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[VIDEO] MARC ANDREESSEN &

CLAYTON CHRISTENSEN:
"VENTURE CAPITAL IS
ABUNDANT, OPPORTUNITY IS
SCARCE"

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(/U/MICHAELGASIOREK/)
MICHAEL GASIOREK (/U/MICHAELGASIOREK/)
A MONTH AGO
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Years after Clayton Christensen flipped Marc Andreessens world upside

down, the two finally sat down for a conversation in Silicon Valley.

Andreessen was taught the algebra of business: If big companies are well

run, startups cant take them out. You must wait until a company is poorly
run to attack. Christensen, with the publishing of bestseller Innovators

Dilemma (https://www.startupgrind.com/blog/sg-2016-welcoming-claytonchristensen-godfather-of-disruptive-innovation/), taught the world the

calculus of business, Andreessen complimented: for my generation
flipped [the algebra of business] on its head.

The Harvard Business School professor and Innovators Dilemma author

joined the founding partner of venture firm Andreessen Horowitz at the

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Startup Grind Global Conference for a dive into the disruption of venture
capital and of Silicon Valleys greatest technology companies.

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So what is the calculus of business? Big companies that are well run are very
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focused on their current customers, becoming sustaining innovators, and

making them blind to innovative disruptors, said Andreessen. Thus, the

gap that opens up is a matter of competence, rather than incompetence, -

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and Andreessen Horowitz has made it its work to fund companies targeting

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lumbering industries like banking, government, logistics, and communication.

The two philosopher kings got personal with Startup Grind

(http://startupgrind.com) founder and CEO Derek Andersen, sharing how

their own industries are being disrupted - kicking off with Christensen making
a wish for Harvard to move to Silicon Valley, and if not that, inviting

Andreessen to quit the venture betting game and do something productive:

become a HBS professor.

Watch the full chat with Clayton Christensen & Marc

Andreessen here (https://www.youtube.com/watch?

v=IkBp1ntD3Zc), and catch the highlights below.

The Evolution of Christensens Disruption

Theory

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Christensens theory of disruptive innovation has evolved since the publishing

of the Innovators Dilemma, adapting to new case studies and becoming

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something of a Valley buzzword. More important, the theory has expanded 178
to
previously untouchable industries like education (Udacity

(https://www.startupgrind.com/blog/udacity-founder-sebastian-thurn-wecan-double-the-worlds-gdp/)), media (Brit + Co

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(https://www.startupgrind.com/blog/80-of-silicon-valley-brands-dont-careabout-brand-missing-huge-opportunity-say-britco-eventbrite-founders/)),
hotels (AirBnB (https://www.youtube.com/watch?v=k1qvL3uHVI0)), and
even government (OpenGov.com (http://OpenGov.com), an Andreessen
Horowitz-backed company).

The law that colored the entire conversation was Christensens view of
growth, which comes in three flavors:

Disruptive innovation makes creative products more affordable and

accessible. Its desirable in capital-rich economies, as it creates overall
economic growth and job opportunities in exchange for (often risky)

investments. Though these products - like supercomputers - usually start out

poorly distributed and prohibitively expensive, miniaturization and sustaining

innovation usually puts these inventions into everyones hands - like the
iPhone, packing as much power as a 1985 Cray-2 supercomputer.

As a contrast, sustaining innovation is the process of fine-tuning your

companys business to increase margins, optimize your workflow, and

specialize your staff. Though tough to watch, Jack Dorseys development

team firings have - hopefully - made the company more sustainable by both
increasing margins (by cutting total spent on salaries) and focusing the
product road map.

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Last, a specialty of Japan and China, is efficiency innovation: specifically,

doing more with less, like Uber aims to with the deployment of a self-driving

fleet. The catch: efficiency innovations increase free cash flow, but cut jobs often dramatically.

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Christensen urged founders and investors to reconsider measuring success460

by how quickly you can get your money out, and to focus on jobs to be
done - processing payments, for example - rather than trying to cover

lending, investing, and saving as banks have. His warning came with an

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example: the New York Times, he illustrated, by trying to do everything for

everybody, is going off a cliff. Instead, by focusing on jobs to be done,
Silicon Valley companies are disrupting even banks and media.

Watch the full keynote by Clayton Christensen on "The State of

Disruption" (https://www.youtube.com/watch?v=Zn6KksdOgE) for the 5-point theory.

Is Venture Capital Being Disrupted?

Capital has become abundantly cheap, but this doesnt mean we can be

careless with it, pressed Christensen, continuing to say MBA are often taught
mistaken doctrines of finance that stifle innovation; namely, Whist thou

can waste inputs that are abundant and cheap, thou must husband carefully
the use of input that are scarce and costly. In laymans terms: sand is

cheap, so use it at will; platinum is expensive, so use it carefully. With a rise

in not just venture funds but also venture investors, Silicon Valley is

experiencing a venture investor bubble new money from new investors

making investments without the rigor of experience, often driven by buzz.
The return to VC over the last 15 years has been nearly zero. Maybe we

shouldnt husband the use of capital, quipped Christensen, and perhaps we

should aggressively put capital to work. So has venture capital, with a glut

of new and often dumb money dumped into ventures now struggling on the
open market, engineered its own downfall?

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Not so, argued Andreessen: The critical crisis in the economy at large is not

that Unicorns are overvalued, but that there arent enough of them. To
contrast the $50 billion in bets placed on venture backed companies,

Andreessen referenced the ailing bond market: globally, there is $6 trillion in

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bonds out in the market returning negative yield, demanding investors pay460
to own them. If just a fraction of a percentage of this money was put

towards innovative ventures, he suggests, the returns both financially and

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technically could yield to more Googles and Facebooks - even if a majority of

these investments totally fail, as the odds predict. Andreessens summarizing

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quote of the night: Capital is abundant, but opportunity is scarce.

Andreessen is excited, rather than threatened, by co-opetitors like Y

Combinator (https://www.startupgrind.com/blog/y-combinator-presidentreveals-the-one-trait-that-successful-founders-share/), which he sees as

ultimately diversifying and bringing innovation to the venture capital market.

With the cost of capital so low, the usual $5 million deals are no longer of

great interest, so the launch of Y Combinators follow-on Continuity Fund was

not a competitive move - it was simply inevitable.

The Rise & Fall of Silicon Valley Unicorns

Despite the abundance of money, Christensen fears a fall of the Unicorns -

companies theoretically worth at least $1 billion - not because theyre being

run poorly, but because theyre all being run perfectly - and extremely

similarly. If smart people have a vigorous theory about how the world

works, theyll fail less, he says of entrepreneurs. But when you continue to
teach the theory, it creates a problem - namely, Christensen began, if

everybody does everything right [and the same way] it creates a new
opportunity for disruption, finished Andreessen.

If the model of building and funding companies is becoming a repeatable

science, both the industries of founders and investors are opening

themselves up to be shaken up by true innovators. Looking to data-driven

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funds like Social+Capital (which legendary fund KPGM attempted to acquire),

creative investment diversification initiatives like YC Research and the YC

Fellowship, and even the rise of university venture fund, it seems like the
venture investor bubble is already seeing new challengers.

Andreessens solution to the keeping companies competitive: focus on

empowering founders. We think founders are critically important, he

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argues, with the top 50 technology companies over the last few years all
being run by the founders. Rather than stubbornness, founders have

conviction: since the founder remembers the company when it was nothing and knows it can easily return to nothing against a disruptive entrant - he or
she has the moral leverage to do what needs to be done, even when its
heresy, Andreessen argues, nodding to Steve Jobs.

But pushed about the recent ousting of founder Parker Conrad from Zenefits
over compliance issues, Andreessen deflected. Yet its hard to believe COO
David Sachs and a board of expert investors had not seen the compliance
problems month if not years ago. Asked if Conrad might pull a Jobs,

returning to revitalize the company, Andreessen admits, this is a business

for the aggressive, and that any CEOs changes are always a matter of
specific personalities.

Even posed against the will to power of great founders, Christensen's view is
more than theory: as venture building continues moving towards a formula,
the companies getting disrupted fastest are our own companies, said

Andreessen of Silicon Valley founders. Most good startups have about 5

years of business before they get locked in to serving a particular customer,

creating an opening for new companies to disrupt the original disruptors.
Examples are making both the editorial columns and front pages: Apple,

Twitter, or Google - now each at least a decade old, are battling a creative
slowdown, doing their best to remain disruptive innovators against the
pressure of public markets to optimize for profitability and efficiency.

Are Todays Tech Giants Slowing Down?

On higher education: were focusing too much on consumption, versus

non-consumption. When the alternative to college becomes good enough -

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whether it be through MOOCs of the kind offered by Udacity (another Startup

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Grind guest), technical skill programs like Hack Reactor, or entrepreneurial

incubators like 500 Startups - people will pay a premium for it. Harvard is
getting disrupted, warns Christensen.

On Apple: The move from 2 year cycles of disruptive products has given

way to a 1 year cycle of sustaining and optimizing innovation - smaller, faster

devices with cosmetic tweaks rather than true movements towards breaking
new ground, suggested Christensen and Andreessen, though both agree its
hard to argue with Apples success in valuation.

On Twitter: Lots is going right at Twitter, said Andreessen, and its a sign
of the times that we have a 10 year old Silicon Valley company doing $3B in
revenues and have 350 million users, and were like, it sucks. Twitters
challenge, then, is remaining innovative at a size when most companies
would inadvertently become optimizers.

Twitter has two options, tweetstormer Andreessen suggests:

First, to accept that the network effect is slowing, and growth has peaked. If
the size of the network is maxed out, the company should evolve to

sustaining innovation, and increasing efficiencies - perhaps improving the

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advertisement business or tweaking tweet discovery. Christensens warning:

If they go after sustaining innovation, theyre sure to be done really fast.

The alternative - and founder Jack Dorseys current course - is to remain
disruptive, making the controversial moves necessary to keep Twitter

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growing. If Twitter can evolve the product, it will grow the size of its pie, and

there will be no ceiling to its success. Heres where Jack is putting his money,
says Andreessen.

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A crowd favorite: Andreessen finally confirmed his tweet storms come not
from an intern sweatshop, but directly from him.

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On Google: Though the company is vigorously pursuing disruptive

innovation by dumping money into moonshots, Christensen wondered if

Google is underperforming on efficiency improvements. What Alphabet
needs is not more technology, but more business models that work,

criticized Christensen, but added, Creating new business models within old
business models is the hardest thing to do.

Traditionally risk-loving, Andreessen is excited by Google as an extension of

his own preferred use of capital: Google has $60 or $70 billion in cash, so by
default it just sits in their accounts, maybe with negative interest,

Andreessen said with a nod to the $3 trillion in bad bonds, so to be able to

take $3.6B a year and put it into moonshots if they get one or two or

three of these moonshots to pay off, the total returns on their capital will be
so much higher.

Long Term Investing: Friends, Family, and

Principles

Christensen, author of the equally successful How Will You Measure Your Life
(https://www.startupgrind.com/blog/the-disruptive-innovators-life-withclayton-christensen-book-how-will-you-measure-your-life/), ended on a

personal note: disruption occurs even when you do everything right, both

in life and business, he said. I look at my students and not a single one had

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a strategy to get divorced or alienate their own children. But many of them
implement that strategy - even though they don't want this to happen.

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Why? When youre a productive person driven by achievement, Christensen460

suggest, you naturally invest time and energy into outlets with tangible
returns - most often, your work. But when you go home and with your

family, the feedback loop is much less tangible than a promotion, a salary

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raise, or an award. The causal mechanism behind this is the impulse to seek

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immediate and tangible evidence of achievement."

Telling a story of how he lives what he writes, Christensen finished, It is

easier to hold to our principles 100% of the time than 99% of the time.

Read next: our book notes on How Will You Measure Your Life

(https://www.startupgrind.com/blog/the-disruptive-innovatorslife-with-clayton-christensen-book-how-will-you-measure-yourlife/), by the Director of Startup Grind LatAm

ABOUT THE AUTHOR

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(/U/MICHAELGASIOREK/)

Michael Gasiorek (/u/MichaelGasiorek/)

(HTTPS://TWITTER.COM/GASIOREKM)

(HTTP://LINKEDIN.COM/IN/MGASIOREK)

Adventrepreneur, community builder, and effective altruist. I'm Editor in

Chief and resident nomad at Startup Grind. I've played at diplomat at the

UN, marketer at AOL, startup founder at Chinaccelerator, venture advisor

at NUIdea, and author at Wood Egg. Loves exotic views, live concerts,
and cooking brunch.

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Comments
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(/U/M

6TKAZ

ANDREW BROADBENT (/U/M6TKAZ/)

A MONTH AGO

/)

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(/BLOG/MARC-ANDREESSEN-CLAYTON-CHRISTENSEN-VENTURE-CAPITAL-IS-ABUNDANTOPPORTUNITY-IS-SCARCE/#COMMENT-2411)

Michael, This is an excellent article write-up on this epic Fireside chat.

You really nailed it.
Reply

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(/U/MI
CHAEL
GASIO
REK/)

MICHAEL GASIOREK (/U/MICHAELGASIOREK/)

A MONTH AGO

(/BLOG/MARC-ANDREESSEN-CLAYTON-CHRISTENSEN-VENTURE-CAPITAL-IS-ABUNDANTOPPORTUNITY-IS-SCARCE/#COMMENT-2413)

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Thanks Andrew, really appreciate the feedback - loving your latest on

Vinod, too!
Reply

(/U/M

WZPK
H/)

TAULANT NANO (/U/MWZPKH/)

A MONTH AGO

(/BLOG/MARC-ANDREESSEN-CLAYTON-CHRISTENSEN-VENTURE-CAPITAL-IS-ABUNDANTOPPORTUNITY-IS-SCARCE/#COMMENT-2420)

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