Courtesy of Andreessen Horowitz
Scott Kupor.
- Venture capital isn't as complicated as it might seem.
- Business Insider spoke to Andreessen Horowitz's managing partner and first hire, Scott Kupor, about what he looks for in founders.
- Kupor recently published the book "Secrets of Sand Hill Road."
- He said Andreessen Horowitz has always looked for founders who are overly confident in themselves and their business idea.
- Visit Business Insider's homepage for more stories.
Scott Kupor was employee No. 1 at Andreessen Horowitz, the venture-capital turned financial-services firm that's bet on tech darlings like Facebook, Airbnb, and Lyft.
In a former life, Kupor was a banker at Credit Suisse, where his responsibilities included overseeing companies' IPOs. In 1999, an executive at one of those companies said he was leaving to join the software startup LoudCloud, cofounded by one Marc Andreessen. Kupor was intrigued.
At a Denny's restaurant in Sunnyvale, CA, Andreessen drew on a napkin to illustrate his ambitions for LoudCloud. The pitch was compelling enough that Kupor quit his job in finance and made the seemingly irrational decision to sign up.
LoudCloud, which Kupor considers a proto-Amazon Web Services, became Opsware and was bought by Hewlett Packard. With the Opsware acquisition under their belt, Andreessen and his LoudCloud cofounder Ben Horowitz set their sights on building a venture-capital firm that would do more than simply write checks. They'd also provide startup founders with long-term support and guidance.
Since Andreessen Horowitz launched in 2009, Kupor and his colleagues have seen thousands of pitches from new and aspiring startup founders. They currently manage a total of $10 billion in assets.
Kupor's new book, "Secrets of Sand Hill Road: Venture Capital and How to Get It," demystifies the world of venture capital, from the legalese on a term sheet to the overall framework VCs use to evaluate potential investments. (Sand Hill Road is a street in Silicon Valley that's home to multiple VC firms, including Andreessen Horowitz, and has become a byword for the venture industry.)
We sat down with Kupor and learned why Andreessen Horowitz had always looked for "egomaniacal" founders, why entrepreneurs with no relevant industry experience can be the most successful, and why some perfectly worthwhile businesses will never need an influx of capital.
The following interview has been edited for length and clarity.
Shana Lebowitz: I want to hear more about your decision to join what was then LoudCloud. You had a job. You were starting a family. And you weren't sure about joining. So how did you decide?
Scott Kupor: There were a couple of things. From a personal perspective, the job of being a banker in the [1990s tech] bubble was that you lived on a plane for 24 hours a day. It also meant that just when you thought you had a Friday and a weekend off, somebody would call at 5 o'clock on Friday and say, "By the way, we're pitching for this business on Monday morning, so I'm sorry if you had weekend plans, but we need to see a draft of a presentation." That got old after a while.
The other thing though was more positive. When you're a banker, you go on these road shows with companies. I would listen to these stories, and I just found myself fascinated with it. I was like, "Wow, it's amazing to hear the storytelling from these entrepreneurs."
When I went into this interview with Marc [Andreessen], I'd never met him before. And he's both physically imposing and he talks fast. He gave me his whole conquer-the-world strategy. He's like, "Look, this is how we're going to do it, and this is what it's going to mean, and this is what the opportunity is." I'm not sure I made a rational decision at all.
Andreessen Horowitz used to say they invested primarily in 'egomaniacal' founders
Lebowitz: You've worked for a startup; you also invest in startups now. Have you noticed that there are common themes in entrepreneurs?
Kupor: It's always dangerous to overgeneralize. But I really do believe you have to be willingly able to suspend disbelief in some respects to do a startup. Because we know the odds of success are just really low. The math just tells us that. And you're probably not likely to achieve, unfortunately, the business outcome that you had hoped.
When we started [Andreessen Horowitz], when we pitched our first fund, we said that we would invest in 'egomaniacal founders.' We literally had a bullet in our slide deck. The LPs looked at that and they said, "That's crazy - how could that be a positive characteristic of who you want to invest in?"
We realized, of course, the word choice probably wasn't that great. But that was the concept: We wanted people who were so confident in themselves that they were literally willing to quit their jobs and start over from scratch and walk through walls and do something that everybody has told them to their face is a waste of time or can never happen.
Over time, you have to be able to soften it to the point where you can attract employees. You can work with business partners. Some people can get away with it maybe their whole careers, but I think the really successful entrepreneurs are able to willfully suspend disbelief, but then also figure out a way to not make themselves impossible to deal with.
The other fairly consistent thing that we see in entrepreneurs is the ability to articulate what it is that makes the opportunity so compelling. You really can tell the difference between people who believe in what they're doing and who have the ability to convey that enthusiasm and people who may just - it's a job for them, as opposed to this is what they feel compelled to do as their life's mission.
A startup's founding team matters as much to VCs as the business idea
Lebowitz: Is it inherently bad if you see starting a company as just like any other job, as opposed to something you're compelled to do?
Kupor: It's not normatively bad. I don't know if I can prove this mathematically, but you would imagine that, given how hard it's going to be to build a business, if you don't go into it with that organic pull, you may not actually be willing to sustain all the challenging times that exist in the organization.
Lebowitz: Are there certain pitches you've seen that are emblematic of what you want to see in a founder or in a new business?
Kupor: The first real priority question for us is, "Is the market size that they're going after big enough that it can sustain a stand-alone viable, profitable business?" And that's just a function of the fact that we're wrong, unfortunately, more often than we're right on these things. We have to at least go into the decision at the outset thinking, "Okay, what could this be? If this is successful, how big can it be and what can it look like?"
Once they answer that question, the teams that do really well help us understand why this team is the best team to go [execute] that opportunity as opposed to any of the other three, four, five, groups that might come in with a similar idea.
We have some [other] heuristics that we look at internally. "What was the problem that you were trying to solve? What experience brought you to that problem?" And in some ways we love to see [that] you felt so compelled to solve that problem and you almost got forced into building a company because you realize the problem was bigger than what you were doing.
The third big area is, we really are interested in the entrepreneur's thinking around the product. We use this term "Idea Maze." What was the Idea Maze that they ran through in order to get to the ultimate product that they believe, at least, is the solution to the problem?
Every founder Andreessen Horowitz invests in has an 'earned secret,' whether they've worked in the industry for years or just entered it
Lebowitz: How often is it the case that people feel compelled to start a company as opposed to the alternative?
Kupor: There is one interesting counter[example], which is that backing somebody who has no predilections about the business and no preconceived notions about what that business might be, in some cases might actually be a good idea.
Herb Kelleher was the CEO of Southwest Airlines, and people asked him what his qualifications were for starting an airline business and his answer was, "Because I know absolutely nothing about the airline business."
We always had this challenge when we first started [Andreessen Horowitz]. We would see a lot of LoudCloud-like pitches. And between myself and Mark and Ben, we had so much [residual anxiety] from having lived through all of the nightmares of running that business that we almost just redlined that area. The bliss of ignorance, to a certain extent, can be helpful.
Lebowitz: If I were thinking about starting a company, how would I know if my experience is going to work to my benefit or detriment?
Kupor: The two founders of Okta, Freddy [Frederic Kerrest] and Todd [McKinnon], both grew up in Salesforce. So, Todd ran engineering and Freddy was part of the business development team there. In that case, they came from the industry and because they came from the industry, they had a unique insight that other people didn't, which was that the proliferation of these applications makes it very hard for the existing user authentication and security mechanisms to work.
Where sometimes these things go wrong is, if you've been in the financial-services industry for 25 years and therefore your mental model has become constrained by the fact that you're used to doing things a certain way, you get a little bit calcified.
Read more: A CEO who launched her company 14 years ago says too many founders have it all backward
Lebowitz: You say early on in the book that not every business needs to raise capital. Do you see this happening a lot, where people think raising money is trendy but don't really need to?
Kupor: That either manifests in a market size maybe not as big as people thought, or it might manifest in an entrepreneur who says, "Look, I think I can build a nice business, and I'm OK if it doesn't grow 100% a year. It'll be a nice $20 or $30 million dollar business, and it might generate some cash flow."
That's a perfectly fine business to build. It's just that, for a venture capitalist who knows that they're going to be wrong a lot of the time, they have to figure out what's the likelihood this company could be in that upper-right tail of returns. You just get this cognitive dissonance between the interest of the entrepreneur and the objectives that the VCs have.
When we're doing an early-stage investment, what we're trying to imagine is the "what if?" question. "What if this company worked? What could it look like? How big could it be? How much revenue could it generate? Ultimately what could the equity value be?"
The rest of the analysis is, "What do I think the likelihood is of that happening based upon this team and their background and all the things that I've learned about them and anything I might know about the competition in the market space?" We have to believe that it can get there even though we know the likelihood is most of them will never get here. Forty percentThe will just go to zero at some point in time.