"You don’t have to be a trained salesperson as an entrepreneur. You do need to convey the organic nature of the company building process that compels you to do this."
Scott is Managing Partner at Andreessen Horowitz and has been at the firm since it was founded. He has a long history with Marc Andreessen and Ben Horowitz, including working alongside them at Opsware in the early 2000s. Earlier this summer, Scott published his first book, ‘Secrets of Sand Hill Road,” a guidebook for entrepreneurs to navigate their way through interactions with VC firms.
We spoke with Scott about the importance of storytelling as an entrepreneur, why VCs and entrepreneurs are on the same team and predictions for the VC landscape.
On what storytelling means as an entrepreneur: When I say storytelling, I mean — how do you create a compelling vision that can cause people, in some ways, to do unnatural or irrational things? For example, you need to be able to convince people to quit their current jobs, even if they’re currently paid better than the job you’re offering them. As an entrepreneur, you’re going to have to convince big customers to take chances on you and do things that may be against their potentially risk-averse nature. When you bubble it all up, we want to know what it is about you as a founder that makes you uniquely qualified to go after this particular domain. You almost need to have an evangelical approach to things that will convince all types of people — customers, financiers and employees — to do things that might seem crazy at the time.
On an example of great storytelling: If you think about Lyft, there was really a question for a lot of people on how big could this market could be and if it was something worth investing in. At the time, people were looking to the taxi market as a proxy for these type of businesses. I think the taxi market in San Francisco was worth about $100 million in total at the time. If you look at it today, that market is about $1.5B dollars between Lyft and Uber — just in San Francisco alone. The reason storytelling was so important in this situation was you needed people like John and Logan [Lyft’s founders] to get us inspired about the vision and talk us through what this could become. So much of your job as an entrepreneur is to paint that picture.
On why most VCs typically invest in only one startup in a given business category: When a VC and a company decide to partner up, we are essentially lending our brands to one another. So it’s very hard to have brand affiliations that are in conflict. For example, it would be very hard as a VC to invest in Lyft and Uber. We experienced this with Instagram. Before it was Instagram, the company was called Burbn, and was more of a Foursquare-like, location-based application. We had another company doing photo sharing at the time, and when Instagram pivoted into that business, we had to ask ourselves if we could continue to back both companies.
On what happens when a company you invest in does pivot: It happens all the time. We’re more interested in the ways an entrepreneur is thinking about product and strategy rather than what the actual product is. We know from being in this business for so long that the likelihood of the product you conceive when you are a seed company being the exact same product when you’re raising a Series A or B round is pretty low. You might have an idea of what the market wants, but once you hit the market, you’re going to get real-time feedback and that can make a huge difference on what you build.
On a successfully backed pivot: For example, we invested in Slack, which started as a gaming company and then made the pivot of all pivots into enterprise software. But the continuity there was that so much of what we were investing in as VCs was Stewart Butterfield — his thought process, his leadership skills, his vision and his team. We certainly couldn’t have predicted that a game would ultimately become enterprise collaboration software, but ultimately we believed in Stewart, and that he was a good enough entrepreneur to listen to the market and respond appropriately. That’s part and parcel of the VC evaluation process — do I believe this person will be responsive to the market depending on the feedback they get?
On the importance of authentic storytelling: You don’t have to be a trained salesperson as an entrepreneur. You do need to convey the organic nature of the company building process that compels you to do this, and why you’re uniquely suited to do it. For example, our partner Martin Casado started Nicira, a software-defined networking company which ultimately sold to VMWare for $1.26 billion. Martin was not a trained salesperson when he came to us, but he had seen networking problems firsthand while completing his PhD. It felt like this had been his life’s journey, and that he felt compelled to build a company around a set of problems he identified throughout his experience. We all sat around the pitch and said, we believe in this market, we believe in the opportunity, and we just can’t possibly conceive of anybody else who can do this given his domain expertise.
On why entrepreneurs and VCs are on the same team: The biggest misunderstanding is really the function of the process. This business has really been shrouded in secrecy for a very long time, because capital used to be a scarce resource in the business. Venture capitalists had access to it, and it’s not that they were bad people, but they had something other people wanted, so the business didn’t really have to evolve in a customer service-oriented fashion. Capital is no longer a scarce resource, so as an entrepreneur you have lots of choices. Today, the choice becomes: why do you want to be with this partner and what kind of value can they add to you? Ultimately, this has forced the venture capital industry to recognize that this really is a customer service business.
On his predictions for the VC space: The biggest changes we’ve seen out of the last 10 years are the huge growth in the number of seed funds and the massive growth coming in the very late end of the market (with funds like SoftBank, etc.). I think both of these trends will continue. I think we’ll start to see early stage venture investing and later stage investing converge more and more in the future. I also think the later stage market will continue to be a very important part of this business. I don’t think companies are going to go public much sooner than they have been over the next 10-15 years.
This interview has been edited and condensed.