Chris Dixon: Who Will Win the Next Generation of Venture? | E1132

Intro (00:00:00)

• Chris Dixon believes that software movements that excite smart people eventually succeed.
• There are two main methods in Venture: heat seeking and truffle hunting.
• The big five companies dominate the market with over 95% of traffic and money.
• AI is exciting and will likely accelerate the consolidation of power among these companies.
• Chris Dixon suggests one change to the regulatory environment: making it easier for startups to raise capital.
• Dixon expresses excitement about being on the show and thanks the host for having him.

Chris’s Professional Background (00:00:49)

• Chris Dixon, with a background in philosophy and computer programming, transitioned from freelance programming to working at internet startups in New York in the late 1990s and early 2000s.
• After selling his own company in 2006, he discovered his passion for investing and began angel investing.
• Together with Dave Frankel and Eric Paley, whom he knew from school, Dixon co-founded Founder Collective in 2008 during the financial crisis.
• Founder Collective focused on providing seed funding in the consumer internet sector, which was overlooked by many venture capitalists at the time.

Wealth and Investment Acumen (00:06:42)

• Rich investors tend to make better investors because they are not afraid of downsides and do not bring unnecessary anxiety to entrepreneurs.
• Principal-agent problems arise in venture capital when individuals' interests are not aligned with the financial interests of the limited partners (LPs).
• In venture capital, the optimal strategy is to remain calm and not panic during downturns, as the hit rate is low but successful startups can be exceptionally profitable.
• The venture capital industry has transitioned from a high-margin boutique business to a low-margin commoditized industry, with large funds like a16z and Sequoia offering a range of services to entrepreneurs, while smaller funds focus on early-stage investments with deep expertise in specific areas.
• There are two main strategies in venture capital: heat seeking, which involves investing in hot deals, and truffle hunting, which involves identifying undervalued opportunities. Venture capitalists should understand their strategy and lean into it, as different strategies require different approaches and skill sets.

Andreessen’s Investment Strategy (00:13:53)

• Andreessen Horowitz uses two investment strategies: heat seeking and truffle hunting.
• Heat seeking involves trying to win deals that everyone wants to win, while truffle hunting involves going deep into verticals or overlooked areas before others do.
• Truffle hunting requires expertise, meeting everyone, and appealing to entrepreneurs.
• Heat seeking is more of a sales motion, where the focus is on being the most helpful and getting founder references.
• Founder references are important because they keep the market honest and force people to behave right.
• There is a concern that there has been an over-rotation on Founder NPS, leading to a lack of governance in some cases.
• The difference between being a founder's friend and being their partner is that a partner is a good fiduciary, supportive, and gives honest feedback.
• A bad partnership involves saying yes to everything and then not providing support or practicing good governance when needed.
• A good partnership involves being honest, supportive, and recommending changes for the best interest of the company, such as a CEO change or governance changes.
• It is important to balance the professional relationship with the responsibility of being a good custodian of the careers of employees and other investors.

Founders and VC Relationships (00:17:10)

• Founders Fund focuses on founder referencing and high conviction investing, prioritizing networking and advice for founders over product and technology expertise.
• Chris Dixon believes founders choose Founders Fund for its strong founder referencing and high conviction approach, valuing investors who remain steadfast even in adverse market conditions.
• Dixon's investment philosophy involves studying the history of technology and underlying forces to predict the future, employing frameworks and patterns to understand how things play out.
• Despite setbacks like the FTX scandal, Dixon remains confident in his approach, asserting that there are no bad ideas, only ideas that are too early.
• When evaluating new technologies, Dixon emphasizes the importance of primary sources, talking to entrepreneurs, examining metrics, reading technical papers, and studying history to gain a comprehensive understanding.
• Dixon highlights that he hasn't witnessed a technology movement backed by intelligent individuals that hasn't eventually succeeded, drawing a parallel to his experience with an AI company he founded in 2008.

The Control of Big Tech (00:26:57)

• Big Tech companies (e.g., the "big five") now control 95% of internet traffic and revenue.
• This consolidation is likely to accelerate due to AI, which favors companies with large data and capital.
• The internet's shift from open and democratic to corporate-controlled began in the 2000s.
• Internet services adopted architectures controlled by companies instead of communities.
• While these companies initially supported creators and entrepreneurs, they have since changed their approach.
• This has resulted in a lack of successful consumer internet companies in the past decade.
• Blockchain networks can create a new wave of internet services with societal benefits.
• These services offer advanced functionality and financial capabilities that make them competitive with corporate networks.
• An example is Forecaster, a blockchain-based social network where users control their names and audiences.
• Forecaster operates like an email list, allowing users to switch software providers if necessary.
• Many new services in Chris Dixon's portfolio exhibit advanced functionality and different economic and control properties.
• Blockchain shifts power to the edges of the network, empowering users, creators, and software developers.

The Role of Cash Flow in Success (00:31:24)

• The dominance of large tech companies is a concern due to their vast data, resources, and size.
• Historically, the tech industry has progressed through different layers of competition, with software becoming the next layer of value after hardware.
• Open-source software, like Linux, has shown that decentralized groups can create better products than large companies.
• Blockchain technology aims to decentralize internet services in the same way that open-source decentralized operating systems did.
• Despite the power of large tech companies, there is support for decentralized, community-built internet services.
• The blockchain community is divided into two groups: the "casino" community, interested in trading and gambling, and the "computer" community, interested in the computing aspects of blockchains.
• The "casino" side of the blockchain community is co-opting the movement for harmful activities, while the mainstream world, policymakers, media, and big tech companies oppose cryptocurrencies.
• The current regulatory system encourages speculative behavior and discourages productive use cases of blockchains.
• The biggest challenge for the next generation of community-built services is to overcome the harmful activities of the "casino" community and the opposition from the mainstream world.

Misunderstandings in Cryptocurrency (00:39:51)

• Andreessen Horowitz (a16z) funds are 10-year venture funds that hold 94% of their investments for the entire lockup period.
• Selling successful investments is not a good strategy in venture capital, and holding investments for a long time is generally beneficial in a growing market.
• Speculation can serve a purpose, such as price discovery and liquidity, but markets around useful services that enable digital ownership should be regulated.
• Unclear regulations discourage good entrepreneurs and encourage bad actors, so clear and strict rules are necessary.
• Sensible policy environments should include long lockups, disclosures, and security audits, but the lack of security audit requirements hinders policy implementation.
• Entrepreneurs may not cooperate if regulations are too strict, so a referee is needed to regulate certain aspects of the industry.

Regulatory Changes in the Crypto Space (00:45:03)

• Chris Dixon's book on crypto aims to provide a comprehensive understanding of the technology, addressing both its positive and negative aspects, and targets a wide range of readers, including crypto enthusiasts, newcomers, tech-interested individuals, and open-minded readers seeking knowledge about the field.
• Despite the limited readership of non-fiction books compared to the internet, Dixon believes books can profoundly impact individuals' lives and influence entrepreneurs.
• The internet has transformed the venture capital industry, leading to the unbundling of brands and making it easier for entrepreneurs to raise money without joining a big firm through seed funds and personal branding platforms.
• Seed funds need a clear value proposition and appropriate sizing to succeed in the competitive landscape.
• Founders should carefully consider factors beyond dilution when choosing investors, as it's a long-term relationship that can significantly impact their company's success.
• Chris Dixon emphasizes the importance of selecting investors wisely, as decisions are largely irreversible and can have a profound impact on a company's future.
• Effective board members provide good governance, support during market cycles, and handle challenging situations, while common issues faced on boards include early-stage investors' struggles with underperforming investments, potential conflicts of interest, micromanagement, and inexperienced board members offering granular product advice.
• Dixon suggests that simply avoiding negative behaviors and being present during downturns can set board members apart, and while specific expertise is valuable, demonstrating good governance and support is crucial for effective board membership.

The Growth of Andreessen Horowitz (00:55:24)

• Chris Dixon discusses the growth of Andreessen Horowitz (a16z) and how it has changed since he joined 11 years ago.
• He prefers the current structure of a16z, where he runs a vertical and has a lot of independence, avoiding bureaucracy.
• Dixon's interest shifted from just investing in startups to having an impact.
• He was motivated to join a16z because he wanted to invest aggressively in the next wave of computing trends.
• Dixon sees money as capital to invest in people and ideas he believes in, rather than a personal possession.
• He supports causes such as internet freedom, blockchains, and open-source software.
• In the past 12 months, Dixon has changed his mind on several things.
• One notable change is that he now believes that the next big thing in tech will be AI, specifically large language models.

Quick-Fire Round (00:59:15)

• Chris Dixon, a venture capitalist, believes remote work is ineffective for building relationships and sharing knowledge within venture capital firms.
• He expresses concerns about the potential banning of open-source AI and blockchains, viewing them as threats to the internet and software economies.
• Dixon advocates for the legality of open-source models and opposes regulations that could further empower big tech companies.
• He emphasizes the importance of integrity in business and hiring exceptional individuals, even if they have some issues.
• Dixon reflects on his biggest investing mistake, which stemmed from overvaluing his expertise in internet security and making poor investment decisions in that sector.
• He stresses the need for a balance between expertise and humility, acknowledging that others may have valuable knowledge and insights.
• Dixon describes his long-term commitment to his mission in the crypto and blockchain space, aiming to see it through to completion.
• The size of his $4.5 billion fund is justified by the current market capitalization of crypto assets, which stands at around $2.5 trillion.