Scott Kupor (A16z) in Brazil - Notes

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Scott Kupor (A16z) in Brazil - Notes

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EricAkira

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Scott Kupor in Brazil – São Paulo, 09/05/2019

Scott’s background:
- Capital Markets (Investment Banker)
- Software Executive - LoudCloud (met Marc Andreessen and Ben Horowitz)
o “Good idea but 10 years too early”
- Managing Partner at Andreessen Horowitz (a16z)

Major Shifts and Trends in VC

VC 1.0: Early Stage Ventures (70s – 1998)

- Capital was the scarce resource
- Persistence in firms – larger firms tended to stay the largest and yield the highest returns
- Small Private Opportunity – firms didn’t stay private for long
- Less than $20bn/year
- US Dominance (90%)
- Lots of IPOs (90 tech IPOs/yr), 5-7yrs to go public, US$40M avg revenue, 5x Price/Sales

...and then came the bubble:

- $50bn in ‘99, $75bn in ’00 and only $10bn in ‘03
- 80% US Dominance
- 630 VC/Tech IPOs, 4.5 yrs to go public, $17M avg revenue, 45x Price/Sales

VC 2.0: Introduction of Seed Capital

Why?
- Costs Fall: Opex > Capex. Capital is no longer scarce. Input costs decline (pay as you go)
- Democratization of access (e.g. Y Combinator)

Major Disruption #1: Seed becomes more important

- # of seed deals: 458 in 2006, 3,780 in 2018
- # of seed funds: 137 new funds 2011-18

Scott believes the same is going to happen in emerging markets. The seed space will be occupied by new funds
and institutionalized, just as it happened in the US
Consequences:
- This changes the balance of power from VC to Entrepreneur
- Having capital is not enough differentiation anymore
Consequences (cont’d)
- Early stage funds are moving to seed
- Seeds tend to be overfunded, but ecosystem remains OK (seed is still less than 10% of funding; Series
A/B % declined)
- Seed activity should continue to increase

Major Disruption #2: The Death of the IPO

- We are at 1/3 of historical volume – the last 18 years figures are equal to 1999-2000 alone
- Bigger IPOs: Avg Revenue $170M
- Private funding overtaking public funding

Major Disruption #3: Growth Equity and Barbell

- Big funds are getting bigger
- LPs are doing a barbell allocation: LPs are allocating to funds in early/seed stage and to very large funds
($500M+)

Major Disruption #4: Winners are Bigger

- Software is eating the world, but barely touched many industries yet
- Bigger consumer market – internet becoming universal
- Bigger enterprise market
o This is not mentioned a lot, but the decentralization of enterprise budgets and bottom-up
addition (SaaS) make it easier to sell to enterprise and expand the market

In summary: What has changed?

- Capital is a commodity
- Founders have choice (balance of power shift)
- Staying private longer

And what has not changed?

- Importance of the basics
o Teams matter
o Markets matter
o Product matters
- The baseball analogy is still valid – i.e. what’s important to a VC is the # of home runs
- Software is still eating the world

Scott believes late stage funds will break into funds focused on Cash on Cash returns and funds focused on IRR.
The convergence between early stage and late stage will continue to happen, such as the convergence of early
stage and seed happened.
On Andressen Horowitz (a16z)
“We believe in the founder/CEO”
[aqui vale a pen a ver o case da Harvard Business School sobre a formação da a16z, que descreve como que a
a16z foi fundada no principio de criar uma marca forte, ajudar os founders a virarem CEOs e ter um time
operacional muito maior e voltado para essa missão. Ele basicamente reproduziu essa parte]
Goal in 2009: Be a top brand in VC
Goal in 2019: Be THE top VC
They have already built the largest network in the history of VC.
They will continue to be focused on the US. Still learning to invest in markets that are not that far away from US
culture (Latam, Europe, Israel). But no India/China focus for now.

What worries him (but not too much)

- Macro environment is a concern, but on a relative base, fundraising is flat as a % of Stock Market
- Convergence of public and private markets valuation indicates some rationality
- Tech Market has reached ’99 levels, but driven by earnings growth, not by multiple expansion
- Tech market share of stock market is modestly increasing, but far from bubble levels

VC funding actually declined as % of GDP, so he believes we are still underinvesting as a society

Some predictions and questions for the future

Predictions
- Early and later stage will merge
- Secondary market liquidity will increase: public and private markets will merge
- Assets will continue to move from public to private markets: compare the size Facebook went public vs
Microsoft, for example

Open questions
- Will persistence persist? Will large VC firms continue to outperform the rest?
- Will diversity (broadly defined) in firms and tech be of major importance?
- US still dominant in Tech Scene? (51% of VC today)
- Will there be generational transition and spinouts in firms?
Q&A

What’s Andressen Horowitz Crypto/Blockchain view? (the firm is part of the Libra Association and announced
a separate fund for investment exclusively in crypto: a16z crypto)
They are focused on what they call “crypto-networks”. It’s basically a new way to build digital services. While we
rely today on a centralized management for building and delivering services, these networks will be able to do
that in a decentralized fashion. This a longer-term change, that will affect the next 20-30 years.
As a firm, they are invested in the public/liquid assets such as Bitcoin and Ethereum. They also joined Libra. His
view is that some of these networks will ultimately enable something that was a promise from the beginning of
the internet: micro-transactions. The only reason we have an internet that relies heavily on Ads is the fact that,
for example, New York Times cannot charge you fractions of a cent for content consumption.

What’s the firm view on Fintech?

Fintechs today are separated in basically two categories: the ones that are unbundling banking services and the
ones that are building banks bottom-up
- Unbundling fintechs are basically focusing on delivering a better/cheaper/more efficient experience on
some vertical banks offer. E.g. Transferwise on International Money transfers.
- The ones building banks bottom-up are acquiring customers in a cost effective way (e.g. credit cards),
and then will offer other banking products to this customer base. Examples here are Brex and Nubank.

Latam Strategy
“There is no strategy”. They recognize not every success will come from US and they are open to find talent
elsewhere. They have relied on partners and referrals. Good news is that they feel more comfortable than in
China, for example.

On recent IPOs
He still believes going public is good – provides accountability to the company and liquidity to employees.
Generally, the market has been better for companies servicing the enterprise space. The macro environment
(trade war for example) is an overhang.

On mega rounds and Softbank coming to Latam

Latam now is equivalent to US on 14/15. Over the next 5 years, other players should enter the space for later
stage/larger deals (Family offices, Pes, HFs).
When rounds and size get too big, more than ever it’s important to focus on fundamentals.
On Regulation Clarity for Crypto (recently a16z held a panel with US regulators to discuss that)
The regulatory space for crypto is still unclear. It needs this regulatory clarity for investors to feel more
comfortable: e.g. which assets are securities; which assets are commodities?

Advise for Corporations looking to invest in VCs as LPs

They need to know what exactly they look to get out of this investment. Generally, they want to get insight into
some space. Problem for VCs is that when management changes, this interest can change, that’s why they
prefer to work with LPs that have a longer-term commitment.

How to find more talent, given that the technical to non-technical people ration in the companies is increasing
We need to find ways to incentivize people to go into technical areas. We also need to rethink education. Some
initiatives are focusing on retraining employees (e.g. Udacity)

What are some red flags when investing?

- #1 They must be in a Big Market: to make sense for a VC to invest, the company has to have a potential
to reach several billion dollars in market cap. One major red flag is when founders say “Oh, and if this
doesn’t work out, we can sell to Amazon/Facebook/Google”. Either the market is going to be huge or it’s
not
- #2 When founders show they have not thought through about how much to raise. It’s important to have
a good estimate of how much you need to achieve the milestones and de-risk the business to reach the
next round. Sometimes founders propose values because they see how much other people raised. They
need to see that founders dedicated time to think about this problem