Ben Horowitz on Investing in AI: AI Bubbles, Economic Impact, and VC Acceleration

You know, you want to change the world, you have to believe you can change the world. What you're really trying to find is, are they literally the best in the world at a thing? And that's always the thing that's worth investing in, as opposed to, they're pretty good at a lot of things and I can't figure out what they're not good at. We just have a higher concentration of talent here than that's probably possible in a company in terms of just sheer IQ. There's a lot of VCs, very few who can actually help you succeed as a company. And so being one of those I think is still quite a special decision. AI is changing how companies are built and how venture firms operate and those changes are forcing new decisions about structure, judgment and speed. Traditional venture models were designed for long timelines and slow feedback. In the current AI cycle, outcomes move faster, competition is denser and firms have to evaluate people and ideas before results are visible. That shift raises practical questions about how to run a partnership, how to hold investors accountable and how to stay close to the work without creating friction. In this episode, Ben Horowitz joined for an AMA to explain how A16Z approaches those problems. He discusses why managing a group of GPs is different from running a company. Why the firm evaluates investors at the point of decision rather than waiting for portfolio outcome and how verticalization allows small investing teams to scale without internal politics. Ben also shares his current view of the AI cycle, including why AI should be treated as a new computing platform. Why application design and model orchestration matter more than raw model size. How AI pressure is reopening M&A and why the current market reflects unusually strong demand rather than pure valuation inflation. We hope you enjoy. I'm going to start first with more of how you manage a firm and particularly lessons that you've learned over the years, obviously extrapolating lessons as a founder as well, and then how we think about running the firm on a day to day. The first question I'll start off is from your book, but it's I think relevant to this conversation in part because when you wrote that in technology businesses, you rarely know everything upfront. We're sitting in this massive AI wave right now. It's still incredibly early, but the difference, of course, between a mediocre company and one that's magical is often the difference between letting people take creative risks and then folding them too tightly accountable. So there's many ways we could take that direction this question, but maybe first start, how do you manage a group of GPs and particularly what's different about managing GPs versus a company and what's the same? It's a pretty different than a company in that with a company like there are functions, there are things, there are very specific outputs that you're driving to, and then the people in the company, I would just say like we just have a higher concentration of talent here than that's probably possible in a company in terms of just sheer IQ. So if you look at critics and in Martín Casados and Alex, Rampello and so forth, I mean these guys, when they've all run companies and then it would just be very hard to have that many people that IQ on an executive staff. If you have somebody like Martín who has probably the best architect and networking software in the last 20 years plus like a really talented investor and so forth, I'm not giving him that much direction. I'm more kind of helping him understand how the process of the conversation affects the process of the dust and kind of how you work your way to the right answer, taking the right amount of risk. And the biggest mistake we make is we get too wrapped around the axle about some weakness that a company has as opposed to focusing on what they're great at and how great they are. So everybody is like kind of you could talk yourself into it's great at something, but what you're really trying to find is are they literally the best in the world out of thing? And that's always the thing that's worth and worth investing in as opposed to they're pretty good at a lot of things and I can't figure out what they're not good at. That's generally a worse investment. So just kind of orienting around that and then kind of helping think through the platform, the personnel and how to deal with the conflicts and then how to close deals and that kind of thing. So it's very different I would say and they just you know like understanding when people run out of gas like investing in technology you really have to be in deep in the tech to be good at it and I think that's very possible as people get older they get less into it sometimes and so at that point we got to make a change. But maybe just sticking on the topic of GPs how do you also think about accountability? Because one question that come up over when to promote the right people, when to manage out the right people and ultimately the vertical levels are making decisions but you're also making decisions, you're marking decisions at the firm levels. What's your sort of thinking and framework? Is that evolved over the last 16 years? Yeah I mean I think it's evolved a little but the main things are kind of the same. So I think it's dangerous to NVC kind of wait for the outputs because they're so far up to kind of wait and see okay does somebody have a great portfolio after 10 years or 15 years before kind of deciding what to do with them? It's just such a long time and you can make a lot of bad investments in that time frame where like you could miss out on a lot of good investments in that time frame if you don't put that person in position to do more stuff. And so I really try to look at okay at the point of attack like how are they showing up like how good are they finding opportunities? How good are they at winning those opportunities? And what do we think the quality is at the time of investment because some work out and some don't but it's not all magic. Like you kind of know you know how great an entrepreneur is Mira or how great an entrepreneur is Ilio. Well like those are pretty special people so if you can win that deal like that means something whether or not those companies work. Maybe just to focus in on verticalization because verticalization I think was probably one of the seminal points in the history of the firm and changing the structure of it and you and Mark have talked about this and now in retrospect it's clear that that was the right decision at that point at time. How do you avoid some of the pitfalls associated with verticalization meeting the communications and strengthening communication across verticals and making sure you still have that connectivity as the firm continues to size and scale? Yeah so look I think that the most important observation and this is actually a conversation Mark and I had with Delayed Great Dave Swanson back in 2009 and what Dave said which I thought was very interesting at the time is like like an investing team like shouldn't be too much bigger than a basketball team. Best ball teams five people who start and the reason for that is the conversation around the investments really needs to be a conversation. And so I always had in mind that okay any investing team we really don't want to be too much bigger than that size and so how do we kind of maintain that and the only way to do it is to verticalize and then the other thing that was happening simultaneously in the industry was software was eating the world. So we had to get bigger in order to address the market but I didn't want teams being bigger than a basketball team and so that kind of led to the vertical structure. I think in effect the most important thing is that those teams should be good and then the communication across the teams we do in different ways so one way is if the teams are very close like AI and for an AI apps then we have people from each team going to the other teams meetings and so there's like good kind of just hardcore connectivity that way and then in addition we've got like a kind of management meeting of that group and a D that we do and then we have kind of the big thing is the GP offside so we just take everybody away for two or three days twice a year with not much agenda. I do think David Haber has this thesis of opportunity lies at the intersection like I think everyone not only culturally knows but also economically isn't something to see everyone win and so there isn't that level of politicking I also think that sometimes can be prevalent at other organizations where it's very zero-sum and like protecting fiefdom type of behavior as well. Yeah that's kind of like a cultural idea that we have at the firm. I would say I mean the feedback we get from people who come from other firms is we have less politics than firms with 10 or 11 people and it's just that's a cultural thing like either politics and gets rewarded and then you have everything from coos to infighting all the time and they don't like each other and so forth or politics and gets de- incentivized and that's where we have here. Another point around culture I always remarked to you like I'm always in awe of the fact that you always hear the gas around the firm even detail around minor things around like I didn't know that then and mark college and you often say whenever you run something it's got to be in the details it's the only way to do it but maybe I'll ask the question slightly differently how do you stay on top of the details right how you hear all this how do you find a sped up but without also micromanaging because I think there's also the creative sort of process of letting things run its course as well how do you balance those two things? Yeah if you think about my job a lot of it is kind of setting the direction and then making decisions when like things get into conflict or [BLANK_AUDIO] or we're not sure what to do. And the kind of, if you think about, what's decision-making, it's, what makes you good at it? It's a combination of intelligence and judgment, or it's judgment kind of, which is a combination of intelligence and knowledge. So like what do you know, and then how smart are you at kind of turning that into the correct judgment? And the knowledge in an organization tends to live with the people doing the work. So meaning, you know, they're not the managers, I would say. You know, like, so it's, you know, what are the deal partners doing? What are the, you know, kind of individual people on the IT team doing, you know, like what are the kind of accountants doing? What are people on, you know, when we go visit LPs, like, you know, that's where the knowledge is, like, in talking to people who are kind of, at the point of attacks, I would speak, we're talking entrepreneurs. And so I just spend, I try to spend enough time, both, you know, kind of in the team meetings. And, you know, we're doing that. I just end up knowing a lot about a lot of things and then plus I'm a founder. So if something gets f-duck in the firm, somebody calls me, you know, like that, that happens a lot, like they're like, okay, I'm the tell Ben, you know, like, this, he's not gonna like this. So it's a, this is a, I think a key thing for leaders is, you never want people to think, oh, we shouldn't bother Ben with that. Because it didn't take me, but it took me like 14 seconds to resolve it. And, you know, generally people aren't looking for, you know, they're just looking for clarity, you know, like what an organization needs, often is clarity, not like correctness. And, you know, if you have clarity, you can move. - Yep, yep, yep, yep. Last question on verticals. So we have seven verticals today. One topic that has come up is, how do we know these are the right verticals? And then how, maybe give some examples of vertical ideas that you've resisted to start, but maybe sound good on it on this premise, that doesn't either have the right technological legs or even entrepreneurial kind of capability around that we decided to not pursue. - Yeah, so they're really kind of designed around the market. And, you know, kind of where are the entrepreneurs? So we try to match up to, you know, if there is a big cluster of important entrepreneurs that are gonna create multi-billion dollar companies, you know, do we have a team that's gonna win those deals? And, you know, different categories end up having fairly different needs. So, you know, the needs of a crypto entrepreneur, a bio entrepreneur, an American dynamism entrepreneur are very, very different. And so you kind of have to have a product that matches that market. You know, in picking markets, you will not be too early and not be too late, right? So it's a little bit of an art, I think that what we've seen is, I'm very confident those are the right markets 'cause there is lots of very interesting activity and all of them now we've gotta then perform in each market. So it's not like a given just 'cause we show up and we're Andrews and Horowitz, that we're gonna win that market. But, you know, so we have to kind of evolve the team and like evolve our thinking and make sure that we win. But I think that the markets we're in are like pretty clearly very good markets. We have had, you know, a few that have popped up, that, you know, people have proposed that we haven't done. I don't think we got that serious with them, but the other one was kind of ESG kinds of things, you know. Clean tech, green energy, this and not the other. And, you know, we thought that the right lens on that was much more gonna be American dynamism one because it wasn't like weirdly constraining and it was much more oriented around the kind of economic outcome as opposed to the do good, do good by doing well or whatever the fuck the phrase is. You know, like those things kind of can lead you into very weird decision making. So like investing is hard enough without like introducing other criteria other than assisting gonna be a giant company and make a lot of money. And you want to have a focus on that. And I think the beauty of American dynamism, like there's a lot of things that like would be, you know, maybe good for America or whatever, but like there's so many opportunities in that space because the US really does have to modernize the way they do defense. We really do have to get much better intelligence and public safety to keep everybody safer. That, you know, and then we've got, we've got to solve the energy problem. We've got to solve the rare earth, mental, mining problem. Like there's very good problems to go dig into where, you know, if you look at like, okay, we're gonna come up with an alternative energy source and our alternative fuel, you know, like that's like, well, any of those work like maybe, you know, and that kind of thing. So we never did a ESG. - Yeah, I remember actually, as you were going through that, I remember very early on in our discussion around American dynamism, I remember you pushing the team and asking them like, hey, is this a marketing message? Or is this like real technological transformative change? And like they went and did the work around it and like it was very clear now, retrospect, there was real tech change especially happening on the spliting side and they defend side and really have people actually then engage with the government. But I think that oftentimes when people ask this question, like it's both a combination of, is there a real technology change? Because that's when you make and generate venture returns. And then also is entrepreneurial talent actually there to build it? - Yeah, ideas are good marketing idea. And I think what, right, when they presented an internal like they presented the marketing idea. And I was like, well, I want to know what the fund idea is. You know, like, how do I make money? Like we have investors, you got to make money. Like it's a great marketing story, but like we're not doing all that. We're going to do the things that, you know, the fund is going to be less than the marketing in terms of its focus. So it's going to be tighter focus. - Yeah, and then we ultimately, you know, zone in on three kind of core vertical areas that there was actually tech change happening. - Maybe such a good, so Mark and I believe the best thing society can do for a person is give a shot, give a shot at life, a chance to contribute, a chance to do something larger than themselves and make the world a better place. That's the best we can do. So can you elaborate on this and how it's driving, how we are evolving as a firm, and particularly looking ahead as people think about, you know, what's going to be a set of funds that are deployed over the next two to three years, but also ultimately have an impact over the next 10 to 15. How do you think about that as you think about leading the firm? - You know, I think it's important to put the work that people do into context. And, you know, we're in a like super special position, you know, what I wanted to get out was like, if you take a step all the way back and you say, what's been good for humanity? What's been good for humanity historically is when people have a chance to kind of do something larger than themselves and contribute. And look, and I think there are, there are many systems ideas like, well, what if life we could make utopia or everybody equal? Or this and that and the other? And, you know, that's kind of ended up doing the opposite if you look at the history of communism or what have you. It's kind of everybody has an equal chance of getting no shot as much more what occurs. And so you really want to enable contribution and kind of the rise of America kind of coincides with that rise in kind of a free market capitalistic rule of law system. And that, you know, if you look at kind of the history of the country and the history of humanity, that, you know, the rise in wealth, lifespan, you know, population size of the earth, all kind of grew spectacularly in the last 250 years. And so America's been very important in that. And then America today is still, I think, very clearly the country where and the system where people are most likely to have a shot, a real shot at life. And, you know, like we've done some things to screw that up and so forth, but, you know, that's certainly still the case. And the, for America to maintain its importance in the world, it has to win economically. It has to win, which means it has to win technologically. It has to win militarily, which means it has to win technologically. And our job is to, you know, kind of help the country win technologically. And it's not only important for us, it's important for the country, it's important for humanity. And that's really kind of what I was driving at. And I think that, you know, for our people, it's, it really kind of helps them go, okay, like this isn't, you know, these things matter, you know, creating these opportunities matter. And just to give you an idea of some of the things that leads to, so actually, you know, Jen and I were just in Mexico. And you know, a lot of that was catalyzed by kind of a junior person on the team going, you know, well, we're doing this so important. And we need to kind of help with this alliance. We need to help secure the border. We need to help with our own kind of defense manufacturing. We've got to, you know, help with energy like I'm going to get this meeting. And then, you know, we got the meeting. And so, you know, if you want to change the world, you have to believe you can change the world. And that's a lot of what it was about. It seems like little tech to M&A is opening back up. What's your view on, on whether that is here to stay and whether that might actually expand to larger opportunities as well? AI is such a disruptive phenomenon that every company, every incumbent is under threat from like AI in general. And so a lot of the ways that you deal with the threat is you just acquire the DNA of the future. And so I think it's, I think there's going to be a lot of M&A because I think that people need to reconstruct how they work. They're going to survive. So if you go back, say three or four years, I think people believe that, you know, there would be the big foundation models would be these giant brains that could do anything better than anybody. It has not played out quite like that. The way it's played out is that the big models do provide a very important infrastructure that, you know, all of our companies, you know, end up building on to some extent. But often the kind of, for any particular use case, the long tail of not only kind of scenarios, but the long tail or the fat tail, I should say, of human behavior is, it's self being something that you have to model and understand very, very well. And so if you look at cursor, cursor consists, I think of 13 different AI models, all which kind of model different aspects of how you program, how you speak to a programmer, et cetera, et cetera, et cetera. And those models end up being very important, so important that they, in fact, release their own foundation model for specifically for programming and for coding. So they have a coding model that, you know, you can swap in and place an anthropic or open AI if you want, or you can use the open AI or anthropic models with their kind of other set. And so, and that thing has gotten great adoption. So like it's kind of going, well, maybe the application behavior is actually, in some ways, more important than having a gigantic, like the biggest model trained with the most GPUs. You know, and it's not clear exactly how that plays out, but right now, currently, I would say that the complexity of the application itself is very high and is not subsumed in the foundation model. And so I think these things are not as straightforward as they appear and the benchmarks can be misleading. And, you know, like I think that this also is showing up in every aspect of AI. So we've seen that there's a great post that just seen more from our team did on, you know, there's no God-level video model. I sort of encourage you to read, which kind of gets into, like, you know, what different use cases end up needing different models, which is again, not what we thought four years ago. For sure. Yeah. That actually goes back to when I started this webinar with your quote from the hard thing about hard things and technology businesses. You rarely know everything upfront. So as folks are figuring out everything that's happening in AI, but the calibration also benchmarking is changing. And also the expectations around the utility of those things for JJ. You know, also the founders that are building that are changing. So it is very fun time to say the least, but also one in which we're learning in real time as a part of it, which can be sometimes deeply unsettling, I think for also folks as well who, you know, maybe anxious about where evaluations are and the market and environment is as a part of that. Okay. I am going to switch gears actually to the future of VC investing, which is very related. So some believe leaner, more efficient businesses will allow founders to retain more on the cap table. Do you worry about that at all when it comes to ownership and what you've been, you know, working with GPs on in terms of expectations of ownership and this new environment? So I think that like what we've seen is we're getting pretty good ownership. So if you look at a lot of the recent investments where, you know, at 20% or better, there are ones that were not where, you know, we don't get to that level of ownership, but those companies get so valuable, so fast that it's been fine. And, you know, like, there have always been special companies with very, very special founders, you know, at a moment in time where like, okay, you know, that is what it is. But I, you know, for us, it's, you know, for a lot of just like core infrastructure, things, the core applications and so forth, like, you know, the ownership has been like pretty reasonable. Question around just the VC landscape today, because when you, when you you and Mark started the firm 16 years ago, you know, there weren't nearly as many VC firms. There's now 3000 plus VC firms running around. There is still this rate limit of great entrepreneurial talent, but also increasingly, there's more sources of capital flooding and whether that be on the retail side, et cetera. I do see the power dynamics between whether it be the LP, GP, and founders also evolving as you think about the future of the firm and anything you're doing at the firm to prepare for that. I mean, I think it's still like very hard to build a company. And, you know, if you're just like an engineer, AI researcher and you're kind of, and then you invented something and you're jumping into the world, it's very competitive world. You know, having a financial partner that can help you build a company is so, you know, does the initial valuation matter more of the partner? And I think that like, you know, most entrepreneurs who are smart realize it's a partner. And there aren't that many good pray like there's a lot of VCs, very few who can actually help you succeed as a company. And so like being one of those, I think is still like quite a special position. I so the one area that we're kind of, you know, you're upping our emphasis in is this kind of entrepreneur who's just like starting something and doesn't, you know, it doesn't quite get qualified for VC money with our speedrun accelerator. And, you know, one of the reasons why we're emphasizing that so much now is it is, you know, with the new tools, it is possible to convert an idea into a product much more easily than it has been in the past. So we just want to make sure that we keep a very, very close eye on that and then, and you know, and then the brand is translating into that accelerator. We're just getting a lot of talent in there. And so that that phenomenon we want to make sure that we're on top of building on earlier question about being multiple winners in AI. Why did prior cycles of technology not play out the same way? Why were there only Google Amazon, you know, concentration of a small number of winners in those product cycles compared to what you think about in what's happening in AI? Well, you know, we don't know quite what's going to happen yet. But I would say, you know, AI is a new computing platform. So you kind of have to look at it as like how many winners were there who build applications on computers and like that's the order of kind of the size of what this is. You know, I think in the internet era, if you say, well, like what are all the businesses that got built on the internet? It was actually like a reasonably large number of businesses from, you know, meta to Netflix to Amazon to, you know, Google and so forth. And you know, those were very, very like spectacle, really huge winners. I think in AI, the products are having even bigger economic impact. And so I think there are going to be more things, certainly more companies that are worth, you know, over a billion dollars and over 10 billion dollars in the last era. I mean, from what we've seen so far. But it's a very big design space, like it's an enormous design space. Like one week, we've never seen that before in technology. And I have probably, you know, he's asked me this yet, but I got a lot of questions about the AI bubble. And I think that one of the reasons why people are so worried about it being a bubble is, you know, the valuations have gone up so fast. But like, if you look at what's going on underneath in terms of the customer adoption, the revenue growth rates, et cetera, like we've never seen demand like this. And so we've never seen valuations where I was like this, but we've never seen demand rise like this either. So it is, we are in a bit of a brave new world, at least from anything that I've seen in my career. And we'll see how it plays out, but like I think to like even like the Nvidia multiples aren't, you know, they're not like outrageous. But you know, particularly when you look at the growth rate and the just the size of the earnings and so forth, like they're not historically nuts to the point where people would be claiming bubble like that. So I think that people think, oh, well, is that growth fake? Is it this? It's that? And from what we're saying, no, like the demand is very intense. And, you know, we'll see how it plays out, but I think this is as big a, this is a bigger technology market than I've ever seen. And you know, we'll see how many companies actually win. - I'm gonna ask you a few fire round lighting and we'll have a few round questions then. And then we'll close out here. What will be your most played song on Spotify rap this year? (laughing) - So I think it's that young blood song, do you know how it feel to see your face on the news? - It's like a popular boo, boo. - Yeah, it's that one really touches me. (laughing) Like like, diggly grum. - I love it. I will say, I think for me, follow the leader is gonna be on one of my most played. I will say that was a-- - That's a great song. - Wrote the piece and also saw "Ruck in Person" early this year at your event and then also-- - You're a hot one? - Yeah. - It's been fun to dig back into the database of songs that I've never really listened to. - Yeah, no, that's an all-time great song. - Yeah, indeed. What's one AI tool that you use every day? - Well, for sure, you know, "Rock and Chats" GPT, I use every day and then, you know, probably, I've been playing with like Vio and Nana Banana a lot on a daily basis of the big guys. - All right, follow Ben's feet on the banana banana drops. Okay, and because we asked Mark, we have to ask you, do you plan to be cryogenically frozen? - No. - Same answer as Mark. You plan to go to Mars. (laughing) - Same answer as Mark as well, despite your background. All right. - Look, I'm trying to stay healthy so that we don't have any generational transfer, but they don't necessarily believe in living forever. I don't think it's best to fight dust and make-- (laughing) - Thanks for listening to this episode of the A16Z podcast. If you liked this episode, be sure to like, comment, subscribe, leave us a rating or review, and share it with your friends and family. For more episodes, go to YouTube, Apple Podcast, and Spotify. Follow us on X, at A16Z, and subscribe to our substack at a16z.substack.com. Thanks again for listening, and I'll see you in the next episode. As a reminder, the content here is for informational purposes only. Should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details, including a link to our investments, please see a16z.com/disclosures. (upbeat music) [BLANK_AUDIO]