t 20, there weren’t 100, there were 3 or 4. And there were two preconditions for them. One is they all were offshoots of monopolies.

John: They were all offshoots of monopolies, you’re exactly right.

Marc: So your point on long-term thinking, the reason they had long-term thinking is because monopolies…

John: They could afford it.

Marc: By definition, all monopolies have this long-term thinking. Right?

John: They all were offshoots of monopolies, that’s an important insight.

Sonal: I never thought about that.

Marc: And arguably from a corporate, like, investment of capital standpoint, they were worth it just for the marketing value. Right? Of being able to demonstrate that they weren’t just, you know, sitting on their rear ends in the corporate office. And then, the other precondition was they were all pre-1975, 1980 — they were all pre-venture capture capital.

John: Yeah, yeah, yeah.

Marc: Right? And so when the monopolies cracked, and then venture capital pulled the talent out, like, that was basically it. And the downside case would be, that removed this kind of long-term commercial research. But the upside case would be, that led to what I would argue as just an explosion of R&D at far greater scale, right? Across the corporate landscape than ever existed in the 1960s, 1970s. And so, we’ve kind of mythologized these things. But they were tiny, they were tiny relative to what’s happening today.

John: So, there’s a lot more happening today, to the extent to which I can’t imagine a start-up, kind of, thinking about the length and the amount of money that was invested to build the Alto. I mean that’s a major, major undertaking by any measure. On the other hand, I think you’re right. There are now a much larger number of players doing interesting things. And in the software-driven world that we live in, the cost of experimentation and development is not the same amount in terms of capital.

Sonal: Right, you don’t need that amount of capital anymore.

Marc: Well, and I agree with all that, but I’d also say — even with what you just said, even that — like, yes, the Alto, but, like, also, like, look, Apple made the iPhone, right? Like, that was, what, a $150 million-dollar project? Like, you know, over the course of its — like, they were able to do that. Google, as you’re well aware, like, basically invented the self-driving car. Those are on par with the Alto.

John: I mean, if you look at the self-driving car, the tipping point was when the DARPA Grand Challenge was won. And that really was a key tipping point, because it demonstrated the technology was considerable. Considering that the previous contest before that, the car had not driven very far at all, and all of a sudden boom. So, there’s a tipping point in that. And when you see those tipping points, that probably is the time when you say, “Let’s move it from an academic setting that’s kind of more freewheeling, and operates more incrementally, to a different environment.”

Sonal: Well, one could argue, in that example, that DARPA was a VC.

John: They were, they were.

Sonal: Because they were putting up the prize money and everyone was competing in the start-ups, i.e. the individual people trying to meet the challenge, etc.

John: Yeah.

Marc: But then Google has now put another, what, dozen years?

John: Oh, yeah.

Marc: And a lot more money behind it. And I think that, you know, the self-driving car, the Waymo project, is as glorious a success as anything that ever came out of Bell Labs or ever came out of IBM Research.

John: Yeah. I mean I think the gap between, “Okay, we can drive on this desert road in a fairly constrained environment,” to, “I can drive in a city environment, with lots of people who do wrong things,” including look at their cell phone while they’re driving, is a much harder environment to do it in.

Martin: I think another interesting example is a company that you sit on the board of, which is Cisco Systems. Which is, Cisco has long had this stated goal of no internal research. However, they really made modern networking in, like, no small sense of the word, right? <inaudible> in the universities. But when you actually go in Cisco and see what they’re actually doing, you’re like, “Wow, they understand the real problems, they understand the customer.” Like, so I think, like, actually they’ve taken a stance against research there, yet they’ve done a tremendous amount of innovation. However, they have done a good job collaborating. So, it’s a little bit of a spectrum in Cisco.

John: Yeah. And they’ve had a model for many years of, “We buy interesting companies, and we bring technology in that way, and then we grow it and use the rest of our ability to really make it successful.” So, it’s a different innovation model, as opposed to one that’s more organic.

Sonal: I mean why wouldn’t you? Because then you’re essentially betting on 1,000 experiments and figuring out which one is a winner, instead of trying to internally, captively figure it out yourself. Like, I just can’t see any alternative to that.

John: Well, the only downside is that once that company gets far enough along, that little start-up, that it’s got some great technology — there are often more than one company that’s bidding for it. Then you could actually lose out in that setting.

Sonal: Right, right. You don’t want to lose that. Right, right.

Marc: God bless America.

John: Good for the entrepreneurs.

Martin: I mean it’s actually a really interesting point. The thing I’ve been most impressed with Cisco over the years is, they really, I think, are probably the top company in making those acquisitions successful and doing spin-ins. I mean there are very, very few companies you can put in that have been so successful in acquisitions. So, it’s basically a core competency.

John: Yeah, it has been a core competency.

Sonal: “Spin-in” as in?

Martin: So “spin-in” is, they’ll take an internal team, they will take them out of the company, they’ll help fund them, and then they’ll bring them back into the company once the product…

Sonal: Fascinating.

Martin: Yeah, yeah, yeah.

Sonal: I didn’t realize that.

Martin: It really has kept them relevant, where many companies have actually not — you know, of the same vintage are no longer.

John: It has, and it’s injected new technology and new products into the space and things.

New talent in Silicon Valley

Sonal: Right. Last question. What do you think has changed with talent — like the whole talent landscape, over the last 30 years? Because we’ve talked a lot about tech trends changing, the availability of capital, the ecosystem, industry, collaboration, academia, etc. But the people themselves in this ecosystem, what is the biggest change that you’ve seen, or are they the same?

John: So, one of the changes I’ve seen recently, that really has me delighted, is to see the number of young women going into computer science. What’s funny about it is, computer science in the ’80s was one of the…

Sonal: Yeah, it was very female-dominated.

John: It was, there were a lot of women in it. And then it got wiped out with the growth of the field and the number of males grew. And now we’ve seen a resurgence — I think, begun by a group of very energetic women that started to build support groups and things like that. And then we got over the critical mass, you got enough women in the discipline that they didn’t feel isolated anymore, and that’s really great to see. The number of opportunities in the software space are so large, we need to bring as much talent in.

The other thing that’s been remarkable for me is, I thought 10 years ago that computer science was going to become second to the biological sciences, in terms of getting the best students, and that everybody — the really best students were going to go do the biological, biotech, things like this. Well, that’s changed. And now computer science gets the very best students in any of these fields. I mean, I’ve seen freshmen that know more mathematics than I knew when I was a senior getting my college degree now. That’s remarkable, and they’re going to build great things, I believe.

Sonal: And those are merging, actually. Like a lot of the comp. sci. folks are now starting bio start-ups.

John: Yes, they are, they are. And bringing computer science knowledge to the bio space.

Sonal: Yeah. Do you guys have thoughts on any big talent shift you’ve seen?

Marc: I think the big one I see, that I think is probably under-remarked on, is engineers are so much more productive today, especially in software, than they were 20, 30 years ago. The tools are so much more sophisticated and powerful than all the infrastructure technologies. And then all the — the ability to learn. Kind of to your point on the undergrads, but, like, the ability to go online and learn. Right? It’s like, I’m an engineer and I don’t know how to do something, like, I don’t have…

Sonal: Stack Overflow it.

Marc: Boom, boom, boom. I know it in 10 seconds.

John: Yeah. You may actually be able to find the piece of code, because code sharing has become such a big part of what we do, reuse.

Sonal: Right, right, right. I mean MIT was a pioneer there with the MIT license and open source. What’s your biggest shift?

Martin: I think the biggest shift that maybe has impacted me is, like, I just remember the transition where pretty much everybody was in computer science for the love of it, because it wasn’t really clear where the industry was going. Often they were doing it to get something else done — to basically the professionalization of an industry. Meaning, it is a real discipline, people are in it to make money, people are in it for a future. Which is not a bad thing, it’s just required. And I think it’s actually quite good, because it requires us to really think about what it is, what people do.

And so, kind of on the negative spectrum there’s a — you know, people are lot more mercenary about it than they were before. And on the positive end, I do think we have a lot of framing around it — what does it mean to have a workforce in computer science that will come and go, and to handle that in a way. But for me, it’s been a very, very stark difference to people that I used to work with 20 years ago, when we were literally all there, you know, for the love of solving these great problems — to now it’s like, you know, this is your job.

Sonal: I think my favorite thing is seeing the intersection of art and humanities and code. And people used to keep them as separate in their heads, and there’s a whole new wave of talent that’s native in both. And that’s really exciting to me because, you know, art is code, code is art. So, to me that’s, like, the biggest, or most exciting, talent shift.

Well, John, just want to say thank you for joining the “a16z Podcast.”

John: Thank you, delighted to be here.

Martin: Thank you very much.

Marc: Cool. Thank you, John.

• 

  John Hennessy
• 

  Marc Andreessen is a cofounder and general partner at a16z. Marc co-created the highly influential Mosaic internet browser and cofounded Netscape.

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• 

  Martin Casado is a general partner at a16z where he invests in enterprise companies. Prior, he was cofounder and CTO of Nicira (acquired by VMware) and is the creator of the software defined networking movement.

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• 

  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

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One of the company building topics that’s surprisingly mystifying is PR — and only surprising since so much of the strategy and tactics behind public relations are actually hidden from public view. We’ve tried demystifying the topic in an ongoing series, covering everything from “the why, how, and when” of PR” and leaders building a personal brand to crisis communications.

But the most frequently asked question startup founders, especially technical ones, have is how to manage a PR agency — from when to bring one in and the mechanics of onboarding and engaging with them; to key acronyms to know in the process of doing so (what’s an AoR? RFP? GA?); to what are the ideal configurations for the who-what-where of in-house vs. agency PR.

So this episode of the a16z Podcast provides perspectives from both sides of the table (in-house vs. agency, big company vs. startup) for what it takes, featuring PR legends and veterans Shannon (Stubo) Brayton, chief marketing officer at LinkedIn (formerly at OpenTable and formerly vice president of corporate communications at eBay) and Margit Wennmachers, operating partner at Andreessen Horowitz who heads up the marketing function (and who co-founded and later sold The Outcast Agency), in conversation with Sonal Chokshi. It’s not dictation — whether from company to agency, or agency to reporter, or PR to internal stakeholders — there’s a lot of strategic thinking involved even with seemingly incidental things. And… it’s a leap of faith.

Show Notes

• Definition of PR and the advantages of working with a dedicated agency [1:37]
• Deciding when a business needs a PR agency [8:47] and various specialties [16:04]
• Common terminology [20:39] and further discussion of agency types [26:07]
• How to work with an agency [27:45] and how to choose the right one [31:45]
• Advice around PR during and after an IPO [34:36]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I am Sonal. We talk about everything from tech trends to company building on this podcast, but one of the company building topics that’s surprisingly mystifying is PR, since so much of the strategy and tactics behind public relations are actually hidden from public view. So today, we cover the frequently asked question of how to manage a PR agency — from when to bring one in, and the mechanics of onboarding and engaging with them; to key acronyms to know in the process of doing so; to what are the ideal configurations for the who, what, and where of in-house versus agency PR.

Joining us to have this conversation, we have Margit Wennmachers, operating partner at Andreessen Horowitz, who oversees a16z’s marketing function — which includes brand and communications, among many other things. Before that, she co-founded and sold The OutCast Agency, which worked with some of the now biggest internet companies — then startups — and continues to work with leading tech companies today. And then we have Shannon Brayton, who is the chief marketing officer at LinkedIn. She has worked in-house in corporate communications at several prominent internet companies, including OpenTable —  which later IPOed — and formerly served as vice president of corporate communications at eBay. Together, Shannon and Margit provide perspectives from both sides of the table — in-house versus agency, big company versus startup — for what it takes to manage PR.

By the way, you can find more background and other topics touched on in this episode, including PR 101, crisis communications, and building a personal brand, in our podcast series. You can look under the public relations tag. But this conversation begins by quickly recapping the “why” of PR. The first voice you’ll hear after mine is Shannon’s, followed by Margit’s.

What PR is and why it’s important

Sonal: So how do you guys actually answer the question of, do they even need an agency or not in the first place?

Shannon: Well, I always start with, “What are you trying to achieve?” So, if you are there because you are trying to get users, PR is not the only lever you should be pulling, obviously. But if you are trying to get funding, or you’re trying to get acquired, or you’re trying to get someone else’s attention, PR is a good lever to pull, but you don’t necessarily need an agency to do that. <Right.> So it all depends on the objective.

Margit: Yeah. And if it’s early stage, PR can be very helpful, because it makes everything else easier, right? So it makes hiring easier. It makes fundraising easier. It makes everything easier, but there’s almost never a direct correlation. I mean, it’s like, I did this interview in Fortune, and therefore, I got these customers. It’s just not how it works.

Sonal: So you’re saying it’s valuable, but there’s not necessarily a direct immediate…

Margit: It’s hard to measure…

Shannon: It’s a leap of faith.

Margit: …on a spreadsheet.

Sonal: Right.

Shannon: It’s a leap of faith.

Margit: Yeah, exactly.

Shannon: I think the biggest tip I give people that ask me about this is, don’t expect to hire an agency and get results immediately, just, like, all of a sudden. You actually need to invest in the relationship both ways. The closer I’ve brought an agency, the better the results. The more I keep them at an arm’s length, the results just completely go downhill, and then the expectations and the relationship just starts to sour.

Sonal: But I have a question about this, because honestly, like, if I’m a founder and I’m busy trying to build a freaking company, for god’s sake — and in the beginning, you’re doing like 20 things at once, wearing 20 hats — I don’t have the time to manage an agency. Like, isn’t the point of outsourcing it to just not think about it?

Margit: An agency is ideally managed not by the founder, because as a CEO, you’ve lots of things to do, right? Like, you’re growing [the] company, you’re probably managing engineering still. Like, there’s just a lot of things to do. So ideally, you have someone with a lot of input from you who will help the agency be successful, and the other way around. And so, yes, you do weekly phone calls, and you share lists, and like, this, that, and the other, but it’s like, okay — building camaraderie and, sort of, the investment together. The agency can only tell the stories that they know, right? So if you are the founder that has that gene and understands, like, “Oh, this will be interesting to WIRED. That will be interesting to TechCrunch. This is not interesting at all.”

Sonal: Which almost nobody can do.

Margit: Like, that’s just — this is not a given that you have that skill. So, then, if you don’t, then you need to let that team in so that they can discover the stories and tell them for you. And then they do all of the story-finding, the fact-finding, the backup — like, who needs to tell the story, and all of that. And then they figure out how to map a particular idea to a particular person at a particular outlet who will be interested in that.

Shannon: And building the story is not, “Oh, hi, I’m gonna call you, and I’m gonna tell you the story, and then you’re gonna tell the reporter.” Bringing the person into your world and letting them help find it — experience your culture, get to know you a little bit better — that’s gonna make the story much richer.

Margit: Yeah, it’s not dictation. There has to be a story. There has to be some tension. Who is well suited to tell the story? What kind of proof point do you need, if any, right? So there was a dance.

Shannon: That’s, sort of, tip number one, right? Is, you have to be willing to invest in the relationship.

Sonal: …to invest that fund in the relationship. So there’s a real dance I’m hearing, but quite frankly, what I’m also hearing a little bit of — and just disillusion me of this — why would I even bother outsourcing this? Why not just hire someone in-house? Like, why do all this work if you’re saying it’s not dictation, you should be able to discover…

Margit: It’s totally legit. I mean, like, I don’t think Apple has really used PR agencies. There are models where you don’t have an agency at all. What we should do is dissect, like, how would you divide and conquer? Like, who is good at what? If you’re internal, you probably are — more of your time is often consumed with talking to the product managers and figuring out what the roadmap is, right, and doing all that. Finding the stories, making sure that everything moves forward, doing all those meetings, right? And you don’t have any of that when you’re on the agency side, right? Your time is taken up with talking to reporters all the time because you have multiple clients. And as a result, you know stories that are kind of outside of scope. And that’s interesting to a client. Whereas, like, you know, it’d be good for me to know if WIRED is doing a cover story on AI.

Sonal: So you’re saying, an agency, in that context — that person has the time to really keep their tabs on what the reporters are doing all the time, essentially.

Shannon: Two things I think when it works really, really well. So one is when you’ve got way more program dollars to spend, and you’d rather do that than bring on a headcount, which is much more of a fixed cost. So a CFO, actually, a conversation with the CFO is typically, “Oh, an agency sounds like a great model instead of hiring three people that may be very, very hard to manage, and then potentially have to exit at some point.” Number two, if you get the phone call, “Hey, we’re gonna launch in India, but we’re actually not gonna put an office there or a country manager, and we just need some arms and legs on the ground,” that works beautifully, to be able to find an agency in the network, and call up and say, “We really need your help with project A, and if it works out, we’d love to keep you on.”

Sonal: So that’s more like more specialty-type things.

Margit: Yeah. You can dial up and down. And so, particularly, you know, once you’re a really established, high-growth company, you wanna grow the team, you want all of that. But, like, when you’re not in that stage, an agency can be super, super effective.

Sonal: So I hear the thing on — that specialties may vary, and that some of the media relationships may vary. But are you also, guys, saying then that people should outsource their media relationships to their agency? Or do the in-house people also still invest? Like, how do you, sort of, divvy that bit up?

Shannon: I think it really depends on who’s got the relationship, and there should not be pride of ownership.

Margit: No.

Shannon: If the agency has the better relationship — like in Margit’s case at OutCast, they probably had way better relationships with reporters than half their clients. The client has to be willing to say, “Margit, I’m fine with you calling Quentin Hardy. I don’t need to do that.” And not having that conflict of interest between the two, it should really be whoever’s got the best relationship.

Sonal: Right.

Margit: And at the same time, I think it’s really important for internal folks to be talking to the press. Because you kinda lose touch. What is even a good story? What are they thinking? Like, what’s kind of in the water? And not knowing that at all is just really detrimental. However, do you need to be booking all of the appointments, or do you need to be working on every story? Probably not, right? So it’s a balance.

Shannon: And the internal team, too, gets a lot of G-2 on other companies by talking to reporters directly, too, if they build the relationships.

Sonal: What’s G-2? Sorry.

Shannon: Some information about other companies. What’s happening in the Valley, in the industry, just intel, in general. And so I think you don’t wanna ever have the agency team do all of it at the exclusion of the in-house team. They should have their own.

Sonal: It’s like you’re basically not outsourcing your insights and your connections, but you are trying to scale what you do, and leverage where you don’t have specialties, etc.

Shannon: Right. Without potentially fixed costs.

Margit: I remember being in situations where the reporter won’t tell the company directly, like, what’s up, but they’ll tell you.

Sonal: You’re the inconvenient messenger.

Shannon: Or like a conduit.

Margit: And then on the client side sometimes, sometimes it’s really nice to have an agency walk in and deliver a particular message, versus you do.

Sonal: I’ve actually heard the best definition of consulting, in general, is that they’re the people who will say what the internal people think all along but just don’t get across.

Shannon: This is why I love letting agencies do media training, too, because agencies can really tell a CEO, “Actually, you look like a complete dweeb,” or, “This message completely did not resonate,” where the employee sometimes has a harder time landing that message.

Overview of PR specialties

Sonal: So, we’ve been talking so far about common configurations for working with an agency — like, having it in-house and an agency. Let’s switch and talk about timing. When should you bring an agency in or not? Now, one assumption — maybe this is a good assumption, I’ve heard — is that a lot of times, in the very early days of a startup, at least — you don’t have any hires, you just need to launch an announcement out. Is that the time to bring an agency in, or should you be trying to hire?

Shannon: I think an agency, to come in at the very beginning and talk about the company’s narrative, and what are your value props, what are your market fit, and who are the people running this company — super, super valuable to have an agency help you do that, without having to hire someone at the outset.

Margit: I totally agree. One thing that I’ve learned in working with a lot of startups is that you need to, like, strip all the language that we are used to, because they can’t hear it. So, for example, a CEO will call and say, like, “We’re launching soon. We need to have an agency, you know. Like, can you arrange the launch?” And then, oftentimes, people say, like, “Well, first thing we need to do is we need a messaging positioning, blah, blah, blah,” and they just hear, like, “Blah, blah, blah, dollars, blah, blah, blah, dollars,” and none of it means anything to you. Try to work backwards from where the CEO is. Okay. So, when is the product ready? You know, it’s all different, whether it’s consumer enterprise, right, like, and work back from there and go, like, “Well, if you wanna have your launch date be that, that means you’d have to be on the road doing interviews then, and then before that.” Just kinda meet them where they are, and try to strip out all the technical lingo out of the thing, because that’s like engineer talk.

Sonal: It goes back to starting with what the goal is.

Shannon: Right. And one of the things I’ll ask people, too, at the outset is, what is your desired headline? Let’s think about your dream cover story. What does that say, and what is the headline? And then you get a really good view into what’s going on when you ask about the absolute dreaded headline, because you can actually glean what is potentially underneath that you’re not necessarily being told.

Sonal: Isn’t that a little bit dangerous also for them, though, in terms of mixed messages? Because a lot of funders, especially those who haven’t done communications and marketing before, they assume that, “Oh, I’m gonna say this. This is the truth. This is the message. There’s no variation from this.” It’s like logic, not story, which has multiple flavors of interpretation.

Margit: And so what you would do is, like, you basically are taking them on the journey with you, right? If they say, like, “I want the headline to be, like, we have the best search engine technology on the planet.” And you’re like, “Okay. Well, then, how — like, what would the reporter need to come to that conclusion, right? And so then you walk — again, you walk backwards with them where you have them go substantiate the story. And then, if you can’t, then you’re discovering that together, right?

Shannon: You don’t commit to the headline, but you basically say, “If this is the type of story you want, here’s all the stuff I’m gonna need to be true in order to help you go for that.”

Margit: And don’t trust an agency, ever, that will promise you a headline or a story or any kind of outcome.

Sonal: So how does the life cycle of a company look? And if you could set up an ideal model, is there an ideal model?

Margit: So, like, an example — you’re basically an established person with an established career in Silicon Valley, and all you wanna do is, you know, put out something that you’re working on something, so you get an inflow of, like, talent and, you know, investors knocking on the door, and whatnot. And you just wanna be very efficient about it. You probably have a relationship with a reporter, and you pick up the phone, he’ll assign it to someone. You do this one story and off you go. And then you go back into stealth, and you’re done. Like, you don’t really need an agency.

Sonal: Then what would the next inflection point be to bring in an agency again, or to have one on a regular basis?

Shannon: I’d say a huge influx of media inquiries coming to you, because then you realize, “Actually, this is getting out there, and we’re not controlling the story.” So I think if you’re getting, you know, 5 to 10 a month, you’re probably at a point where you may need an agency to help you manage through that.

Sonal: So when you get a lot of media inquiries, other inflection points.

Margit: There are companies that, like, really don’t have any profile, and they’re thinking of going public. I would say, you have left money on the table if you find yourself in that position. Because there’s not that much you can do. Like, once you meet with bankers, you’re on a quiet period, so you can’t really be doing anything, right? So, if you are a company where there’s product-market fit, the company is growing, things are going well, you’re thinking of — if it’s an enterprise software company, another office somewhere — you have a management team, right, and you’re thinking like, “You know what, we should get the CFO in the door, because in the next two years, we wanna be in a position that, if the market is good, we might file.” You definitely need to get a PR firm in yesterday, because you only have a very short window in which you can do anything at all before you go quiet again.

Sonal: That’s actually rather counterintuitive, because I would think that you would want PR when things aren’t going very well, but it sounds like you’re saying, actually, when you have traction but a low profile, right.

Margit: You want a different kind of PR.

Shannon: That’s right. And that’s the next inflection point I was gonna say, which is — it’s more incidental than inflection point, but a crisis —I would not leave it to a founder or a management team to manage a crisis on their own if they don’t have deep PR expertise.

Margit: You’re not allowed to do this alone.

Sonal: And frankly, even if you did, I was about to say, I’ve seen these guys in action. Like, there’s a diagnostic thing that only a crisis person can come in and do.

Shannon: Absolutely.

Margit: You want professional help.

Shannon: The best example, the trivia one — they desperately needed some PR help way earlier than they probably actually got it.

Sonal: Oh, right. This is — you’re referencing the story where the founder emailed the PR folks and said, “Don’t quote this guy. I have this article.” And that person who was working for them kinda went rogue and did their own thing. I remember that.

Shannon: Correct. And they were all over social media, and the whole story was just going in a million different directions.

Margit: Nobody was in charge over there.

Shannon: Boy, they sure could have brought in some help. One other thing, too — I think there are certain people I’ve worked with who think, “Oh, I don’t need to tell her about that thing.” It’s like some skeleton that I inevitably end up finding out about. And so I wish I knew upfront, because I would potentially do things differently. In year one, if I knew that in year two it was gonna come out, you had a DUI or something.

Margit: The thing is that, you know, I think lawyers — I’ve never been in this situation, knock on wood, but I think lawyers tell you, like, “I don’t wanna know if you did the thing or whatever.”

Shannon: Right. PR people do.

Margit: I wanna know.

Sonal: It’s the exact opposite, that’s right.

Margit: Because I cannot help you if you’re lying to me, and I cannot steer the ship story-wise if I don’t know what to stay away from.

Sonal: No information is privileged for a PR person.

Shannon: That’s right. And by the way, with my DUI example, it’s totally hypothetical, but I would not put a founder into a car for a photoshoot if I knew he had a DUI.

Margit: That’s a great way…

Shannon: Because I know that picture is gonna be amazing for reporters to use in a year. So I need to know that.

Margit: But that’s a very different muscle, right? So there’s the kind of PR that helps you build, right? And then there’s the kind of PR that helps you protect and, you know, figure out the most elegant way to be in a crouch.

Sonal: Proactive and reactive, basically, essentially.

Margit: Yeah. Well, there’s reactive stuff where, you know, things are going great, and people want to write about you, and you…

Shannon: And you wanna take advantage of the building phase, yeah.

Margit: And you react to that. But, like, all of that is building, right? You are trying to see stories that don’t exist, right? You’re in a crisis, you’re trying to minimize a story that very much exists.

Shannon: A very certain type of person enjoys managing through a crisis. And so you wanna get an agency that has that type of person, or that type of deep experience in the trenches.

Margit: Its wartime people.

Sonal: This goes back to the whole notion of specialties, which you both mentioned earlier. So, are there any other specialties on the PR? I’m sure there’s a million flavors, but like…

Margit: Yeah. There are people who are really good at product reviews. And if you’re a hardware company, and like, product reviews are — they’re their own animal, right? Like, and you wanna make them, for the most part, as my belief, really high touch, you know. Someone is there to hold the reporter’s hands — obviously, proverbially, you know, as they discover the product. That’s its own muscle. There’s a set of people who will review products. You know, if you do it right, you know, you even get coverage about, like, the unpacking, the whole nine. But it’s, like, that’s very different from exec comms.

Sonal: So, so far, I’ve heard exec comms, product, I’ve heard crisis. Are there any other flavors?

Shannon: Developer, like, dealing with developer communities.

Margit: Consumer.

Sonal: Consumer.

Shannon: “I could do “GMA,’ ‘Today Show,’ or ‘CBS This Morning,’ which segment do you want?” That’s a real specialty, and those are usually people based in New York who have deep relationships with the producers at these shows. For a consumer-facing product, that’s the nirvana — is to have a “Today Show” slot, right?

Margit: Still, even though…

Shannon: Still, which is hard to believe. All these years.

Margit: I just saw this morning, apparently, in 2019, people will get the majority of their news online and not on TV. I’m like, “It hasn’t happened yet?”

Shannon: That’s surprising.

Sonal: Well, that’s where the reality does come in. I have a friend who founded a beauty-related company, and she was saying that getting a placement in “InStyle” magazine — and also, incidentally, based in New York — was the only thing that moved product for them.

Margit: And the thing is, like, you do the holiday gift guide press tour in July, and you do the little stint, and you do giveaways, and it’s beautiful photography, and it’s all that stuff. It’s, like, it has nothing to do with, like, how you blog for a developer.

Shannon: I worked at eBay for seven years, and so every July, we literally had, like, a Santa in 100-degree weather passing out eBay-related gifts, literally, in Times Square.

Sonal: That’s hilarious.

Shannon: Because that’s when you had to get in the gift guides, was in July — to make it to December.

Sonal: That’s so great.

Shannon: But you need someone that knows that. You need someone that really understands how to execute that type of event, and you need that kind of lead time.

Margit: Yeah. I mean, like, literally, I’ve come across companies where they call in November, and they wanna be in the holiday gift guides.

Sonal: Oh, that’s too late.

Margit: And that’ll be the following year.

Sonal: On the magazine side, like, the thing’s already shipped. Like, you’re already late, physically, let alone editorially.

Margit: You know, if you’re a product company, like, how would you possibly know?

Sonal: Right, exactly. Are there other milestones like that? So, as we’re on this topic of managing an agency — clearly, part of this process — you guys began with the need to discover the stories internally. You’ve talked about proactive and reactive moments, incidental and building ones. Now, what are the other kind of broad milestones to think about in a company’s life cycle that could be newsy moments that an agency could get involved in?

Margit: So there’s, like, you know, we exist, right? And let me just say, a lot of them you bundle together, right, like, “We exist,” and that’s interesting depending on who the people are and what they’re working on, all of that. Then you’ve raised money. And of course, whether that’s an inflection point, the bar for press coverage keeps raising because, you know, people raise rather large rounds these days, right? Then you get a rock star independent board member. All of those are ingredients, right? Okay, product, right, like, and what are the product milestones? And then you have product-market fit where, all of a sudden, 50% of Wall Street uses your product. Like, there’s lots of milestones. And I’m not saying every one of them is a big to-do, but they’re markers.

Shannon: And then you wanna handle them strategically.

Margit: I’m so glad you brought this up. I think a lot of people, particularly when it’s their first time out, they’re lucky that this PR thing happens. They have a nice product, and it’s viral, and this and the other. And they don’t understand, like, how lucky they are, and they can’t separate the two. And then they just think it’s just rinse-and-repeat without doing anything. And those are flukes, right? Most of the rest of us, you need to be very deliberate, and thoughtful, and smart about, like, what moments you aggregate together or can go stand alone, who cares about the different things…

Shannon: What’s the vehicle.

Margit: …and what’s the consolation.

Sonal: What do you mean by what’s the vehicle?

Shannon: Sometimes you wanna put a tweet out. Sometimes you actually wanna just give it to a reporter exclusively. Sometimes you wanna write a press release.

Sonal: Do people still do those?

Shannon: It kinda depends on what you’re trying to achieve.

Sonal: So what are other milestones? I mean, you mentioned earlier the gift guide. Were there any other consumer-type ones like that?

Shannon: There’s a company I’m talking to right now who’s based in L.A., and they wanna go national. So, if you’re really taking your story out of a small area and making it national…

Margit: That’s an excellent place for an agency because, you know, if you are launching — if you’re one of those, like, companies in the transportation bucket, right, like, you’re not gonna put people everywhere, but you are gonna launch in different markets, right?

Sonal: Right.

Shannon: For sure.

Terminology and categories

Sonal: So we’re kinda getting local people, players on the ground. So let’s shift gear here and just go deep for a couple of minutes on some terminology. I love doing this on the podcast. We do taxonomies and terminology.

Shannon: And people mostly don’t like to admit that they don’t know a lot of these PR terms.

Sonal: I know.

Shannon: They think PR is fluffy and, “Oh, I should know it.”

Sonal: Right.

Shannon: But actually, when you dig into it, you realize most people don’t know most of those phrases.

Sonal: Even I didn’t.

Shannon: So this will be useful.

Sonal: I was on the flip side of receiving PR pitches, and when I first came here, someone mentioned GA, and I was like, “What the fuck is GA?” And it’s generally available for the product being available. Let’s do a little buzzword bingo. So AOR.

Shannon: Agency of record.

Sonal: And what does it mean? Why does it matter?

Shannon: It means that you have a master agreement with an agency who’s going to service your business for a certain amount of money every single month.

Sonal: So it’s like a retainer.

Shannon: It’s a retainer. It’s a contract.

Margit: So let me ask you a question. Because you’ve been on the corporate side, so like, you have an agency of record, but you have multiple agencies.

Sonal: Oh, that’s interesting.

Shannon: Okay, so agency of record would be…

Margit: Is that a bragging right, or what is?

Shannon: It’s probably the biggest piece of your budget. It’s the deepest relationship. And, say it’s an agency who covers everything except crisis, and then you have a crisis. You would go outside of your AOR to supplement their skill set.

Margit: With another agency.

Shannon: With a different agency.

Sonal: RFP.

Margit: Request for proposal.

Shannon: Request for proposal.

Sonal: And?

Shannon: Should we do this at the same time?

Margit: Oh, my god. So that’s sort of — oftentimes, companies use this process where they put out an RFP to multiple agencies so that they have some, sort of, standard set of questions and answers, right? And oftentimes, the bigger the company gets, the more involved they can get, and they’re often driven by procurement and not the actual PR team, although they’re obviously orchestrated by that. And it’s sort of, like, who are you as a business, right, like, what are your revenues, team size, locations, all that kind of stuff, right? And then how would you handle X? Or give us your ideas for Y. And then the agency comes in — and oftentimes, you send in the questionnaire, and then there’s sort of this bake-off where you do the proposal, and you bring the team.

Shannon: It’s a dog and pony show.

Margit: It’s a dog and pony show. You come up with really good ideas based on nothing, and then you have to sell. I’m not sure I would recommend them. I don’t think they’re the most effective thing, because it comes down to, oftentimes, where like, that agency has really good ideas…

Shannon: The big thing I would add on RFP, too, is do not bring in the shiny object from D.C., or the shiny object from New York, if that is not your account team. Bring the people who are going to work on the account.

Margit: Oh, absolutely.

Shannon: That is one thing an agency will do, is like, “Oh, John is here from D.C.”

Margit: Our expert from…

Shannon: “He was Clinton’s social media policy person.” And then you never see John ever again. He was there to win the pitch. When I would do RFPs back in the day, I would always tell people, “I only wanna see the team that I’m gonna be working with every day.” It’s really important.

Margit: That’s super important. And that’s why, you know, if you actually do the process that way and you make that requirement, that team is ready to go.

Sonal: You’ve literally onboarded them, actually.

Shannon: They’re in it. Yes. So I’d love to get your perspective on this. If you put your account up for review because you’re not happy with your agency, the incumbent agency should not be allowed to pitch. I think it’s terrible for the agency, and I think it’s terrible for the company.

Margit: I’m gonna say something harsh. If the agency actually wants to repitch the business, you should fire them again.

Sonal: Why?

Margit: Because it’s just a stupid-ass decision. Replace the revenue, learn from — why is the account gone, and then move the hell on.

Shannon: I could not agree more. You set up all these bad dynamics by doing it.

Sonal: Well, I do have a question, though, which is — how do you avoid the complacency problem when you do have an ongoing agency of record, and you wanna light a fire under them?

Margit: So I think OutCast was really good at this because we had clients like salesforce.com, for example. We had, I think, about a dozen years from 1998 onwards, right — through, I think, 5 VPs of marketing before the company filed for IPO. And that was, like, Caryn Marooney. She just did an amazing, amazing job managing that account through changes, inflection points, growth. And what we would do is, we would ask ourselves, we would ask the teams, like, “Okay, so what’s on the to-do list, and what’s not on the to-do list?” And, like, forget what the client is telling you during the weekly calls. Like, what do you think will blow them away? And then go do that. And, like, do not ignore media, because if there’s a good story, you have permission to do everything else. You can have every conversation. You can screw up occasionally. But if there’s no media, then, like, what are you doing? And as a result, we always were called a media shop. And I was like, “You know what, I’ll wear that badge with pride, because I think it’s important.”

Sonal: What does it mean to be a media shop? I actually don’t know what that means.

Margit: That the only thing that you can do is talk to reporters.

Shannon: Or the thing you do best is media relations.

Margit: Right. Look, you’re not really good at crisis, you’re not really good at building out, like, messaging — but like, that’s the thing. It’s, like, you get so mired into, like, “This is what’s on the to-do list.” And mind you, if you’re working with a company, your client may be sophisticated, and they may not be. So you need to do that, like — you need to have your own motor and machine to go, like, “Okay, what should it look like?” And then go do that.

Shannon: And on my end, I would say, at eBay, the best relationship I ever had with an agency was with Capital Communications, who is based in New York. And the reason that we were able to avoid complacency with them is we were basically categorized into different product categories. Basically, they had clothing, shoes, and accessories, but it was like, “If you nail this, you can get another category.” So we kept upping the pie. I mean, we’re not fit for every single category, right, but it was always a possibility. And so that kept them from being complacent.

Sonal: Besides the domains you guys have described — like, consumer, enterprise, some of these pieces of the pie — or specialties like crisis, local — what are your thoughts on the other competencies within a shop? Like, should you go for a one-size-fits-all agency that offers interactive and writing, and other things? Should you go for a boutique firm that only focuses on X? Like, do you have thoughts on the size and the types of the agencies themselves?

Shannon: I don’t mean to sound like a broken record, but it depends on what you’re trying to solve for.

Sonal: Well, that’s a fair point.

Margit: Sort of very broadly, right? If the company is doing well, basically across the board, and it’s global, it’s kinda nice to have an AOR that is global, because you can just turn knobs, you can turn things on and off, and then you can add and layer in on the step that you need.

Sonal: You mean like a global agreement.

Margit: Yes, a global agreement because, you know, if you’re that established, it’s nice to go like, “Okay, I need the Indian people to do X, right? I need the team in South Africa to lay low for a while.” That’s easier. Otherwise, you have to figure out, “Who’s my international agency there? And who manages…?”

Shannon: I do think a lot of agencies promise that they’re amazing at that, “Oh, don’t worry, my Greece counterpart will easily talk to the Brazil counterpart.” It doesn’t happen as seamlessly as it looks, so you really have to dig before you hire them on for a global job to make sure that these processes are really down.

Margit: And you will often give up the higher a bar for the global.

Shannon: For the coverage, yeah. It’s true.

Margit: Because I don’t think, like, nobody can tell me that there is an — I have not seen an agency that is equally excellent in every office that they have.

Shannon: Absolutely.

Margit: I just don’t.

Working with an agency

Sonal: And let’s spend a few minutes now just talking about some mechanics of engaging with an agency. We’ve already talked about the process of why it matters, the terms, you know, the configurations. Give me some more of the nitty-gritty of bringing them into your machinery. So, you guys mentioned, like, you wanna have regular check-ins. Should they be weekly? Should they be daily? Should there be someone in your office embedded? Should there be someone just on a phone call? How do you manage all that?

Shannon: So, weekly, usually, has worked for me in the past. I think embedding them — those are the people who have done the best with the company. They can walk around, they’ve got great relationships, they get a vibe for the culture, they can go to an all-hands meeting and hear the story from the CEO. There was a model, again, with Kaplow, where they had somebody that went on leave for six weeks, and I went to New York and worked out of their office for six weeks. And that was amazing for me, too, to get to know the agency.

Sonal: You inverted it, literally.

Shannon: Yeah, I inverted it. And I got a better view of how the agency ran, and what they needed more from my team, and how challenging the time zone thing was. And it was really valuable.

Margit: There’s nothing that, sort of, is like picking up the phone and going like, “Hey.” It doesn’t have to be, “I’m reporting back to you on what I promised.” It can be, “I just had coffee with a reporter, and they’re really interested in X,” or you know, “Your competition seems to be all over…” like, you know. So just sharing intel back and forth, because you need to communicate enough so that you’re in a groove. It’s a little like talking to our kids. Like, you need to be talking — basically, you need to be in some communication all the time, so that there’s a groove. Because you want to be top of mind for the agency so they’ll pay attention to you, and for the agency, you want to be top of mind so they’ll include you in stuff.

Shannon: One thing we did at LinkedIn, too, is — quarterly, we would sit down with the agency, and we basically had, like, a red, yellow, green on the things that we had agreed they would do, and talk about what was working, what wasn’t. And that was an opportunity not for us to just say, “Hey, this isn’t working.” They were able to tell us, “We can make this work if we had more of X, Y, and Z.”

Sonal: So you set them up for success.

Shannon: Exactly. And it felt like you could have a transparent conversation without hurting the other person’s feelings.

Margit: So I will add one more thing. I actually think that it is important for the CEO to know at least some people at the agency, and for them, occasionally, to staff a meeting. And a lot of people probably disagree with me on that.

Shannon: I totally agree with you.

Margit: Because one is, eventually, there’s a bill, right? And like, if they don’t ever see you, right, it’s, like…

Shannon: Out of sight, out of mind.

Margit: “What am I paying for? What is this?” And also, there’s a reason that person is the CEO and the founder of the company. They are the originator of the idea. They are, hopefully, the most compelling person to talk about what it is and where it is going. And again, if you want to enable a bunch of storytelling, then you ought to have the people have access to the holder of the story.

Shannon: The in-house PR person needs to give up a little of the control to allow the agency in sometimes.

Sonal: This is actually one of the questions I wanted to ask, which is — a founder/CEO should be pretty — not too involved and not uninvolved.

Margit: The thing with, you know — if you are the founder of a company, you’re trusting those people to represent your soul to the outside world, which then gets written up in some way by a neutral third party — hopefully neutral. I think that those are people you wanna know.

Sonal: Absolutely.

Margit: Don’t you think?

Shannon: Yeah, I do, too. And I think a lot of CEOs don’t have the patience, because they, again, have this mindset, “I just wanna outsource it. Isn’t the whole point of me paying for all this so I don’t have to deal with it? You’re taking care of it,” etc., but you’re saying that they are — it’s like sales. You need to put the CEO in front of the account.

Margit: Yeah. I mean, look, if you don’t wanna deal with PR, then don’t bother hiring an agency. A normal reporter — completely reasonable reporter — will expect to see and meet and talk to the CEO.

Sonal: So more on the mechanics side, tell me — we were talking about the RFPs or the proposals, and getting all these. And whether you do it or not, you clearly may have multiple people you’re considering as potential agencies. How do you vet them and know that they’re the right one for you?

Shannon: I think the best agency referrals come from reporters. So, they’ll come in and they’ll pitch, and you’ll say, “Wow, that team was amazing. Great ideas.” But to get to the real heart of who they are as media relations experts, you call reporters you have relationships with and say, “What do you think of so and so at such and such agency?”

Margit: I love you for saying that, because I will tell you, so many people, when I say, “Oh, you’re referencing them with reporters?” they’re like, “Oh, good idea.” Duh.

Shannon: Duh.

Margit: That’s their customer.

Shannon: So referencing them, for sure, and then other clients. Either clients that have churned out — you get a lot of feedback that way — or current clients too who are probably relatively happy, you think.

Sonal: What if the problem is on your side as a company? What if the turnover is on your side, and you’re the reason the agency is not doing well? How do you sort of tease apart the truth and the reality? Does it even matter?

Margit: It’s excellent, because many companies don’t even ask themselves that question. So they’ll call, and they’ll go, like, “We’re unhappy with our PR firm.” And then you start digging, like, “Why, what’s going on?” Well, they’re just not executing. And you just try to diagnose, “Okay, so do they know what to do? Are you giving them information? Are they part of…” you know. And something I always say was like, you know, “If you’re a good client, they have a chance. If you’re not a good client, then they don’t even have a chance.”

Shannon: That’s why I like that report card thing, because you can easily say, “Look, you’re not executing on this,” and they can say, “Well, you didn’t give me access,” or “You didn’t return my call.”

Sonal: You mean the red, green, yellow you were talking about.

Shannon: You use that review to basically talk about what you, as a company, could be doing better. And you’re absolutely right, it’s usually two-sided. It’s very infrequently just the agency. It’s just much easier to blame the agency.

Margit: Right. Also, my favorite is, like, new CMO comes in. First thing they do is do an agency review. Happens all the time. But, like, I think it’s just so much smarter to take some time and go, like, “Okay, what’s actually going on here?”

Sonal: So that’s about diagnosing the success of it. How do you know it’s successful, it’s working, that your partnership — this is not a measurement question, because I know we’ve talked about a lot and there’s not a clear-cut answer. How about selling people internally? What if you, the person who’s managing the agency, knows it’s working — but your CFO who holds, like, the purse controller doesn’t agree, or how do you make that case internally?

Margit: Well, you obviously try to explain and educate, like, what it is and what they’re supposed to do. And then, at the end of the day, it comes down to — do you have a mandate? I think it’s good to include everybody in the process and in the updates, have them see and engage with the agency, and do all of those things, right? But at the end of the day, to me, it’s a little binary. You either have a mandate to figure out how to make your function successful within a certain budget parameter, or you don’t.

Shannon: And it’s making sure, too — you can’t be assured that the CFO saw the big story in “The Chronicle” this morning. You actually do need to do some promotion of the work that the agency and the team do together.

Margit: PR it back internally, basically.

Shannon: Exactly. You can just expect everyone’s gonna fall into your story, or absolutely saw it. So you actually have to do a little promotion internally.

PR during an IPO

Sonal: So we talked about some major inflection points in the company. What about going public? So, you talked about, Margit, earlier — about the importance of having PR milestones in place before you go public. So, Shannon, you’ve taken a couple of companies public. What’s some special advice you have for those thinking about that particular piece?

Shannon: So, a financial comms agency is super, super helpful in the lead-up to your first earnings call. So there’s the actual IPO piece, which I think a lot of people think is much trickier than it really is. The day of is a very busy, crazy day, but it’s not rocket science, necessarily. I think getting an agency to help write a script, and get the CEO and CFO to really be on the same page about the story and practice it — it’s a nerve-racking day.

Sonal: For the roadshow?

Shannon: No, your first earnings call post-IPO.

Sonal: Right.

Shannon: So, I think the IPO has this misnomer that it’s, like, super challenging and tricky —and yeah, there’s some complexity to it, but what’s really hard is your first earnings call as a public company. And so that’s where I would optimize for getting an agency in to really help figure out, “Are these two on the same page? What is our story? Where are we, and where are the gaps?”

Sonal: And does that person report into an investor relations function? What if that doesn’t exist yet?

Margit: It depends. I’ve seen investor relations report into the CFO, and the comms person reports, sometimes, to the CEO or CMO.

Sonal: And, Margit, of all the startups you’ve seen, what would you say is the best reporting structure for where an agency and the comms person should, kind of, report into? Is there any variations on that?

Margit: So, I am a proponent of having the PR person report to the CEO. It can report into the CMO. But oftentimes — so if the CMO is a quant person, I think definitely PR should not report into the CMO, because it’s just a different animal. If the CMO is a brand story type of person, it can certainly work. Regardless of who does your review, the PR person needs to have access to the CEO whenever they need to.

Shannon: And then that layer in between, whoever it is, cannot be upset when the PR person goes direct to the CEO and doesn’t necessarily loop into them. So they have to have — everyone’s gotta be okay with the fact that, “I may not report to the CEO, but I have direct access, and I don’t need to bring you in every single time I talk to him or her.”

Sonal: It sounds like the CEO is the one responsible for setting that precedent and culture, that all these pieces are okay.

Margit: It’s telling, right? When a CEO refuses to do that, the caliber of talent they can get just drops 10 notches.

Shannon: And it shows, too, that they may not value the function as much as we would like them to.

Sonal: Okay. You guys have given us a lot of food for thought in terms of how to concretely manage an agency, think about it strategically. What are the things that you wish you could tell founders and, like, hit them over the head with every day — that you’re, “I want these guys to know this?”

Margit: I think founders have an idea that you call a reporter and go, “Hey, can you write this story?” It does not work that way. And I wish people were a little more thoughtful about the function — the comms function — and actually how strategic it needs to be and how well thought out it needs to be before you take a story to an important reporter. It’s not easy.

Shannon: I was gonna argue almost the flip of that, which is, it seems like there’s a new breed of founders who, sort of, are in this internet-native world of “blogging is everything.” Go direct. You don’t need any middleman. Eliminate all the middlemen.

Margit: You can do that, but you will never be as credible as an independent source of information. And you may also not have the eyeballs that you can get when WIRED writes a story, and then it gets shared on social channels. Worse, let’s say you’re established, you’ve done fine on your own, things are great. Well, what if something goes sideways? You have no relationships, you have no trust, you have no benefit of the doubt. All you have is — people, like, hear all of your claims and adoration, and all of a sudden, you have to do a product recall. Wouldn’t you like to have some relationships in place where at least you can explain yourself? I think so.

Sonal: Kind of points in the bank, too. That’s great. Any other final common myths, misconceptions, parting…

Margit: I would just say, you know, as much care as you take with your product and the hiring of your first 10 engineers — and like, whose money you take, right? Take as much care to decide, like — you’re either going to take this function seriously, and then actually do it and learn it, because there are people who are there to help you — or actually don’t bother. Because spending $2 with a half-hearted commitment is a complete waste.

Shannon: And don’t be afraid to admit when you don’t know something related to PR.

Sonal: Hopefully, that’s the point in this podcast. Thank you, Shannon and Margit, for joining the “a16z Podcast.”

• 

  Shannon (Stubo) Brayton
• 

  Margit Wennmachers is the head of marketing and content at a16z, where she also advises entrepreneurs on their communications and marketing strategies. Previously, Margit cofounded the The OutCast Agency.

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• 

  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

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There’s all sorts of interesting tech trends happening right now, including AI, VR/AR, self-driving cars and drones (as well as interesting stuff happening in verticals like healthcare and finance) — and there’s a lot also happening in seemingly more “mature” tech revolutions, such as mobile and cloud. But where are we now, really, with these shifts… and how does that inform how we think about the next couple decades?

And does a framework like Carlota Perez’s — as outlined in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages and summarized by venture capitalist and longtime internet investor Fred Wilson (of Union Square Ventures) — fully apply when it comes to software? Because, argues Chris Dixon (general partner on a16z crypto), software “has so much more plasticity, ability to adapt, ability to evolve” that unlike hardware, “the core itself will also dramatically change… not just the apps around it”. The total economic value that will be unlocked with the software revolution, observes Wilson, should be orders of magnitude bigger than what we saw with manufacturing for sure.

But just how much internet innovation is actually powering true disruption (i.e., is more than just a sustaining innovation, to use Clayton Christensen’s terminology)? How do new business models change everything? Dixon and Wilson consider all this and more in this hallway-style episode of the a16z Podcast, where we recorded the two having a think-aloud conversation about everything from the history of the internet and startups, the evolution of capital and infrastructure, to the advent of crypto. How do they they both define “decentralized”, what do they think of dApps, and where do NFTs and “crypto goods” come in?? One thing’s for sure: It’s the most interesting time they’ve both ever seen in over 30 years of internet work, life, and play.

Please note that the a16z crypto fund is a separate legal entity managed by CNK Capital Management, L.L.C. (“CNK”), a registered investor advisor with the Securities and Exchange Commission. a16z crypto is legally independent and operationally separate from the Andreessen Horowitz family of fund and AH Capital Management, L.L.C. (“AHCM”). 

In any case, the content provided here is for informational purposes only, and does NOT constitute an offer or solicitation to purchase any investment solution or a recommendation to buy or sell a security; nor it is to be taken as legal, business, investment, or tax advice. In fact, none of the information in this or other content on a16zcrypto.com should be relied on in any manner as advice. You should consult your own advisers as to legal, business, tax and other related matters concerning any investment.

Furthermore, the content is not directed to any investor or potential investor, and may not be used or relied upon in evaluating the merits of any investment and must not be taken as a basis for any investment decision. No investment in any fund advised by CNK or AHCM may be made prior to receipt of definitive offering documentation and due diligence materials. Finally, views expressed are those of the individual a16z crypto personnel quoted therein and are not the views of CNK, AHCM, or their respective affiliates. 

Please see https://a16zcrypto.com/disclosures/ and https://a16zcrypto.com/disclaimers/ for further information.

Show Notes

• Discussion of the early internet and how it drove new technology [1:20]
• The current state of technology, including cloud and SaaS [17:31]
• Changes in the current capital market [26:21] and the enormous potential of crypto-based technology [37:51]
• Discussion of timing around tech developments on the horizon [49:30]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. We recently took the “a16z Podcast” on the road to New York City. And so, today’s episode features a fly on the wall recording of a conversation between venture capitalists and longtime internet investor, Fred Wilson of Union Square ventures, and a16z crypto general partner, Chris Dixon. The two discuss everything from current tech trends like AI, to seemingly more mature trends like mobile and cloud to the advent of crypto.

And throughout the episode, they weave through past and present in internet history to reflect on where we are now, really, to where we may go next. Are we seeing disruption? Or is a lot of current innovation just “sustaining innovation,” to borrow from Clay Christensen’s framework? Or, how about Carlota Perez’s framework for tech revolution and financial capital? Does that fully apply to software? And what, precisely, is so unique about software itself? And how might that affect internet native applications for things like crypto?

The two discuss all this and much more in this episode of the “a16z Podcast.” As a reminder, the content provided here is for informational purposes only, and does not constitute an offer or solicitation to purchase any investment solution or a recommendation to buy or sell a security, nor is it to be taken as legal business investment or tax advice. Please also see a16zcrypto.com/disclosures for further information there.

Early internet and tech developments

Fred: So, 2018, you know, I don’t know what it is now — 25 years into the internet, sort of the modern — the mainstream internet. Some very large, some, you know, trillion-dollar tech incumbents, very — venture industry has grown dramatically. Tech seemed more mainstream. Some people argue it’s, perhaps, becoming mature, you know, maybe it’s like TV where there’s like four TV channels, and there’s four big incumbents. There’s all sorts of interesting stuff happening in, like crypto and AI, and new devices like virtual reality and augmented reality and self-driving cars and drones. There’s interesting stuff happening in verticals, so, like, changes in healthcare and real estate, in finance. You know, so I guess — I don’t know, a question I think about a lot and, I’m sure you do, is where are we now? And how does that inform how we think about the next decade, two decades?

Chris: So, you know, I think it’s really important to have a framework. And as a lot of people who, you know, follow me and USV know, we’re really big fans of Carlota Perez. And, if you look at the big technological shifts that have happened over the past 200, 300 years, what you see is that many of them last for, kind of, a century. Like automotive, or more broadly speaking, industrial or manufacturing-based businesses were, kind of, the technological revolution of the 20th century.

And, even though internet and tech, kind of, emerged very powerfully in the ’80s, and ’90s, I think we might argue that internet and tech really is the technological revolution of the century we’re in now. And so, if that’s the case, it’s 2018 — we have 82 more years to go and yet, like, we’re feeling like it’s already a mature sector. We’re looking at everything, Google, Amazon, Facebook, Apple — you know, they have these massive entrenched platforms, and it’s becoming really, really hard to compete with them. How could we have, you know, another 50, 60, 70 years to go?

And I think, you know, going back to something that Marc Andreessen said, you know, in the original design of the internet and the World Wide Web, you know, we didn’t necessarily get it all right. And so, what we have now, in terms of, like, these entrenched platforms, is maybe a function of what the spec was that we’ve been building on for the past 25 or 30 years. And, if we could maybe broaden out what the protocols are, to a point where, you know, we could have a much more open and level playing field, we might actually have a lot more ways to go. So, that’s me speaking optimistically about where we are.

Fred: Let me give you maybe a more — even a more optimistic view, which is — so, one thing about Carlota Perez, and I think it’s a brilliant, you know, brilliant theory and explains a lot of history. But I wonder if software is different than hardware. And let me try to explain that. So, you build a car, you know, 1900-ish, you build cars, you have Ford and GM, etc. They get better but, you know, they don’t — fundamentally the car has stayed mostly the same — you know, obviously gotten better, but they’re still the same basic function, same basic, you know, kind of, design.

And then, all the action from, I don’t know, 19, probably what, 30s to today moved to, kind of, the “app layer.” It was [the] interstate highway system and shopping centers and shopping centers and trucking systems, and the sort of the “apps of cars.” And then TV, like the TV, you build the TV, you have the radio, you know, you build the physical infrastructure, and then maybe you upgrade color, or HD or [something], but it’s fundamentally fixed. It’s fundamentally — once you’ve built the core, it’s fundamentally done, and then you just build around it.

The Internet, as you, of course, know, is deliberately designed to be a very lightweight protocol, where all of the intelligence lies at the nodes and the servers, and are software-based, and can upgrade themselves. And so, I guess what I would say is, I wonder if software, because it’s fundamentally a software — I mean, of course, at the bottom level, it’s copper, and other, you know, fiber and other things, and radio waves. But the heart of it is software. And, I just wonder if software has — my view, software has so many more degrees of freedom. It has so much more, kind of, plasticity, ability to adapt, ability to evolve, that maybe unlike the car and the TV, that the core itself will also dramatically change, and not just the apps around.

Chris: So, I think, certainly the total economic value that will be unlocked with the software revolution should be at least one, maybe two, maybe three orders of magnitude bigger than what we saw with manufacturing, automotive, you know, for the reasons you described. I just think that it’s just, if everything, if we can get everything into software, then just imagine, like, what the possibilities are.

Fred: It’s the expressive power the — it’s the design, it’s a much richer design space. You can write it, you can do so many you can encode —any kind of human process can be encoded in software.

Chris: Yeah, I mean, even, you know, the greatest thing about Tesla is the over-the-air software upgrade. It’s like, literally, I get in the car and all of a sudden, I got a new upgrade, and there’s, you know, new software, all of a sudden.

Fred: And they actually fixed like the breaking and stuff where…

Chris: They can fix anything. But I read today that they pushed an update to people who have cars in the affected areas of Hurricane Florence, I don’t know — to make their batteries last longer, like so that they could go long without charging. That’s fucking amazing. Just think about that, boom. Kind of, imagine like Elon Musk woke up thinking he was gonna do that and he just hits a button.

Fred: Well, and it has implications like so, if I remember reading a book about Ford and the whole — you know, the big problem was they broke down all the time. And so, the big innovation was service centers everywhere. And so, you know, this change in being able to update over the air also changes, for example, the service model, and, therefore, the, kind of, almost, you know, the industry structure, potentially.

Chris: I mean, the car, I mean, that car is still not a piece of software, but there’s more software in that car than all the cars that I’ve been driving for my entire life. And so, you know, we’ll get more and more of what we interface with in business and our personal life, whatever, that’s gonna be software as opposed to hardware. And I just think that that makes the total available market of this technological shift way, way, way larger. I think we’re in a moment in time where it feels like there’s not a lot of innovation. And, you know, I will admit that, you know, the past, maybe four or five…

Fred: Well, are you saying innovation or disruption?

Chris: Disruption is a better word.

Fred: Yeah, there’s a lot of innovation, right?

Chris: Yeah.

Fred: I mean, there’s great stuff happening in AI and self-driving cars, and…

Chris: Right, but a lot of that’s accruing to…AI is a really good example. So, you know, if you look at the big tech companies, I don’t think that they were disrupted very much by the shift from web to mobile. And, I don’t think they’re gonna be disrupted very much by the adoption of AI power software.

Fred: It may just, it may further entrench their monopolies because of the data — the fact that you’re differentiating the AI through data, and they’re most likely to have the most data.

Chris: I forget where I read this, this data is now four or five years old. But if you look at the top 100 mobile apps, and you look at what the top 100 websites were before the iPhone came out, it’s not a very different list, right? So, you know, those companies — Facebook, I think, is the perfect example of this — saw that the mobile phone and mobile apps could potentially disrupt them. They pivoted their focus to get there, and they got there. And the net of it is that they are in a stronger position than ever. So, I don’t think, you know, that a lot of the innovation is currently powering a lot of disruption.

Fred: One thing that mobile did, you know, you take the ride-hailing as an example. It did enable new behaviors which allowed for startup opportunities that — I mean, so it did — you know, I think of it as every new computing platform has new capabilities. And, generally, startups will exploit the uniquely new capabilities, and incumbents may or may not successfully port over to the platform. In the case of mobile, they did. But it also unlocked, you know, so you had the intimacy of the camera allowed for Snapchat and…

Chris: But even that, you know, I’ve always thought that the maps layer could commoditize the entire ride-sharing business. It hasn’t, like Uber and Lyft, and a bunch of other companies, and a bunch of companies in Asia dominate that business. But I don’t understand why the map on your phone, whether it’s an iPhone or an Android phone, isn’t the ride-sharing application. And then all of these ride-sharing networks…

Fred: And it’s maybe what Google wants to do longer term. And one would think with their self-driving car effort and the maps…

Chris: It just seems like…

Fred: You’ve got a button — you use Google Maps, you open it up, you’ve got a button and get a car and…

Chris: Like, why does that happen today? I don’t get it like how — I mean, I don’t understand why the map interface hasn’t become the default interface for dispatch of anything. Whether it’s a scooter, or a car, or a bike, or whatever — maybe it’s just, like, it’s gonna take some time. Maybe that stuff doesn’t happen overnight. But that’s where I wanna do dispatch. So, even that, I think, you know, the mobile OSes have the opportunity to suck that functionality in. And that is one thing that’s going on a lot right now, is that the functionality is getting sucked more and more into the operating systems and the proprietary apps that these big companies have built on top of those operating systems.

Fred: And so, when you say there isn’t a lot of innovation, I think what we’re — to clarify, there’s a lot of clever, you know, inventions happening. There’s AI. I think of it as, like, AI, new computing platforms, crypto, etc. But there’s a lot of that happening, but a lot of it feels sustaining, as, like, Clay Christensen would say, not disruptive, right?

Chris: For sure.

Fred: So, it will reinforce the current industry structure, not change it.

Chris: I think that’s right. But yet, you know, and this is why we’re so interested in crypto. I think crypto is the one innovation out there that feels highly disruptive, because it’s a real change in business model. It’s not just a technological change. It’s a fundamental change in business model. You’re not monetizing with ads, you’re not monetizing with subscriptions, you’re monetizing with the underlying token. It’s, like, orthogonal too.

Fred: So mobile wasn’t. Mobile was, some would say, the standard. The internet was disruptive. So in some ways, crypto, like the internet, is the first, kind of, potentially major disruptive wave. Is that your view?

Chris: Yeah, I mean, I think what Google did is that they made advertising the business model for applications. Like, my mail and, you know, my browsing and my searching is all supported by advertising. Like, Microsoft would have made me pay for that. They would have said, you’re gonna pay for Explorer, you’re gonna pay for Outlook, and that’s how we’re going to monetize it. Google comes along and says, “No, that’s an ad product.” And so, that’s what’s disruptive, is, like, that’s just — everything changes when you change the business model. It’s like, all of a sudden, you know, your strengths become your weaknesses. And, that’s what allows a lot of new entrants to come in.

Fred: It’s funny because I talk to people now who I think weren’t around during the early internet. And a lot of people will say — I hear it a lot — that, well, the internet came along and, you know, by ’94, had all these killer apps. And, you know, I think one fun exercise is to go watch movies from the ’90s as a way to, kind of, go back and look at it. And, first of all, the interesting thing, the internet just doesn’t exist. There’s no mobile phones. Every once in a while, someone will, like, it’s like this ritual. They’ll say, “I’m gonna go online,” and like the very phrase, like, go online, kind of is this, kind of, archaic phrase that is from that era. And then suddenly there’s, like, this beeping and there’s this and that, and then there’s like, you’ve got mail, and they get on and they do this thing, and then they get off, and like it’s this thing, and it’s the thing you do for 10 minutes.

But it almost — if you actually watch movies from the ’90s like the internet, even that doesn’t happen except for, like, hackers or a couple of, like, specialty movies or something. And it was essentially, you know, I mean, it was like literally waiting for an image to load, and, like, innovations of the time were things like having the image load in a less annoying way because it was that slow.

Chris: Like, I remember listening to what we would now call podcasts over dial-up in ’97, ’98. A friend of mine, Josh Harris, had this company called Pseudo, and he was making basically audio and video.

Fred: Wasn’t it kind of like “Justin.tv,” like, he’s filming his life and…

Chris: Yeah, yeah. He was just 15 years too early, but he had all the right ideas. And, you know…

Fred: All the ideas that happened, Webvan, Instacart — like, they all, all of them — I had this game, this board game, I still have it somewhere, it was called “Dot Bomb.” And it was, like, making fun of all the terrible ideas. I blogged about this once, and it was, like, this joke game about all the stupid ideas in the ’90s. And it’s literally, like, every unicorn, like, hot company today. It was, like, internet money, you know, grocery delivery.

Chris: Well, you know, you and I are friendly with an entrepreneur here in New York named Adi Seidman. Adi Seidman had YouTube in like ’99. It’s just like it didn’t make any sense in ’99. I mean…

Fred: Yeah. Well, it’s broadband, he needed the infrastructure. Like, I mean, I think it was 2000 — was YouTube 2005, I think?

Chris: ’05, ’06.

Fred: Like, that was kind of the moment when broadband really tipped and you could plausibly have — I mean, it’s a model — the internet wasn’t a real thing, I think, until you had broadband.

Chris: I also think we needed — I think the two big moves that made YouTube successful, whereas all the people who tried YouTube before YouTube — were broadband, that’s, like, 80% to 90% of it, and also social sharing. It’s the idea that you could take a YouTube video and embed it on your MySpace page, or even just send somebody, like, a URL, and boom, they hit it, and they could watch something. Like, the idea that everybody was going to go somewhere to watch something with social and social sharing, it blew that idea up. Now, all of a sudden — the embeddable YouTube player, like, that was genius.

Fred: Yeah. Before that, I remember it was like heavy.com and they’re really like, there’s a whole concept before that — was destination, it was business model. Part of it was a business model, in addition to your earlier point. Because the thought was you need to get eyeballs on your page, stickiness, these concepts, which prevented people from encouraging, why distribute — like, the whole idea of embed, like, one school of thought would have been letting people embed YouTube — well, how do you make money? How do you do this? But that was one of the very insightful things that YouTube creators did.

Chris: Right. But broadband, I think, you know, was the main thing, but everybody had that opportunity. Everybody who was trying to do YouTube at that time was benefiting from broadband. So, there were a couple things that YouTube did that others didn’t do. And I think the embeddable player was maybe the move that differentiated them from everybody else. And just maybe the timing. Plus they had a lot of venture capital money behind them. So, they could spend money. Sometimes that’s the key difference.

Fred: Yeah. I think I was reading this history of — I think it was Vimeo and a few of the other competitors. And, they had just a whole different set of financial constraints and couldn’t — and also, frankly, the view towards copyright. I think YouTube took a more laissez-faire view.

Chris: Right. But that ultimately caused them to have to sell to Google, because they concluded that they couldn’t continue to play the game that way, which was the right way to play the game as an independent company. They needed somebody who could fight the content owners.

Current state of technology

Fred: Yeah. Okay, so going back to what’s happening today then. So, kind of, the big — I mean, I think there’s multiple layers here. So, there’s, kind of, the big core tech trends. I don’t know if you agree, but I think it’s, kind of, AI, kind of, proliferation of new, kind of, computing devices.

Chris: I still think cloud, I think cloud is still — I mean, cloud’s like a 10-year-old-story. But I still think cloud is driving a lot of innovation. I still think…

Fred: Cloud infrastructure or apps, SaaS or…

Chris: Well, I’m thinking infrastructure. 

Fred: It’s pretty amazing how having the fresh codebase, having the fresh attitude, the different perspective, you can kind of type them.

Chris: If you could build on Stripe versus you couldn’t build on Stripe, you know? Like, that was a big difference. Like, that whole — I mean…

Fred: Well, just the whole modern thing and as a developer, I think the whole concept of, like, developer experience, that really thinking through, you know, I think you didn’t — obviously, you were an investor in Twilio. One of their big focuses was, kind of, the “time to delight” or something, or time — “hello world” of just, like, immediately getting in there.

Chris: Like, the idea of introducing text messaging into your app, like, what’s the big deal about having to be able to text natively from an app. But you think about it, and, like, so many little things — but they’re big things — are enabled by an app being able to text you. Like, with a two-factor code, or your car’s arriving, or whatever, like — and to do that before Twilio was like, hard. And, now it’s like five lines of code.

Fred: But how do you think about — so in that, in the cloud infrastructure world, you have AWS, Azure, Google Cloud.

Chris: That, I think, is game over, mostly. Like, maybe there’s somebody who’s gonna come out from left field.

Fred: Game over in the sense of incumbents are winning, or AWS has won it or…

Chris: I think incumbents. I think Google’s gonna take some shared — I feel like what Google is doing is going top-down into that market. They’re going to some of AWS’s biggest customers, and they’re saying, you know, we’ve got some better tech, maybe they do, maybe they don’t — we’ll do it for less, and we’ll care about you where they don’t. They’re taking share. But I think it could be, like, Amazon has 60% of the market, Google has 30% of the market, and Microsoft has 10% of the market. I think it’s gonna be a three-player game in that business. And that’s good.

Fred: I think the thing I hear from Google is the challenges. It’s just that, sort of, the high touch concierge enterprise, kind of, model, which those companies, you know, whatever, the Citibanks of the world expect is just not something they’re used to, although they have now they have Diane Greene. In that, I think they’re…

Chris: So, maybe Microsoft will get there, you know.

Fred: The data I’ve heard is Microsoft has been making more progress because they’re used to it — because exactly that is — I mean, Microsoft fundamentally is an enterprise company today, right? And they’re very, very good at, sort of, you know, servicing these large corporate clients. And, then they also have, as I understand it, these sort of, like, they tie everything together, effectively a new kind of bundling. You already have Office, you have all this other stuff.

Chris: But there’s a second kind of enterprise customer. There’s the truly legacy enterprise customers who are, I think you’re right, it’s a very high touch, white glove kind of thing. Then there’s the new enterprise companies, the Spotifys of the world, right? Like, Spotify is gonna either be on Amazon, Google, or Microsoft. But Spotify might not be high touch. Like, they may just want really really good infrastructure.

Fred: And they may care that, for example, Google seems to have an advantage on, you know, their TPUs, their AI chips, for example, you know, all the, kind of, bells and whistles and fancy technology they have, which, of course, they will have.

Chris: I think winning the hearts and minds of developers is really hard when you’ve got an incumbent, and it’s, like, the standard. Like, every developer knows how to build on AWS. So, if you’re starting a company, where are you gonna build it on? You’re probably building it on AWS — 90% of the companies, maybe 95% of the companies we back are built on AWS. But once you’re an established company, and you can think about maybe moving from one to another, I do think, — I think that there’ll be three players in that market.

Fred: So how do startups fit into cloud?

Chris: Well, I think they’re a big beneficiary as a cloud infrastructure.

Fred: Okay, right. So, building on top, and you’re able to take what was CapEx and move it to OpEx and not worry and focus on what you wanna focus on — music playing…

Chris: By the way, that’s a story that has been playing out for the better part of 10 years. What I’m saying is, I think there’s still some legs to that. Like, you were saying, what are the big drivers? It’s AI, it’s AR and BR, it’s crypto. And then we were talking about a few other things that I think are still playing out. And one of the things that’s still playing out is cloud. I think there’s still some legs there.

Fred: Well, I think also on the app side. I mean, SaaS — I mean, I think we live in this world where we think everything is, you know, is SaaS-based. And the data I see is something — it’s, like, sub-10% of corporate applications today are still — you know, it’s unbelievably low. I mean, people are still using, you know, I don’t know, you go to the whatever, you go to the United desk, and they’ve got like a DOS interface, you go here, and they’ve got Windows. You know, I mean, the government hack was, like, Cobalt, you know.

And so, and a lot of it’s more modern, but it’s still like, it’s Windows, it’s whatever, it’s not — you know, we live in this, kind of, world where we think everything is SaaS-delivered. And so, you know, you see these really interesting things happening, where, like, vertical SaaS is an interesting trend, where you see this, you know, whatever, massage parlors need their own billing and reservation system or something. And it turns out that’s a big market, and those people previously wouldn’t really have software.

I, kind of, think of it almost like — people have this view that like AI is gonna come take the jobs, but they have this, kind of, anthropomorphic idea that it’s going to be like the Jetsons, like, this robot is going to come in and like, “Move over, I’m gonna type and do it.” But actually the way that the jobs are actually taken is a much subtler thing, which is these new software applications, just, you know, whatever, your new, you know, payroll system, your new payroll SaaS app, just suddenly, you don’t need as many people in your payroll department.

And it’s a much subtler thing. And it’s not a one-to-one transition. And it’s not a literal thing of, like, kind of, like ,Elon Musk, AI comes in and, like, replaces your payroll department, it’s just like, more and more just, kind of, incremental software comes in and just makes everyone more efficient, which takes jobs. Now, I think it also will create many jobs, they’ll just be — it’s just always harder to envision the jobs that are created than it is to envision the jobs that are destroyed.

Chris: What you’re talking about right now, I think is where a lot of the action is in startups and venture capital right now. If I look at where, you know, a lot of the dollars are being invested, where a lot of the value creation is happening, where a lot of the bigger companies are getting built — it is sort of in that enterprise SaaS area. I think consumer has gotten harder because of some of the things we’ve been talking about before, but I don’t think that enterprise SaaS has gotten harder.

And so, in a way, I think, for — we’ve thought for the past four or five years, it’s more of a grinded out execution, operational, not super sexy style of startup and style of investing that has been winning the day. And the things that were, kind of, happening in the latter part of the last decade, where you had, like, a Facebook come out of nowhere, a Twitter come out of nowhere, or a YouTube come out of nowhere, where VCs were making 100 times their money on these huge big consumer breakouts — we see those but not as many.

Fred: Yeah, I mean, the great thing about SaaS is the business. Once you have those customers and they like your software, they stick with you. So, it’s like an annuity. It’s a very high margin annuity. It’s a challenge to get those customers, and you have to get — there’s a lot of detailed, kind of, sales and marketing execution to go reach efficiently. And that’s, kind of, the trick in a lot of those companies, is how do you efficiently reach the massage parlor, the whatever, small business payrolls, you know, person who needs payroll.

Chris: The founders all complained to me, they’re like, every venture capital meeting I take they wanna know, CAC over LTV, they wanna…

Fred: Yeah, yeah, yeah. It’s very metrics-driven.

Chris: They wanna know our sales power, they wanna know, like, you know. And I was like, because honestly, that’s what separates the winners from the losers in that world.

Fred: And in that world, there’s almost always five, or two to five, credible competitors, too. So, it’s like a cage match. You know, it’s not, like, you’re some weird, you know…

Chris: But they’re also not winner-take-all markets. So, probably still a power-law distribution in the outcomes, but maybe it’s not as severe, maybe it’s not — maybe the winner’s not 10 times bigger than number 2, who’s then 10 times bigger than number 3, which you can see in consumer, but maybe in enterprise, it’s the winner’s 3 times bigger than the next biggest one, who is then 3 times bigger the next biggest one. And if it’s a business that can support, you know, billions of dollars of market value, that could be two or three companies that could be pretty big winners for the founders, and for the VCs who back them.

Changes in the capital market

Fred: So let’s maybe talk a little about the changing capital market world. So, the venture world has changed a lot. There’s new ways to fund startups, including, you know, crowdfunding, which you’ve been really involved with. There’s, you know, the ICOs and, kind of, the crypto stuff that’s kind of, you know, emerging. There’s a lot more venture capital, there’s a lot more stages of it, there are these mega-funds. You know, I guess, you know, how have you seen the industry change over time?

Chris: Well, I think the first thing I would say is, what you said, is that I think there’s more capital available for founders today than there’s ever been. And I think that’s a good thing. You know, a lot of people in the venture business, or the people who give us the money, you know, think there’s too much money, and maybe yes, but the reality is, like, what’s good for founders is good for the venture business. I just, kind of, believe that as, like, a fundamental truth. So, there’s a lot of money out there.

The traditional angel seed, early-stage VC, then growth VC market — I think the explosion of capital is probably more in the later stage. You know, with the SoftBanks and Sequoia going out and raising however many billions they raised, and so on and so forth. And I think that, if anything, there may have been a slight contraction in seed and angel and early-stage money in the past few years.

But I think what’s interesting about crypto — so first of all, you know, there’s a lot of people who went and, you know, used tokens, or just a crypto business plan or business model to go tap into like a lot of new money that was showing up in the world of crypto. And I think that may, you know — certainly in 2017, and even now, there’s a lot of that money sloshing around. But I think what we’re really seeing, and I’m an optimist here, and I’m hopeful about this — is that we’re seeing a new capital market being built. We’re seeing a new way of raising capital that’s global from the ground up, that’s not subject to these, I think, antiquated laws around who can invest in startups and who can’t invest in startups.

And just unleashing the startup capital markets to be global and anyone can play is great. It’s a huge innovation. And I understand there’s people out there saying there’s gonna be scams and, you know, people are gonna invest and lose all their money. And I get all that, and I realize that that’s not all good. But in general, I think that making it possible for everybody to invest in these, you know, high-growth opportunities is good. And I think it’s good for founders that the capital markets, for what they’re doing, are going to continue to grow.

Fred: I mean, the fact that today you have to be literally a millionaire to invest in startups, to be an accredited investor. If you actually participate in ICO, it’s very complex. You need to download, like, a wallet, you have to, like, put in a long hexadecimal address. I don’t — I mean, I’m pretty, pretty sure that almost all the people that participated in those things were technical people that were into crypto. I mean, the vast majority were, and those are people, like — and I just said, like, anecdotally around Silicon Valley, these were, like, programmers who were very sophisticated, who understood exactly what the technology was, who were maybe not accredited investors, and who felt like now they finally found a market were like they understood the product, you know? I mean, they were customers of the product. They were literally protocols built for developers, and they would use it and they could participate in this. And the idea that, you know, a non-technical, wealthy person is able to invest in that, but this programmer who really deeply understands the protocol is not, just seems strange.

Chris: Very strange and wrong. The other thing is, you know, if you were an early user of Facebook, you might have said to yourself, “Oh, my God, this thing’s gonna be huge.” It was — so, let’s say that was 2003 or 2004 or 2005, whenever that was — when did Facebook go public, ’11 ’12?

Fred: ’12.

Chris: Right. So, it was like, seven years before you could eventually become a shareholder on Facebook. But if you’re an early user of Bitcoin, you had Bitcoin day one. So, what’s great about crypto is that I think it allows the early adopters to not only be users, but also participate financially, if they want to — if they wanna hold on to their Bitcoin, and go along for the ride, they can do that. And that’s why I think that this token business model is so exciting, is that in a way, it kind of takes the world of investing and the world of using and combines them. And like, there’s this — I read this blog post last week about, like, there’s two parts of crypto. There’s the money part of crypto, and there’s the utility part of crypto.

Fred: “Tech and Money,” I think.

Chris: Yeah, “Tech and Money,” right. And, like, the money people are, like, Bitcoin maximalists. And they’re really focused on hard money, and the tech people are Etherium maximalists, and they’re focused on, you know, DAP platforms and smart contracts and all that. I don’t buy that at all. That to me is — I mean, I’m not arguing that that’s what the world is today. I think it’s Eric Thornburg who wrote it, and I thought it was very insightful about where we are in crypto right now. But I reject that idea. And I think what’s powerful about crypto is that they’re the same thing — that using and investing are the same thing — and you don’t have to be a user to be an investor, and you don’t have to be an investor to be a user. But if you wanna be, you can be both, and it’s just as easy to be — like, it’s just as easy to be both, right. And that, I think — it’s just not right, particularly for a lot of these businesses where the user is the product. Facebook users made Facebook, Twitter users made Twitter, you know, YouTube users made YouTube. It’s just not right that the people who make the product have no participation in the value appreciation.

Fred: And I think and beyond that. To me, one of the great tragedies in the history of the technology industry is that what happens is there’s a sort of lifecycle in every network. But I use network in a very broad sense, like, Windows is a network. So it’s a network between developers and users. And there’s a lifecycle, and they start off, and at the beginning, there’s sort of this, you know, the network, the platform wants to attract everybody, and they play very well. And so, you know, they provide tools for this third-party software developer. Facebook early on says, “Hey, media companies, come work with us,” you know, they’re solicitous. And then over time, you know, you hit the, kind of, growth peak, and everyone “it’s a party” and everyone’s having a good time.

And like, you know, you’re growing 100% year-over-year, you know, you don’t worry too much about stuff. And then eventually the top of the escrow comes, and then it becomes — that’s when things get ugly. And that’s when — and I don’t blame any of the management of these companies or the boards. I think it’s just the logic of the business model. The logic of the business model is, sort of, it forces them at that point, when things start to slow — like Google, like Google search. Like, if you look at mobile, like it’s hard now, you get all sponsored links on mobile, they just keep adding more sponsored links. You have Yelp going up in front of Congress and doing, you know — like, when it’s the growth period, hey, great, we’ll have one little ad at the top and like, but, you know…

Chris: When the pie is growing, no one’s fighting a piece of the pie. When the pie stops growing, people start fighting over the pieces of pie.

Fred: And then what happens is these networks have these, kind of, internal battles. And those are the most vicious — like, that’s the funny thing about tech. I think that, like, people outside of tech don’t — so, traditionally, in economics, people think of substitutes as the competitors. So, the hamburger and — this is an example, the hamburger and the hot dog are the competitors. Whereas in tech, actually, the hot dog and the hot dog bun are the ones that have the most vicious fights. Microsoft-Netscape, you know, Facebook-Zynga, like, Twitter and the Twitter apps or whatever, right?

Because, like with Twitter, it just feels, kind of, tragic to me that you had this giant developer ecosystem that was trying to make the protocol proliferate. And they could have worked together in concert, and it could have been a much bigger and more impactful platform. But the logic of the business model, the ad-based business model, said we need to control the experience, we need to control where the ads appear, we need to, like, etc., etc. Again, not placing blame on anybody. It’s the logic of that model, right?

Chris: Yeah. Well, look, I mean, you know, it did live through that period. And I was on the board of the company during that time. And I very much wanted to see an open platform. I mean, if you read the blog posts that I wrote when we invested in Twitter, it’s still on usv.com — I wrote about the API and the open ecosystem and all this stuff that was getting built on top of Twitter. That’s what I wanted Twitter to be. But we had an advertising attention-based business model. And the truth of the matter was, there were other people who were out there running around buying up third-party Twitter clients. And inside Twitter, we saw that, and we’re like, we can’t have that. Like, we can’t let somebody go get half of our user base by acquiring all these third-party clients, and then taking them onto a new network, and then we’ve just lost half of our users. Particularly when we have a tension-based business model.

If Bitcoin and tokens had existed in 2005 instead of 2009, I think it’s very possible that Twitter could have adopted a token-based business model, left the protocol open. Twitter could have been the protocol, and the third-party clients could have been the clients on top of the protocol, and it could have worked beautifully. And, like, part of me just wishes that we could have done that. And then we could have seen how powerful this new business model is. We’re gonna see it, eventually we’re gonna see it, someone’s gonna do it. And we’re gonna be like, “Holy fucking shit.”

Fred: Well, and the thing you’ll have is, instead of the fighting, you’ll have this beautiful alignment between the core protocol, all of the third-party developers, all of the users. And, by the way, the other thing you didn’t mention when you mentioned the Bitcoin users, not only do those users own Bitcoin and participate in it, they also probably, by the way, disproportionately have Twitter followers, Reddit karma, Hacker News cred, whatever that’s called, you know, Google juice. And they’re out there, like, talking about it and marketing it. And so, you know, you have this army of users, miners, developers, core protocol developers, all fully aligned. And by the way, and control — and probably very powerful, relatively speaking, on the most important marketing medium of, you know, the internet. And it’s just a very powerful combination.

Chris: I think that’s very —by the way, I think that’s a wonderful thing. I think that’s very scary to a lot of the people whose jobs it is to regulate and protect the capital markets, because they’re looking at that and they’re saying, there’s all these people who own a lot of this thing, and they’re out there promoting the shit out of it. The truth of the matter is, though, it’s — most of these people are not pumping and dumping. The truth of the matter is mostly people are true believers, who have held all the way through. Once my money gets into the crypto ecosystem, it’s gonna stay in the crypto ecosystem. It might, you know, move, like, I’m definitely going to be playing around in all these networks, and, you know, using them and staking and doing all this incredibly cool shit that you can do. But that wealth that I took out of Fiat and put into crypto back in ’11, ’12, ’13, ’14 is not going back that way.

The potential of crypto

Fred: Let me just try this out. I have this theory, let’s see what you think of this theory. I have this theory that we are in the middle of a transition period where the digital world is becoming more important to the point —but we’re in a transition period in the sense that we still — it’s even in our — we still think of the offline world as primary. And you see this, by the way, and all the critiques of Bitcoin, for example. Oh, like, in the end, a lot of, like, the, you know, traditional economists were taking — it boils down to, “Oh, it’s fake money. It’s digital, therefore, it’s fake.” And like, for example, like to think that gold, which, you know, has whatever, out of dental and speaker wires, and it has no real utility, like, to think that that has some kind of, like, ontological, like, higher status than a digital good is, I think, evidence of this, sort of, offline bias. And like, and I think you hear it — by the way, I notice this whenever people use language. E-sports, notice — e-commerce — like, when — you have to preface, the online one is the one with the modifier. Right?

Chris: Right.

Fred: Right. And so at some point, by the way, these things will flip, and it’ll be, like, that’s commerce, and then there’s offline commerce.

Chris: You’re saying — the predecessors to Bitcoin were called e-money.

Fred: Yeah. No, no…

Chris: And there were a lot of predecessors.

Fred: And whenever you have a modifier on the thing, you know that people think it’s subordinate. But eventually, it’ll flip and it’ll be, like, Amazon is commerce and Walmart is oh, yeah, it’s like, you know, meatspace, or offline commerce or IRL commerce, whatever they’re gonna call it. So, I think we’re in this transition period. And it’s funny, too, because like, you know, Fortnite made $300 million last month on dance moves, emotes. And so, digital goods have become a massive industry, for example, in video games, and there’s digital resources, domain names — you know, I’ve always bought — I’ve been a longtime collector of domain names. I’m like, let me tell you, it’s a little piece of the internet and like, of course, it’s going to be valuable, and I’ve always wanted them and I hold on to them. And that’s a multi-million…

Chris: I’ve never sold any of those either, by the way. I never sell a domain name. Why would you?

Fred: I mean, it’s the — I own a piece of the internet. It’s like owning real estate around Central Park or something.

Chris: In a way, this is like religion. Like, it’s like, you know, I would never ever sell a domain. I might swap a domain. Like, if you said, you know, “Hey, I’ve got, you know, ABCD,” and I said, “Well, I got…” you know, we might swap, but I’d never sell for dollars.

Fred: So, I think that when we’re in this transition period where we’re still, kind of, like, anchored on this sort of thing of, like, “Well, it’s not real.” But it’s gonna be obvious 10 to 20 years from now, especially as, like, the newer generation, kind of, grows up. And just, of course, like, of course, an emote is worth more than, you know, offline equivalent or whatever. And that it’s going to be — and these words are gonna — and the language is gonna change with it, and just the whole, kind of, way of thinking about it. And there’s not gonna be this weird thing like, “Oh, it’s digital. It’s not as — ” Do you see what I’m saying though? And I think, like, e-sports is a great… 

Like, the other thing I think about is, like, a lot of, like — I remember, a lot of times in the history of tech, like, mobile 2011 or ’12, it felt like mobile was definitely growing. But I don’t think, at least for me, until, like, maybe 2012, I didn’t realize it had actually replaced desktop. There was a moment at which it was sort of, like, “Wait a second, this isn’t just like a big thing. This is the thing.” You know what I mean? And you realize, now, in retrospect, that we thought we were in, kind of, this growth period, where we’re actually in this hockey stick. And I think that’s sort of, I believe — one of my theories is we’re in this like — so take e-sports as an example. I think we’re in this hockey stick right now with e-sports. Like, video games, it’s just gonna be obvious that, like, it’s going to seem certain — I mean, I think it’s always great that people play physical sports, I’m not anti, but, you know, it’ll be like horseback riding, vinyl records, like, you know, a whole bunch of other kind of…

Chris: I think this is where what geeks called NFTs, non-fungible tokens — I think you just call them digital goods.

Fred: Crypto goods.

Chris: Crypto goods. I think the innovation here is that these digital assets can be scarce, can be one of a kind. You know, the reality is, like, we’ve never had the ability to make a digital good non-replicable. And that’s I think what, you know, has held back a lot of the business models around digital goods. It’s just like, if you had an mp3, you could give it to a million people. If you had an, you know, an MPEG, you could give it to a million people. So, I was explaining this to  somebody last week, who’s trying to, like, figure out, you know, crypto. And I said, you know, think about all of the digital goods that you earn in a video game, right? And you spend — you know, you’re obsessed about this video game for, like, six months, and you collect all these incredible video — but they’re stuck in the game.

Like, imagine if you could take them out of the game, and you could put them in your wallet or think about just, like, your bank account. And then, another game comes along, and you could literally take them to another game. And this person who I was talking to, who was a skeptic, like, a fucking skeptic like you wouldn’t believe, he’s like, “Holy shit, my 12-year-old would just be all over that.” Like, that’s like, you have just given my 12-year-old his, like, nirvana.” And I said, but that’s what we’re doing here. Like, that’s where we’re going.

Fred: I think games will be the first to adopt this stuff, because they just tend to be very, kind of, fast cycle time experimental.

Chris: But also, no, no, it’s not just that, it’s also who’s playing them.

Fred: You mean the kids, the kids that are far more open to new technology.

Chris: Yeah, like, tell a kid to download, like, an Ethereum wallet that has NFT capability, and move their games out of Fortnite into their Coinbase wallet or, like, that’s not gonna get in the way.

Fred: But I think the other thing with NFTs that excites me is, I feel like this should be a wonderful time in history for creative people with, you know, 4 billion smartphones, and the ability to just sit down and write something and create a piece of music. And from a business model perspective, it hasn’t been. And so one of the things that’s really exciting to me with NFTs is if you — let’s take music as an example. So, mostly on, like — selling the song itself has become a not great business model. And so, a lot of musicians have moved to — they go where the scarcity is, and the scarcity is offline. And so, it’s shows and merchandising.

And so one of the really exciting things to me about NFTs is the idea that you can reintroduce digital scarcity and have, whatever — exclusive album art, exclusive whatever. Maybe this is — to me, it seems like a very promising new business model not just for games but for writers, for musicians, for, you know, whatever, you know — filmmakers, videomakers. Reintroducing scarcity, allowing, kind of, business model innovation. I mean, game…

Chris: Well, the cool thing is, it doesn’t have to be that there’s only one of them. It could be there’s a million of them, or in the case of Bitcoin, 21 million. We still haven’t mined all the Bitcoin. And we’re nine years into it now. So, like, imagine if you made a song. I just came up with, I think, a pretty cool idea. Imagine if you made a song, and there was 21 million listens to it, and you had to mine the listens, but it was gonna take maybe 5 or 10 years to mine all those listens. You know, actually, you get 21 million listens pretty quickly on the most popular songs. But like, imagine if there was some mechanism of releasing a piece of art or a piece of music that felt more like mining Bitcoin than it did…

Fred: You could never do scarcity — there’s no way to ever do — I mean, they tried with DRM and things like that. But this is always…

Chris: But the point I’m trying to make is like, I don’t think necessarily for the artists the move is super tight scarcity. I think the move might be pretty loose scarcity, but still some scarcity. And the other thing that’s cool that’s happened with Bitcoin is, the value has risen over time. And I know that’s come down recently, but it’s mostly risen over time as we’ve started to mine more and more of it. So, we’ve never seen — well, you have seen that a little bit in art, like certainly physical art, that’s what you do see. But, you know, I don’t have a crystal ball view of how this is all gonna go down. But I definitely think that the move is not…

One of the things I learned really, like almost, like, painfully, was that when we first started investing in the internet in ’94, ’95, ’96, what we were doing was dumb. We were just basically investing in things that had existed in the offline world, that were getting moved on to the internet. Like, “Okay, so let’s invest in an online newspaper, let’s invest in an online store, let’s invest…” you know, like, but that’s actually not the move. The move is, [you’ve] got to find the native thing that needs to happen now to have this thing.

Fred: That’s funny. Every form of media, you go back and you look at the early movies, and they were plays, and they were trying to film the play, and then later on, they’re like, “Oh, we can do a close-up, we can do an establishing shot, we can do this, we can do that.” And they just up and develop a new grammar. And then there’s sort of the — there’s the movie-native movies or something. I think it’s a very common pattern throughout.

Chris: Right, so I think with digital goods, with music, with film, with art, whatever, like, I think…

Fred: It will be some crypto native thing.

Chris: I don’t think it’s to make, like, a limited edition piece of your art, like, that there’s gonna be 10 of these. I think it’s something that’s more like the way Bitcoin has happened, where it gets mined over time released by…

Fred: Something you can never have done before, as opposed to a direct, kind of, whatever — just, like, porting over some concept from the non-crypto world.

Chris: That’s why I don’t love when entrepreneurs/founders come to us, and they’re like, “We’re gonna take mortgage backed securities and put them on the blockchain, or we’re gonna take — like, they’re really — a lot of people are interested in taking things that exist in the physical world, or the existing financial world, and putting them on a distributed ledger. And I mean, I think that that’s like — I think there is some incremental value to doing that. But what I’m much more excited about is people creating brand new things de novo from scratch, on these crypto networks, that never existed off the crypto networks, couldn’t have existed off the crypto networks, and always will live on the crypto networks. Like, to me, that just seems like a 10x or 100x better idea.

Fred: Yeah, like DAO is a good example. Like, autonomous organizations. This concept, which is now — it, kind of, fell a little bit into disrepute because of this thing called the DAO, which was, kind of, mismanaged.

Chris: It’s unfortunate. It’s unfortunate that they named themselves after the big idea.

Fred: I know, I know. But this idea that you can — I mean, to me, it still blows my mind that you just look at any of these interesting solidity contracts. And it’s code running on the internet. No one — you know, once the developers have shifted out and taken off all, you know, the controlling, kind of, code, it’s just literally code that exists — it’s autonomous code. And it’s its own little organization. And these things will get more and more sophisticated. And this is something that could never have existed before. Like NumArray is one that you guys are involved in, for example.

Chris: People think that NumArray is a hedge fund powered by a crowdsourced network of data scientists. And it is, but I actually think if you really try to understand what Richard’s doing, I think he’s playing around with staking. Like, staking is a really powerful idea. I mean, it’s existed forever. I mean, if you read Taleb’s new book, it’s really all about skin in the game. It’s about staking. But I think that we’re gonna see a lot of really innovative things being done with staking, because I think crypto-tokens make staking super easy to do.

And there are — like, I think Richard’s idea is that if I can get data scientists to stake their models, to put skin in the game against their models, I’m gonna get much better models than if they just throw them up against the wall. So, I just think we’re gonna see a lot of innovation around staking, around governance, you know, on-chain governance, is that gonna work? I don’t know. I think, like part of me says it’ll never work. And part of me is, like, I hope it does work.

Timing of new innovations

Fred: Obviously, we’re both excited about crypto. How long — and there’s all these great ideas floating around, but it’s early. You know, how long do you think it’ll take to play out — to sort of — I mean, it’ll obviously, hopefully, take many decades, but like, when will we start to see meaningful applications used by people beyond the, kind of, crypto enthusiast?

Chris: I think that we got to fix — it’s the broadband issue. We’ve got to figure out how to get crypto networks that are truly secure and decentralized, that can handle much higher transaction processing speeds than what we have today.

Fred: To me, think of the crypto network as a computer. And the computer has different design criteria, it’s very different than traditional computers in-network but in the consensus mechanism, etc., it makes this abstraction that’s a computer on top. And you need trust, you need developer experience, you need scalability. And yeah, it’s like we’re internet pre-broadband, we’re mobile phone pre-iPhone. <crosstalk>

Chris: Exactly. Like, remember when people were building, like, what were they called? Were they called, was it WAP or something? There was, like, some standard for building applications.

Fred: I had this poor friend who was, like, into mobile from, like, the ’90s. And I think he, like, gave up in 2006. Like, it’s never gonna happen.

Chris: That’s what we are. We have not had our iPhone moment in crypto yet. And the right…

Fred: We need the iPhone moment and then we need…

Chris: That’s what I’m waiting for. And, you know, it doesn’t have to be totally decentralized. There’s this whole narrative around like, you know, where on the decentralized curve is enough? I just think, like, decentralized means that nobody controls the network. And that’s, kind of, to me, fundamental, like…

Fred: To me, it means trust, and it goes along with nobody control — like, you trust the network. I trust that if I have this NFT, I really have it. And no one can take it away. And no single person can take it away. No bad system engineering can take it away.

Chris: What’s the quote, like, power corrupts, absolute power absolutely corrupts, or whatever it is — but like, you just said, like, when Facebook realizes that they’ve got the keys of the castle, they’re gonna start to extract rents. Like, it’s what happens. So, that’s why decentralization is so important. And so, I think we got to have a crypto network, or 2, or 3, or 4, 10, who knows, that is truly decentralized, truly secure, and can process transactions at the speeds — at least of, like, an ATM network or something, you know. We don’t have that yet.

Fred: Yeah. So, we need that. And then it happens over — so, whenever that happens, and then hopefully we have the 5 to 10-year, kind of, immediate explosion of apps the way that we did with the internet and mobile, and then, a long tail of, kind of, further innovation.

Chris: Definitely. That’s what I see. And that’s why, largely, we’re not investing in a lot of DAPs. I mean, we are playing around with NFT’s in games, for all the reasons you raise. I just think that’s the first place that we might see it. And, by the way, if you go back and look at the history of infrastructure, sometimes it’s the apps that demand the infrastructure, and then the infrastructure gets there because the apps demand it. So, games, in a way — games might make it such that we get the crypto network we need, right, like…

Fred: What’s a good historical example where the app — I think actually, by the way, games have driven — for example, games have driven GPUs. So, like, just like, that market is one where the gamers have been endlessly hungry for more polygons. And that created this kind of, you know, Nvidia and this whole industry around it, which then had these interesting —you know, then, of course, spun out the deep learning movement.

Chris: Well, I mean, it may be a good example, like, a lot of interesting core infrastructure came out of Netscape. Why did Netscape have to build it? Because it didn’t exist.

Fred: Javascript, cookies, SSL.

Chris: But if you go all the way back to, like, where we started, I think we are maybe in the most interesting time I’ve ever seen in my 30-year career, but it’s not at the surface. It’s, like, under the water, and you’re not getting rewarded very much as an investor for being, you know, super bullish. Well, last year was great. Like, everybody wanted to own crypto, but I think that was, kind of, like, a wave and it’s certainly come and gone. I don’t think you’re getting rewarded a lot for that. And you’re getting rewarded a lot more for, you know, the more operational execution-oriented stuff, like enterprise SaaS and things like that. But I think what’s super interesting is the stuff that’s gonna start bubbling up and that’s where my head’s at.

Fred: Awesome. All right. Thank you.

• 

  Fred Wilson
• 

  Chris Dixon is a general partner at a16z, where he leads the crypto/ web3 funds. Previously, Chris was cofounder & CEO of startups SiteAdvisor and Hunch (acquired by eBay); and an early blogger at cdixon.org.

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There’s a lot of research and writing out there on “thinking fast” — the short-term, gut, instinctual decisions we make, biases we have, and heuristics we use — but what about for “thinking slow” — the long-term decisions we make that both take longer to deliberate and have longer spans of impact on our lives… and the world? Because we’re not only talking about decisions like who to marry (or whether to move) here; we’re also talking about decisions that impact future generations in ways we as a species never considered (or could consider) before.

But… why bother, if these decisions are so complex, with competing value systems, countless interacting variables, and unforeseeable second- and third-order effects? We can’t predict the future, so why try? Well, while there’s no crystal ball that allows you to see clearly into the future, we can certainly try to ensure better outcomes than merely flipping a coin, argues author Steven B. Johnson in his new book, Farsighted: How We Make the Decisions That Matter Most.

Especially because the hardest choices are the most consequential, he observes, yet we know so little about how to get them right. So in this episode of the a16z Podcast, Johnson shares with a16z crypto general partner Chris Dixon and a16z’s Sonal Chokshi specific strategies — beyond good old-fashioned pro/con lists and post-mortems — for modeling the deliberative tactics of expert decision-makers (and not just oil-company scenario planners, but also storytellers). The decisions we’re talking about here aren’t just about individual lives and businesses — whether launching a new product feature or deciding where to innovate next — they’re also about even bigger and bolder things like how to fix the internet, or what message to send aliens with outcomes spanning centuries far into the future. But that’s where the power of story comes in again.

Show Notes

• Discussion of what long-term decision-making means [0:24] and how we can use simulations to improve [9:41]
• Making decisions in groups and the importance of diversity [16:35]
• Thinking thousands of years ahead [22:23]
• How ideas come from niche groups, and a discussion of managing the chaos of the internet [27:21]
• Practical advice for long-term planning [36:15]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal, and I’m here today with Chris Dixon, a general partner on a16z Crypto, and Steven B. Johnson, who is the author of many books, including “Where Good Ideas Come from,” the PBS series, “How We Got to Now,” a book on play called “Wonderland,” and his latest book is “Farsighted,” which is, “How We Make the Decisions that Matter the Most.” So, welcome.

Steven: Thank you for having me.

Long-term decision-making

Chris: Could you start just telling us a little bit about the book?

Steven: Yeah. This is a book that has been a long time in the making, which is appropriate for a book about long-term decision-making. It had a long incubation period. One of the things that occurred to me, that got me interested in this topic, is that there had been a lot of material written, both in terms of academic studies but also in terms of kind of popular books — but a disproportionate amount of that was focused on people making gut decisions or instinctual decisions.

Chris: Just like thinking fast.

Steven: Thinking fast and slow. Also “Blink” is like that. It is amazing the amount of processing and all the heuristics we have for making short-term instinctual decisions. But the decisions that really matter the most are slow decisions, or decisions that have a much longer — both time span in terms of how much time you’d spend deliberating them, and then also the time span of their consequences. And I got interested in what, kind of, the science is, and some of the art in a way, behind those kinds of decisions. Actually, the book partially starts with a great excerpt in Charles Darwin’s diaries where he’s trying to decide whether to get married. And it’s a beautiful list where he’s like, “Okay, against getting married, I’ll give up the clever conversation with men in clubs.”

Sonal: My favorite of “against marriage” was “less money for books, etc.”

Steven: Yeah, yeah. Right, right. And it’s this list, and, you know, looking at it, it’s kind of comical and sweet in some ways, but that technique of creating a pros and cons list, basically, that was state of the art in 1837, 1838, and it’s still kind of state of the art for most people. That’s the one tool they have for making a complicated decision. And, actually, we have a lot more tools, and we have a lot more insight about how to make these things.

Chris: It seems like there’s two questions, right? There’s a descriptive and a normative question. Like, how do people make these decisions, or societies, or, you know, governments, or whoever the actor might be? And then there’s a second question, how one should make these decisions, right?

Steven: I got more and more interested in the second question, right? Like, what are the tools that you can really use to do this in your life?

Chris: And can you get better at it?

Steven: Yeah, and it’s a tricky one. I was really grappling, trying to take very seriously the legitimate objection to a book like this, which is that it is in the nature of complex life decisions, career decisions, “should I get married” decisions, “should I take this job” decisions — that each one is unique, right? That’s what makes them hard, is that they’re made up of all these multiple variables and competing value systems and stuff like that. And it turns out, really, that a lot of the science of this and the, kind of, practice of making a deliberative decision, is a set of tricks to get your mind to see the problem, or the crossroads, or whatever you want to call it, in all of its complexity, and to not just reduce it down to a series of predictable patterns or clichés or stereotypes. And that’s where actually the advice, I think, is useful.

Chris: And so that’s, like, the scenario planning where there’s, sort of, a discipline around — what’s the upside case, the middlecase, the frameworks, forcing yourself to, kind of, mentally traverse different future paths.

Steven: Yeah, exactly. Well, one of the big themes of the book that runs throughout it in lots of different ways is the importance of storytelling.

Sonal: Like a narrative.

Steven: Yeah, and all these different ways. Scenario planning is one example, and that’s usually used in a, kind of, business context, right? So you’re like, okay, we’re trying to decide should we launch this new product. Let’s generate some scenario plans for what the market is going to do over the next five years, but let’s generate multiple ones. Let’s not just predict the future.

Chris: Yeah, I had a friend once who worked at a large oil company in their scenario planning group. And, you know, at first, it doesn’t sound, like, that interesting. But it turns out these large oil companies, like, whether oil is $30 or $100, you know, a lot of money is at stake. And so they had this infrastructure, like, thousands of people. It was, like, the state department or something. It was quite fascinating to hear about, like, what if there’s a war in this area and oil drops this much, and what do we do and, like, just the level of rigor. I never imagined it was as complex as — you know, as sophisticated as it was.

Steven: Well, I had some great conversations over the years with Peter Schwartz who’s here in the Bay Area, and he’s one of the pioneers of scenario planning. And one model that he talks about is you do three different narratives — one where things get better, one where things get worse, and one where things get weird.

Sonal: That’s interesting. I’ve never heard that.

Steven: Yeah, I love that, because I think that all of us kind of intuitively build the, like, “it gets better, it gets worse” kind of scenario plan in our head. It’s useful to actually walk through it, and do it, and tell that story. But the weird one is what’s cool, because then you’re like, “What would be the really surprising thing?”

Chris: Well, the funny thing, at least, if you look at history, weird is often the case.

Steven: That’s right. We’re living through it right now, and that’s for sure. And a key part of it is that the predictions don’t even have to be right on some level for it to be useful exercise, because a lot of this is about recognizing the uncertainty that’s involved in any of these kinds of choices. It’s creating a mindset that’s open to unpredictable events. So, going through narratives where you imagine alternatives — even if they don’t actually turn out to be the case, they get you in a state so that when you do encounter an unpredictable future, whatever it happens to be, you’re more prepared for it, or you’ve thought about at least some of those variables.

But the other thing I was just going to say on the storytelling front, one of the places where it, kind of, came together — there’s a lot in the book about collective decisions. Like, what do we do about climate change, or what do we do about the potential threat from superintelligence and AI, right? Something that we think about a lot here.

Sonal: Global, multi-generational type of things.

Steven: Yeah, super long-term decision-making, right? And one of the points that I tried to make in the book is, while we have this cliche about our society — that we live in this short attention span world and we can’t think beyond 140 characters and all that stuff — the fact that we are actively making decisions that involve changes to the environment that might not happen for another 20 or 30 years, and we’re thinking about what the planet might look like in 100 years, is something that people have not really done before. They’ve built institutions designed to last for longer periods, so they’ve built pyramids designed to last, but they weren’t very good at thinking about, you know, “We’re doing these things now. What will be the consequences 80 years from now from these choices we’re making now?”

Chris: So, regardless of what you think about whether we’re doing enough for climate change now, the very fact that it’s a central political topic — that was not the case 100 years ago.

Steven: It’s a sign of progress. And superintelligence is even a better example of it, I think, because the fact that we’re having a debate about a problem that is not at all a problem for us now, but then potentially might be a problem in 50 years — that is a skill that human beings didn’t used to have. When I was talking about this once with Kevin Kelly out here, another Bay Area person —he had this great point which is, like, this is why science fiction is such an important, kind of, cognitive tool, because you run these alternate scenarios of the future and they help us, kind of, imagine what direction we should be steering in, even if they’re made-up stories.

Sonal: Don’t people actually say that science fiction is the only way to “predict the future” in terms of what you can actually think of for very complex technologies? I feel like I’ve heard a statistic or an observation to that effect.

Steven: I mean, I’d certainly think that you would find more things that ended up happening in fictional accounts than, you know, official people making predictions about the future outside of a fictional context.

Chris: Yeah, my bias has always been towards history, for example. Like, the only way you’re ever going to possibly get a lens on how to predict the future is to read a lot of history, understand how these things work, because of social complex systems. You’re not going to, you know, have empirical data, and polling, and everything else to analyze this stuff. I wonder to what extent our ways of thinking about these things in academic literature and things like this have been shaped by the kind of the — you know, when you require everything be testable, you also dramatically narrow…

Steven: The things that can be tested.

Chris: Yeah.

Steven: Or, the things that can be tested [are] a subset of the things that are interesting and worth exploring in the world. And you get steered towards those things. I made this decision with my wife to move to Northern California, having lived in Brooklyn and New York for a long time. And, you know, when you think about a choice like that, there are so many different variables. There are variables about the economics of it, the kids’ schools, do you want to live in a city or do you want to live near nature. I mean, all these different things, it’s an incredibly complicated thing to do…

Chris: All the second-order things you could never predict.

Steven: Right, what will the consequences of it be?

Chris: The serendipitous meeting your kid has, the changes in your life, or…

Steven: Yeah, particularly with children, you know you’re changing the overall arc of your kid’s life by making a choice like that, and that’s scary. But to your point, that kind of decision — well, certainly I would say is one of the most important decisions that I ever really thought about and kind of worked through with my wife. How would you study that in the lab, right? You know, it’s very hard to, like, be like, “Okay, everybody, we’ve got 10 of you that are going to move, and there’s another 10 of you that…” And there’s no, like, double-blind study you could do.

Using simulations to make decisions

Chris: And by the way, that’s why — you mentioned in the book simulations, and we have actually some investments in this area, but, like, the idea that computing is getting powerful enough that you could ask questions like, “We want to fix the New York subways, and we want to shut down these subways. How does that have — what are all the consequences of that?” Or, we change interest — you know, there’s always been the Santa Fe kind of…

Sonal: The complexity.

Chris: …you know, the complexity theory simulation. I think it’s still kind of this fringe. I always think about — I have friends who did machine learning in the ’80s, and back then it was this kind of rebel fringe group in AI, right? So mainstream AI back then was heuristics-based. It’s like, okay, we’re going to win all these things by, you know, literally putting in these rules and teaching computers common sense. And there was this, kind of, rebel group that said, “That will never work. You need to use statistical methods and have the machine learn.” Now, fast forward to today, like, machine learning and AI are synonymous, right? It feels like simulations today are this, kind of, fringe group.

Over time, like, it just seems, like, a far better way to test these really complex things. Like, what if you could run a simulation — I don’t know if you could run a simulation for moving to California, but you could run a simulation for changing interest rates or for closing down a bridge. Those things, I think, are fairly limited today. You could imagine them getting orders of magnitude more sophisticated, right?

Steven: There’s so many things to say to that. So the first is, it actually gets back to that classic book that David Gelernter wrote in the ’70s or ’80s.

Sonal: Oh, my God, “Mirror Worlds.”

Steven: “Mirror Worlds” and that was a…

Sonal: I edited him on a theme post after that. He’s one of my dear favorite people.

Steven: I read that book when I was, I guess, just in grad school. It was one of the first tech books where I was like, “Oh, this is really fascinating.” In some ways, my first book was shaped by that.

Sonal: Marc Andreessen also said it had a huge influence on him.

Steven: Yeah, yeah. And so, we will — I think that is something that’s coming.

Chris: We should explain “Mirror Worlds.” The idea is that, as I recall, you kind of have the whole world instrumented with IT devices and things. And then the Mirror World is the computer representation of that, and the two can interact in really interesting ways.

Steven: Yeah, so basically you have every single object in the — and let’s say we’re talking about a city, you know — is somehow reporting data on all of its different states. And then the computer is just some massive supercomputer, although it was a supercomputer in his day. Now it might just be like an iPhone or something.

Sonal: He, by the way, today argues it’s just streams of information.

Steven: Right. Yeah, yeah. What was that thing? It was like lifestreams or something.

Sonal: He had a lifestreaming thing, but now he thinks about it in the context of streams, as like browsers, Twitter, like, streams of information that we constantly live in.

Steven: So you basically have, you know, software that’s looking in all that information, and then the idea would be that it would develop enough of kind of an intelligence that you could say, “Given the patterns you’ve seen over the last 10 years with all these different data points, if we close that bridge, or if we, you know, switch this one neighborhood over to commercial development, what would it look like? Press fast-forward. It becomes a kind of SimCity kind of simulation but based on actual data that’s coming from the real city. It’s just one of those ideas. I think there’s a whole generation of books you’ve, kind of, read.

Sonal: Yeah. I always think of “Ender’s Game” and the whole scene where he essentially is playing a simulation and he realizes in the end — I mean, I’m sure this book’s been out for years.

Steven: Spoiler alert.

Chris: Hey, don’t spoil “Ender’s Game.”

Sonal: But that it’s actually the real war that he’s fighting in the final simulation.

Steven: So, the other thing about simulations — it is a big theme of the book. It’s one of those, kind of, ways in which the book connects to storytelling as well, because I think the personal version of this for the “should I marry this person or should I move to California” — this is actually what novels do, right? We don’t have the luxury of simulating an alternate version of our lives, because we can’t do that yet. We probably won’t be able to do that for a long time, particularly the kind of emotional complexity of choosing to marry someone or something like that. But we do spend an inordinate amount of time reading fictional narratives of other people’s lives. And the idea is that that’s part of the — almost, like, evolutionary role of narrative is to run these parallel simulations of other people’s lives.

Sonal: That’s a fascinating way of putting it.

Steven: Right? And by having that practice of seeing, “Oh, it played out this way with this person’s life, this way with this other person’s life.” And the novel’s ability to take you into this psychological…

Sonal: Immersive.

Steven: …of what’s going on in a person’s mind. A great biography will do that, too. So reading history, as you said, is a part of that. But it’s — in fact, the first draft of this book had just, like, a ridiculous amount of “Middlemarch” in it.

Sonal: You still have a lot of “Middlemarch” in it, for the record.

Steven: It was right up front in the first draft, and I think my editor was like, “This is great, but I don’t know if this is what people need.” It’s interesting how we spend so much time either, kind of, daydreaming about future events, or reading fiction, or watching fiction on TV. We spend so much time immersed in things that are, by definition, not true. They haven’t happened or they haven’t happened yet. And I think the reason we do that is because there’s an incredible adaptive value in running those simulations in our heads, because then it prepares us for the real world.

Chris: We’re building, kind of, the emotional, logic space or something in terms of, I don’t know, expanding. I always think of that — like, I always get this feeling when I read a good book. I think someone said it makes the world feel larger, right, and I think it’s another way of saying it, kind of, expands, you know, the possible, like, trees of possibility, right?

Sonal: It’s like your mental sample space.

Chris: Yeah, you just feel like the world is bigger, right? You read history and you feel like it’s big — or you read a novel and you feel like the emotional world is bigger, right, and there’s, sort of, more possibilities. And it’s interesting, so you’re saying it’s almost like an evolutionary need to do that to adapt, to be more emotionally sophisticated.

Steven: There’s a great essay by Tooby and Cosmides, I believe the names are pronounced, about the, kind of, evolutionary function of storytelling. And they — one of the things that they talk about is precisely this point, that we spend an inordinate amount of time thinking about things that are not true, and that would seem to be actually a waste of time. But in fact, there’s a whole range of different ways in which things are not true. There’s the, “She said it was true, but it’s not true,” or, like, “This might happen and thus might be true, but it’s not true now.” Or, you know, “I wish this were true.” And our brain is incredibly good at bouncing back and forth between all of those, kind of, hypotheticals and half-truths. And I don’t mean this in a kind of “fake news” kind of way. Like, this is actually a really good skill — the ability to conjure up things that have not happened yet but that might is one of the things that human beings do better than any other species on the planet as far as I know.

Sonal: It allows us to create the future.

Chris: Like, and also to do it a — I think Aristotle said the point of tragedy was that you could experience it with an emotional distance, right? So, you can go — that’s another value of narrative, right — you can go and you can experience and, like, look at the logic without — so you can go and think about tragedy and how to deal with it without actually being overwhelmed by the emotion of it, right? And so you’re involved but not so involved that you can’t, sort of, parse it and understand it, right?

Making decisions in groups

Steven: That’s a great point. And the other thing, I would — just a last point on simulations. We’re talking about how it’s hard to simulate these types of decisions in the lab, but the one place in which we actually have seen a lot of good research into how to successfully make complex deliberative decisions is another kind of simulation, which is mock trials and jury decisions, right? And that gets you into group decisions, which of course is a really important thing, particularly in the business world.

Chris: So, like, what are the key, I guess, components both to the group composition, and also to the process to determine, you know, to get to the right answer?

Steven: So the biggest one, which is something that’s true of innovation as well — not just decision-making — is, you know, diversity. It’s the classic slogan of, like, diversity trumps ability, which is — you take groups of high-IQ individuals who are all from the same, say, academic background, or economic background and have them make a complicated group decision. And then you take your group of actually lower-IQ people, but who come from diverse fields, professions, fields of expertise or economic fields, whatever, cultural background — that group will outperform the allegedly smarter group.

Chris: Is that because that more diverse group will traverse more future paths of the tree of possibilities?

Steven: So, the assumption was always — the diverse group just brings more perspectives to the table, right? So, they have different — you know, it’s a complicated, multi-variable problem…

Chris: That’s going to your earlier framework. Is that good, bad, weird? Like, they’ll just simply bring up and explore more possibilities, because of their more diverse experiences?

Steven: There’s no doubt that that’s part of it, right? What makes a complex decision complex is that it has multiple variables, operating on, kind of, different scales or different — you know, and it’s a convergence of different things.

Sonal: Right, you’re saying it’s more nuanced than that.

Steven: So, it also turns out that just the presence of difference in a group makes the, kind of initial, kind of, insiders more open to new ideas. If you have, kind of, an insider group, a homogeneous group, and you bring in folks who bring some kind of difference — even if they don’t say anything — the insider group gets more, kind of, original.

Sonal: They rise to the occasion.

Steven: They challenge their assumptions internally more. So, there are exercises you can do to bring out the, kind of, hidden knowledge that the diverse group has — the technical term for it is hidden profiles. And so when you put a bunch of people together and they’re trying to solve a problem, come up with a decision, there’s a body of, kind of, shared knowledge that the group has. This is the pool of things that everybody knows about this decision that’s obvious.

For the group to be effective, you got to get the hidden pieces of information that only one member knows, but that adds to the puzzle, right? And for some reason, psychologically, when you put groups together, they tend to just talk about the shared stuff. Like, there’s a human kind of desire to be like, “Well, we all agree on this.” And so some of the exercises and practices that people talk about are trying to expose that hidden information, and one of them is just to assign people roles and say, “You are the expert on this. You’re the expert on this. You’re the expert on this.”

Chris: Just arbitrarily. So they say, “My job is to go and be the expert on this, and therefore I’ll more likely surface hidden knowledge.”

Steven: Yeah, it diversifies the actual information that’s shared, not just, like, the profile of people.

Sonal: I have a question about this, because I find that fascinating, that you can essentially define expertise as a way to go against the problem of seeking common ground. But then later, you talk about this difference between the classic phrase of foxes and hedgehogs, and how actually it’s not hedgehogs that are deep experts in a single thing, that perform well in those scenarios, but foxes that are more diverse in their expertise. So I couldn’t reconcile those two pieces of information.

Steven: That’s a great question. So, just to clarify — so it comes out of this famous study that Philip Tetlock did.

Sonal: He wrote “Superforecasting.”

Steven: Yeah, yeah, and “Expert Political Judgment.” And he did one of the most amazing, kind of, long-term studies of people making predictions about things. And it turned out, kind of famously, that all the experts are, like, worse than a dart-throwing champ at predicting the future. And the more famous you got, the worse you were at predicting. But he did find a subset of people who were pretty good, you know, significantly better than average of predicting kind of long-term events — which of course is incredibly important for making decisions because you’re thinking about what’s going to happen. You can’t make the choice if you don’t have a forecast of some kind. And what he found in those people — he described them in the classic fox versus hedgehog which is, you know, the hedgehog knows one big thing, has one big ideology, one big explanation for the world. The fox knows many little things, and is a kind of monolithic thinker but has lots of, kind of, distributed knowledge.

And so the reason why that, I think, is in sync with what we’re talking about before is, in that situation, you’re talking about individuals. So, it’s a fox and a hedgehog. And what the fox does is simulate a diverse group, right? He or she has a lot of different eclectic interests. And so inside his or her head…

Sonal: Right. There are, like, 10 people in their head.

Steven: Right. That’s one of the reasons why, you know, a lot of the people who really are able to have these big breakthrough ideas — one of their defining characteristics is that they have a lot of hobbies.

Sonal: Oh, that’s so true. I used to give the tours at Xerox PARC for all the visitors, and actually one of the big talking points was, when we had, like, one of these big muckety-mucks coming through — was, like, how there’d be a material science expert, and he’d be the world’s expert in, like, goat raising — or there’d be someone else who’s a father of information theory for computers, and he’s, like, a world-class surfer. They all had one specific, like, music, whatever.

Steven: Yeah, there’s a funny connection actually to “Wonderland,” my last book, which is all about the importance of play and driving innovation. And so much of, kind, of hobby work is people at play.

Sonal: Right, Dixon has a classic post on this, on, like — the things that the smartest people do on the weekend is what the rest of the world will be doing 10 years later.

Steven: Yeah, I remember reading that.

Extremely long-term thinking

Chris: Yeah, I mean, the way I was thinking about [it] is, there’s so many things in life — especially the workplace — are governed over — you basically have a one to two-year horizon, right? And that’s particularly because business people almost by definition, right, if you work in a public company, they’re moving by quarter, by year. And so where are the places in the world where smart people have a ten-year-plus horizon? I mean, it’s, like, probably academia? And then my model would be sort of technical people on the weekends — nights and weekends, right?

I think it’s more than a coincidence that so many of these, you know, Wozniak and Jobs, and the early internet and all these other things started off as these, like, home-brewed clubs and weekend clubs and things like that, right? Because it’s just simply time horizon, right? I mean, I think it relates to your book but, like, so much of what we’ve done or what we do in the business world, and just the whole, kind of, system, right, is structured around a relatively short time horizon. I think about it in terms of, like, what we do in our job. One of our big advantages is the fact that we are able to take a longer-term perspective, just based on where capital comes from and all the other kinds of things. And that just le’s you invest in a whole bunch of things that other people just simply can’t because they’re under a different set of incentives.

Steven: I mean, one of the great things that I got out of actually deciding to move to California is spending a bunch of time with the folks at the Long Now Foundation. You know, it’s really trying to encourage — it’s not 10 years. It’s, you know, 1,000 years.

Sonal: 10,000. It’s a 10,000-year clock, literally.

Steven: Basically, it would be as long — to last as long in the future as civilization is old. Yeah, I tell people about that. They’re like, “That’s an incredibly idiotic waste of time. Why would you want to <inaudible>? There’s so many pressing problems.” But so many of the problems we have now come from not having taken that kind of time, right? And, in fact, one of the other riffs in the book — I started thinking about like, “Okay, if we are now capable of thinking on longer time scales — if we’re thinking about climate change on 100-year scale, if we’re thinking about superintelligence on a 50- or 100-year scale, what’s the longest decision that one could contemplate?” And actually, Zander Rose who…

Sonal: He runs The Interval for The Long Now.

Chris: …runs The Interval at Long Now. He heard me talking about this, and he said, “Oh, we’re working on this project with this group called METI, which is a group that is debating whether to and what they should — if they decide to — send as a targeted message to planets that are likely to support life.” Now, we’ve identified these planets, whatever. And it’s similar to superintelligence, in that it’s a surprisingly controversial project, and there are a bunch of people, including the late Stephen Hawking, who thinks it’s a terrible idea.

Sonal: And if you’ve read “The Three-Body Problem,” it’s the worst idea ever.

Steven: Exactly, yeah. “The Three-Body Problem.” I’m sure a lot of your listeners have read that.

Chris: It just provokes them.

Steven: By definition, they are going to be more advanced than we are, which is a whole complicated reason why that is, but they will be. And in the course of human history, every encounter between a more advanced civilization and a less advanced civilization has…

Sonal: Ended in a bad way.

Steven: …ended badly.

Sonal: And this is, by the way, rooted in the Drake equation and the Dark Forest analogy.

Chris: Yeah, and the Dark Forest idea, right, is that therefore the best strategy is to be…

Sonal: To be silent.

Steven: Yeah, that’s right.

Chris: We should keep it on the down-low.

Sonal: You hunt silently, or you don’t hunt.

Chris: And that’s the answer to the — was it Fermi paradox?

Sonal: Right, Fermi paradox. Exactly, it brings all these concepts together.

Steven: What I just love about it is just, because of the speed of light and the distance you have to travel to these planets, this is a decision that, by definition, can’t have a consequence for at least, you know, 5,000 to 50,000 years, and depending on the planet you’re targeting, maybe 100,000 years. And so the idea that humans are walking around and be like, “All right, I think we’re going to decide to communicate with these aliens on this other planet, and we’ll get the results back in 100,000 years.” Just the fact that we’re capable of thinking that is pretty amazing.

Sonal: You know, I find something kind of, not self-indulgent, but something that, I think, is very confusing about making decisions in this framework, is that — you know, we can’t predict 10,000 years ahead, but nor can we predict immediate second and third-order effects of things we build today. So my question is — I mean, this sounds like a terrible question to ask, the book is about making better decisions — but why bother making a good decision? Why don’t we just, sort of, let it work itself out in a series of complex, little, tiny events?

Chris: You’re saying why bother because you can’t do anything…

Sonal: You can’t predict the future. I mean, we don’t how things are going to play out.

Chris: Yeah, well, the question is, can you get better at it? I think that was the thing — I think that’s one of the things that’s important about Tetlock’s work which is — that first book was about people being comically bad at it, but he did carve out this element and said some people actually have a strategy that works and seems to be better than just flipping a coin or, you know, you just making it up. And so, I think that, you know, there’s definitely not a crystal ball for this, and there’s not an applied strategy that works in all situations, but I do think you can kind of nudge it. And because decisions are — I mean, that is, kind of, the definition of wisdom, is that you make the right choices…

Sonal: Right, you make a decision.

Steven: …in life, right?

Ideas from the fringes

Sonal: I have a question, too. So we talked a little bit about the fox and the hedgehog. One of the things you mentioned in your book is the role of extreme perspectives versus mainstream, and I thought that’d be really interesting because we think about that a lot. Like, where ideas come from on the fringes.

Steven: Well, it all kind of revolves in the story about the Highline in New York, right? The now-iconic park that was an old, abandoned rail line. One of the…

Sonal: On the West Side Highway.

Steven: Yeah, one of the great urban parks created in the 21st Century. And for, you know, 20 years, it was an abandoned rail line, an eyesore, a public nuisance, and so on. So, one thing that the book argues is, there’s a stage in decision-making, in the early stage, which one should consciously, kind of, seek out to do — which is to diversify your options, right? And folks have looked at — one of the key predictors of a failed decision is, it was a “whether or not” decision. There was just one alternative, like — should we do this or not?

Sonal: In a company.

Steven: In a company, but I think it applies to a lot of things. When you just have one option on the table, those decisions are more likely to end up in a, kind of, failure of one form or another. So part of the strategy, as I said, when you’re at that early stage — let’s do this versus this versus this. Multiply your options. In the case of the Highline, for 20 years, the debate about the Highline was basically, should we tear it down or not? And it was really even agreed that we should tear it down, but just who’s going to pay for it? It was like, it’s a rail line that nobody is using. Industrial rail is not coming back to downtown Manhattan, whatever. And so it was just stuck in this kind of “whether or not” form. And then this interesting bunch of folks, who, to your kind of point about extreme positions — who were not part of the official decision-making process of what to do — that was the city. It was a debate between the rail lines and, you know…

Sonal: <inaudible>

Steven: But then you had, you know, an artist, and a photographer, and a writer who’d kind of gotten attached to this idea that maybe you could do something with this space. And it was this, kind of, marginal set of folks, who were not part of the official conversation about what to do with this, who added a second option — you know, and said, “Listen, what if we kept it and turned it into a park? That would be amazing.” Because our politics are so contentious and polarized, there’s this, kind of, default — you know, anti-extremism now. Like, we want to get out — you know, we get rid of this extremism. But in a society, there’s a certain level of extremism that’s really important. So, sometimes ideas that are important and need to happen come into the mainstream from the margins. So, it’s trying to get, what I call, the optimal extremism. And it’s a tricky one. I don’t have, actually, a clear recipe for this, but, I think — when you’re making a decision, are you bringing in those fringe voices to at least have a seat at the table?

Chris: Relating to the internet, like, one thing I think is so potentially great about the internet is you have all of these niche communities. You know, subreddits and, you know, crowdfunding. You know, we’re investors in Oculus, and I don’t think Oculus would have ever gotten initially funded had it not been for the crowdfunding. I mean, there’s obviously been, you know, bad things on the internet as well, but I think, for the most part, I believe [it] has allowed some of these kinds of more interesting and potentially positive fringe groups to get together. Whether that will continue, you know, as the internet has become more and more centralized, is a topic that we both have talked about before. You wrote a really interesting article for the New York Times last year about something I spent a lot of time on.

Steven: It was a kind of adaptation of your work actually.

Sonal: Oh, that’s awesome. That’s actually great to hear.

Chris: A much better version of it. But, yeah, so, you know, I think the issue we were talking about is sort of the centralization of the internet, and how do we make sure that the internet stays interesting and diverse and, I think, good for small businesses and creators, and all sorts of other people, right? And this is an issue that I think a bunch of people are talking about, right? I mean, you see it discussed when people talk about these issues like demonetization, deplatforming. You see people talk about it in terms of regulation, should these platforms be more regulated? Are we headed to an internet that’s similar to TV, where you have, like, four channels that control everything. You know, Google, Facebook, Amazon, etc. And then you wrote about — there’s this, kind of, fringe movement that is trying to, kind of, through technology principles and innovations, create alternative infrastructure.

Steven: Yeah, there was a direct connection, actually, between “Farsighted,” this book, and that piece for the Times Magazine. And really the thing that began it all was Walter Isaacson wrote an op-ed, I think, in “The Atlantic,” saying the internet is broken, you know, and we need to fix it. It has these problems. And he kind of listed a bunch of problems, which I thought were reasonable. And so, I sent him a note, and I said, “You know, I liked what you wrote. How would we go about fixing it? Like, what would be the decision-making body that would decide these are the fixes and we’re going to apply them?” And he wrote back and he said, “You’re right. It would be impossible in this polarized age. You know, we can’t do it.” And I thought, “That’s incredibly depressing, right?”

Sonal: That’s not a good answer.

Steven: Like, you know, if we’re just stuck with the infrastructure we have, then that’s really depressing, right? So I slowly, kind of, dug through the writing about it, and, you know, about halfway through it, I began to think that some of the blockchain models and some of the token economy stuff that you’ve written about as a way of creating sustainable business models for open protocols, basically — which is what we really, kind of, need. I think one of the reasons that piece worked is that — there were a million pieces written about the blockchain, but I didn’t actually set out to write a piece about the blockchain. I set out to write a piece about how would we fix this problem, and I got organically led towards the blockchain. Meanwhile, as that was happening, all the crazy ICO scams were happening, and, like, it was like the best and the worst of online culture exploding all around me.

Chris: I think I read the same thing. Walter Isaacson, I think he articulates very well the negative side of it. I think the positive side — I would argue two things. Like, one is just the nature —  like, the architecture, specifically the internet protocol, being very presciently designed as a dumb layer in a good way, right, so that you can reinvent. The internet is reinvented if the nodes on the internet upgrade themselves, right? And so I think of internet architecture as the intersection of incentives and technology design, right? So you have to create a better kind of software that runs in those nodes, and then you have to provide the right incentives, right? And one of the fascinating things about the bitcoin whitepaper is it’s, essentially, you know, eight pages of incentives. And if you do the incentives right, the internet is able to, sort of, heal itself or upgrade itself, I should say, or change itself. And then the question people are looking at is, can you take that interesting incentives design, and can you apply it for things that are more useful than simply solving cryptographic puzzles like bitcoin, right, and incentivize new behavior?

So the other thing I always think about is, so many of the models we use are hardware-based, including — I’ve read all your books and, like, the people you talk about, right, by definition, are building usually physical things, because that’s what they were doing 20 years ago, right? And you think about, like, once you build the combustible engine, you basically built it. I mean, you can improve it. You know, you build a car, you basically build it. Where software is fundamentally different. This is a Marc Andreessen point — “software eats the world.” He’s always talking — he just thinks people fundamentally misunderstand software, and keep applying these old physical models of how — you know, Carlota Perez, and all these — which are great frameworks but they’re all based on how hardware cycles work, right?

Steven: Yeah. I guess one thing that I would, kind of, bring out that I actually didn’t get to in that crypto piece in the Times was the importance of governance — structures inside of these crypto protocols and platforms. And, you know, there’s always been some level of governance involved in software, in the sense that you had a corporation, or you had a standards body that was, you know, deciding what the actual software package should be, or what features should be included. But now, really, for the first time, the governance is actually built into the code. If you think about decision-making that — that is, in a sense, you know, do you have governance? Like, we have embedded in this code a set of rules, governing, like, what we collectively are going to decide for the future of this platform. And the fact that that’s now being built into the software is really fascinating.

Chris: Well, the point of this movement is to decentralize, take the power away from an individual, and therefore you have to think about, well, then how do these systems upgrade themselves and govern themselves? And who gets to decide who gets a voice? And all these questions, right? Because in the old model, you just said, okay, the CEO. Right now, it’s like, “Well, there’s no CEO,” so how do you figure it out?

Advice for long-term planning

Sonal: For masses of people to decide and coordinate activity at an unprecedented scale. So this has been great. We’ve been talking about decision-making and how it plays out, you know, in crypto, in innovation, and also then even in personal lives — like Darwin, or even novels and literature like “Middlemarch.” But what are some concrete takeaways or advice — not just for how to think about decision-making and being farsighted, but for what both people and companies, big or small, could do?

Steven: So, for instance, one of my favorite kind of tricks in the book is this thing that Gary Klein came up with, which is a technique also to deal with, kind of, the dangers of groupthink in making, let’s say, a work decision, where you’ve got your team and you’ve decided, “We are going to launch this product and we’re all really excited about it.” And so, he created this, kind of, technique which he calls a premortem. I love this idea. So postmortem, obviously, the patient is dead. You’re trying to figure out what caused the patient’s death. A premortem is — this idea is going to die a spectacularly horrible death in the future. Tell the story of how that death happened, right? In five years, this will turn out to have been a bad decision. Tell us why. And that exercise — again, it’s like scenario planning. It’s a kind of negative scenario planning. Even if it ends up not being true, the exercise of forcing your brain to come up with a story…

Sonal: The alternative thinking.

Steven: …as opposed to just saying, “Hey, guys, do you see any flaws with this plan?”

Sonal: Do you guys do that when you talk through deals?

Chris: Yeah. No, so I think a good investor discipline is to do something similar to that where you kind of — and frankly an entrepreneur — I think one of the myths around entrepreneurship is that there — I mean, they’re risk-takers. That said, entrepreneurs do take risks, but good entrepreneurs are very good at doing premortems, ordering the risks, and then systematically trying to mitigate them, right? I mean, now, that’s not to say that they don’t take big risks, but you certainly don’t want to take unnecessary risks, right? So I think what a good entrepreneur is doing is constantly thinking about all the different scenarios, how they’ll go wrong, you know, kind of, rank-ordering them, taking a bunch of risks, but saying — hey, so my key risk and this is — you know, it’s sort of like, “This type of business is all going to be financing risk, and this one will all be about talent, and this one will be all about, you know — how will it go wrong.” And you see enough of it — and, of course, it’s a very rough and imperfect science, but it feels like you can get — it seems like you get better over time.

Steven: Yeah, the original patent that Google filed for the self-driving car projects — included in it is this thing they call the bad events table. Basically, it’s like, at any moment as the car is driving, it’s creating this bad events table, and the bad events are ranged from, “I’m going to dent the right side mirror by accident, you know, just scraping against this car,” to, “I’m going to collide with these two pedestrians and they’re going to die.” And there’s, like, 15 bad events that can potentially happen, given the circumstance in the road. And not only do they, kind of, list the bad events, but then the software is calculating both [the] likelihood of the event happening, and then the magnitude of the risk, right? So two pedestrians die — very high magnitude — but if it’s very low probability, you kind of measure it. And I think of that as, in a sense, the car is doing that at the speed of instinct, but in a way, that’s a kind of table that would be really nice to put next to a pros and cons table, you know? What are all the terrible things that could happen? And let’s rank them with probability and with magnitude. Just to see it.

Sonal: I think about this all the time, actually, in terms of how people make pros and cons lists, and how they’re so flat variable-wise. And if you’ve gone through any statistical training, the first thing you learn in any linear model is how to weight your algorithm, and you weight the variables. And I always think about that. Like, well, I’m going to give this, like — well, I’m going to give this, like — a move to California 10x weight, and my move back from New York. You’ll give something else 2x, and you multiple all those probabilities and those weights to come up with your decision. I think that’s a very good way of thinking about it.

Steven: You know, pros and cons tables date back to this famous letter that Ben Franklin writes to Joseph Priestley — who, coincidentally, was the hero of my book, “The Invention of Air” — but he’s, like, explaining this technique he has, which is basically a pros and cons list, and he calls it moral algebra. What gets lost in the conventional way that people do pros and cons lists is, Franklin had a kind of weighting mechanism, where he basically said, “Okay, create your list of pros and cons, and then if you find ones that are comparable, kind of, magnitude on one side and the other, cross them out.” We would do it differently now, but it was a way of assessing, “Okay, these two things are kind of minor, and I got one on one side, one on the other, so I’m going to cancel that out.”

Sonal: They don’t make — that’s great.

Steven: I think some of those exercises are really important. I think cultivating a wide range of interests and influences is a really important thing to do, both in terms of innovation and creativity, but also in terms of decision-making. And I think it’s very important to stop and say, “Okay, what would the alternate scenarios be? What if it gets better? What if it gets worse? What if it gets weird?” And the other thing about the, kind of, diversity point I think that’s going to become increasingly important — the diversity is actually going to be also machine intelligence, too, right? Increasingly, part of that intellectual cognitive diversity is going to involve machine intelligence.

Sonal: Oh, interesting.

Steven: And so it’s going to be, you know, not just, you know, making sure you have a physicist and a poet in your, kind of, posse that’s helping you make this decision — but we’re going to see more and more people making decisions. For instance, you know, there’s a lot of interesting research, in the legal word — bail decisions. Normally, a judge would make a decision, “Okay, this person should be let out on bail for this amount, or not let out on bail, whatever.” And there’s some evidence now that machine learning can actually make those decisions more effectively. It’s not that we want to hand over the process to the machines entirely, but the idea that you would be assisted in making a choice like that, I think, is going to be something we’ll see more and more of.

Sonal: I mean, I think we’re already seeing hybrids of that play out, like, with hedge funds with quant strategies, etc. But you’re saying something even more. You’re saying it’s like a partner in decision-making.

Steven: Yeah, it’s a collaborative model. My friend Ken Goldberg, who’s at Berkeley in the robotics program there. He talks about inclusive intelligence, right? The idea that it’s not just about, you know, just human intelligence versus artificial intelligence, but actually this, kind of, dialog that you’re going to have with a machine. You might say, “I think I should release this person on a very low bail,” and the machine comes back with, “Well, looking at all comparable case studies, I think he actually, you know, shouldn’t be released at all.” At that point, you’re like, “Okay, that’s interesting. I’m going to question my assumptions here and think about what I might have missed.” You might not change your mind, but having that extra voice in the long run will probably be better for us.

Sonal: Right. It feels like crowd intelligence on a whole massive different scale. Were there any qualities of people that you’ve seen? One of the things that you put in the book was that one of the key factors is an openness to experience as a real great predictor — a very good decision-making prediction, etc. I thought that was fascinating, because I thought of immigrants. It’s like a defining quality of immigration, and what brings people to different places.

Steven: You know, it’s one of the big five personality traits.

Sonal: It’s openness to experience.

Steven: It’s another…

Sonal: It’s another phase of curiosity.

Steven: …phase of curiosity.

Sonal: Gotcha.

Steven: And I love the word curiosity. But openness to experience is a slightly different way of thinking about it, that you are walking through life looking for, you know, “I’m open to this thing that I’ve stumbled across, and I want to learn more.” And Tetlock’s predictors — the superforecasters that we’ve talked about — they had that personality trait in spades in general. So it’s a wonderful thing, and it’s related, I think, to another quality which is empathy, right?

Sonal: Mm-hmm, which is also, by the way, one of the very things that fiction helps with.

Steven: Exactly, exactly. So when you get into the world of, kind of, personal decision-making, novels, in a sense, train the kind of empathy systems in the brain because you’re sitting there, like, projecting your own mind into the mind of another, listening to their inner monologue — their, kind of, consciousness — in a way that almost no other art form can do as well as a novel can. And so that exercise of just, “What would that other person think? What would their response be?” In so many decisions we have to make, you have to run those simulations in your head, right? Because your decisions have consequences to other people’s lives. And if you aren’t able to make those projections, you’re going to be missing some of the key variables.

Sonal: That’s great. And then, finally, what do you make of all those folks that have, like, this list of tips and advice? Like, when they think about, like, “Jeff Bezos does this and Elon Musk does that.” I think you might have written about this in your book, about how Jeff Bezos believes that you should get to 70% certainty.

Steven: Yeah, I actually — I like that technique, which is to say don’t wait for 100% certainty, because a lot of the challenge with these complex decisions is you cannot by definition be fully certain about them. So the question is, where do you stop the deliberation process?

Sonal: So you don’t just freeze and not do anything.

Steven: And by measuring your certainty levels over time, taking a step out of the process, and say, like, “Okay, how certain am I really about this?” I think that’s a really good exercise. So I think those little — you know, I definitely included them. I tried it with this book to try and hit the sweet spot of like, “These are kind of interesting tools that have been useful and that have some science behind them,” but also then to just look at the, kind of, broad history and some of the science about the way that people make decisions and somewhere have it kind of be a mix of those two things.

Sonal: I think it’s great, and especially because we, as Homo sapiens, are very unique in being able to actually have the luxury of doing this. Well, thank you, Steven, for joining the “a16z Podcast.” He is the author of the new book just out, “Farsighted: How We Make the Decisions that Matter the Most.” Thank you.

Chris: Thank you very much. It was great talking to you, Steven.

Steven: I loved it. Thank you.

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  Steven Johnson
• 

  Chris Dixon is a general partner at a16z, where he leads the crypto/ web3 funds. Previously, Chris was cofounder & CEO of startups SiteAdvisor and Hunch (acquired by eBay); and an early blogger at cdixon.org.

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  Sonal Chokshi is the editor in chief as well as podcast network showrunner. Prior to joining a16z 2014 to build the editorial operation, Sonal was a senior editor at WIRED, and before that in content at Xerox PARC.

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