Lessons - How to Spot Winning Startups Before the Rest of the World | Chris Dixon - Andreessen Horowitz General Partner (Coinbase, Oculus, Pinterest)

In this lesson's episode, discover how frontier investing differs from backing more predictable businesses, understand why patience, resilience, and contrarian thinking create outsized opportunities, explore how earned insights help identify exceptional founders, and uncover why investing in standout strengths often matters more than eliminating every weakness. I'm curious, when you're looking at investing in crypto blockchain, what are the similarities, what are the differences between traditional angel investing into any other category? Pick a category that's maybe not as bleeding edge. I mean, AR, VR is probably, there's a lot of bleeding edge tech and there's probably a lot of uncertainty as well. Yeah, speak to that because I'm curious because I know a lot of investors. I don't know a lot of investors that are just so niched down and hyper-focused on blockchain and crypto. So there has to be some differences, some similarities. Yeah. Yeah. Well, I think you hit on one thing, which is when you're doing things kind of at the, quote, frontier, people call something called frontier tech. There's a different approach generally because you're doing something that hasn't, you know, that, that hasn't, that, that isn't as predictable. So just to, you know, like just generally when I do any of these kind of cutting edge sort of frontier, like when I did VR stuff or, you know, blockchain stuff or AI before, you know, back before ChatGPT, you would have these You're sort of dependent on these external factors, like when will the technology... So generally, these technologies kind of go through two phases. They have kind of an incubation phase where you have lots of early adopters. And like the case of blockchains, there are probably like 30 million kind of hardcore users right now, which sounds like maybe a lot, but it's actually tiny on the scale of the internet. And then you have a moment where kind of like chat GPT or the iPhone, where you have sort of a breakout product and suddenly the space transitions from kind of this, you know, early adopter phase to going more mainstream. And so when you're in that early adopter stage, you just have to sort of. behave differently. And so, for example, you have to, you know, when you're on a typical, if you're building a typical like accounting SaaS company, you might raise venture capital and plan for like a two-year kind of budget and assume that if you hit certain metrics, you can raise more money. This is a very predictable financing market. If you do certain things, you can raise more money and it's much more established kind of what the metrics need to be and the patterns. When you're in these emerging areas, you'll have these massive waves of excitement and then kind of bull and bear markets. And if you hit a bear market and you don't have the cash, you know, you won't make it. Right. And so you just have to like operate. So like Coinbase, for example, they would be they were very good about this. They would just raise a lot of money and save it and then kind of endure through like tough times. You have to have a thicker skin and you have to. be willing to kind of power through. I've seen just so many cases in my career in technology where, you know, people that stuck with something ended up doing very well. Like so many of the entrepreneurs that you see today that are successful, you know, like sort of the outside view is like there's some kind of overnight success when in fact they were just trudging through many different ups and downs. Um, yeah. And so you just, so the entrepreneur needs to be ready for that. The investor needs to be ready for that. The, you know, the, the, the company needs to be structured, you know, you end up capital for that. You need to have the team for that. So it's just a different way of thinking about the world. There's sort of free kind of, you know, pre-growth, you know, kind of incubation phase and then. mainstream breakout phase. I mean, that's the hard part. The good news, that's the bad news. The good news is when you do that and you're willing to do that, you tend to be one of the very few who are willing to do that. And that's how you have outsized outcomes, right? That's how you have as an investor outsized outcomes. That's how as an entrepreneur you do. If you just kind of follow the consensus, you know, if you're the, you know, if you're the 10,000th company building a wrapper on ChatGPT, like, I don't know if that's, you know, going to be like, that's just the consensus strategy. Right. And so... You got to be right. You can't just be non-consensus and contrarian and wrong. But that's to me the interesting part of technology. That's where I've always gravitated towards. That's why I want to be at the frontier and doing that stuff. I assume that once this kind of blockchains go mainstream, I'll probably move on to something else. And so, you know, there's just different, it's a different approach. There's a lot of value in doing the other thing too. I mean, we need people to kind of do, you know, do kind of later stage technology as well. And I think they all have value. So I'm not making a value judgment. I'm just sort of saying that this is where I've liked to operate. And it's just a very different way of operating. And it's a skill I've developed and... Well, you've done it well. You've had massive success. I'm also just curious. I mean, you've worked with like Marc Andreessen, Ben Horowitz, which I mean, you're a legendary investor. They're legendary investors. I can ask you the lessons that you've learned, but I want to ask you the lessons that you've learned from them as well. Yeah, I've learned a lot from them. So the first, you know, five years I was at the firm, we would just, it was like very, it was a much smaller, the firm's much bigger now, it's like 500 people. Back then it was pretty small and there were, I don't know, seven of five or seven of us that would just sit around a table, like some entrepreneur would come in and then they would. you know, describe their, their business. And then we'd sort of sit around a table and discuss it and make investments. Um, and so I, it's hard to summarize all the very, I mean, I learned so much about just from them and just from entrepreneurs. all the different aspects of building a business. So like, for example, I'm not an enterprise software person, but I've sat in, I don't know, hundreds of enterprise, if not thousands of enterprise software discussions and just learning all the details of organization building and sales development, just all the things you do there. Um, Yeah, I think we have a lot of kind of broad investment kind of lessons, I guess. One of Mark and Ben's favorite phrases is invest in strengths, but not lack of weaknesses. And so, Almost every interesting startup will have issues when you're investing, when you're doing what we do, which is investing in early stage. Obviously, once you're Nvidia or something, maybe all of your issues are done, but then you're worth $2 trillion. But when you're doing kind of early stage investing, almost by definition, you're gonna have things that are messed up. And if you look for, the biggest danger you can make in venture capital is looking for a startup that's sort of good on all metrics. What you really want is a startup that's great in a few things and probably really messed up in a bunch of other areas. And specifically, what are you great at? What we really bias heavily towards, and this is another kind of Mark and Ben thing, but is technical product-focused entrepreneurs. So what we look for are people that have a deep insight. We like to say an earned secret. I think that's originally a Peter Thiel phrase. The idea is that kind of most... almost by definition, a startup is a contrarian idea, right? Because if you had an idea that was like, I want to build an iPhone with a longer battery life, right? That's a good idea. But Apple knows that's a good idea and they probably have a thousand people working, right? So almost by definition, in a way, a startup is a good idea that appears to be a bad idea because it appeared to be a good idea. All of these incredibly wealthy companies would be investing, right? So you have some kind of contrarian insight. And that's usually, that's what Peter Thiel calls a secret, but it's also an earned secret because you don't just come to these things like walking down the street, right? You often come to them through, you know, years of, I've been working in the apparel industry and I, you know, there's this thing I've discovered that's this crazy thing that needs to be fixed and I have a way to fix it, right? Or I was in a PhD program and I developed, a breakthrough way to do large language models, and now I'm going to go do that. So it could be a technical secret, it can be a business secret. And so you want to, so I think when you do venture investing, you want, people that have those earned secrets. Now, those people that have those earned secrets, they're not often people that know how to, at first, run a company, right? And they may have hired badly. They may have made some bad decisions. They may have bad press. They may have, you know, I don't know, financial issues, right? And so if you kind of look at The mistake you can make as a venture investor is going in and saying, like, I want somebody who's all buttoned up and everything's working fine. What you really want is someone who's got this sort of deep secret, who's obsessed with a problem, who has deep knowledge of the domain. And very likely, the rest of it is sort of a fixer-upper, right? And so that, as a result, we structured the firm. This was kind of a novel thing and really is kind of still somewhat novel in the venture industry, which is we'll find those great entrepreneurs and then we'll layer in services that help them fix those other issues. So as an example, it's very unlikely that you're sort of like a brilliant inventor and also spend all your time out at conferences meeting entrepreneurs. connecting with Fortune 500 leaders. So we have a group of dozens of people whose job it is to connect you with people of Fortune 500 companies because we sort of assume that these technologist founders that we invested in won't already have that network. So we try to supplement their network. And so we just do it for, you know, we help them with legal and policy. We help them with recruiting. We help them with comms. We help them with financial stuff. And so that's kind of the core thing. Now, What I described as very general, there's a lot of details. And this is, I think, adventure as like, in some ways, is like, People talk about a fox and a hedgehog. You know, the hedgehog knows one thing. The fox knows many things. I think of venture capital and startups as a fox thing. There's like a million little things to know, and it's very hard to summarize all of it. And each domain will be different. You know, blockchain is different than consumer internet. It's different than enterprise software. It's different than fintech. And each one has patterns and people and lessons. Yeah. But that sort of broad framework, I would say, is something that, you know, I learned over the last 10 years and much of that from Ben and Mark and other folks I work with. Thanks for tuning in. 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