A16Z's David George on How Private and Public Markets Fused Into One

the perfect guest. We're gonna be speaking with David George. He is the head of the Growth Fund and in dres and Horowitz, a sixteen Z someone perfectly situated to explain of all these things that's going on. So, David, thank you so much for coming on.

The Growth Fund is a fund that invest in companies at the later stage of their life cycles, so typically once they found product market fit, and our early stage funds investing companies early stage when they're kind of trying to find product market fit, we invest in companies once they have found product market fit. So that's the delineation. Right now. We're investing out of our fifth growth fund.

It's about a seven billion dollar fund. If you combine the committed capital of our five funds, it's about twenty two billion dollars in overall committed capital.

early stage investors in. And The first time that we invested was in the growth fund, so it's about fifty to fifty. We love to invest in companies where we know the founders really well. One of the things we talked about all the time is game film. This is something that public market investors are very familiar with. They look for game film. They want to back CEOs management teams that have demonstrated continued success, and we seek to do the same thing the private markets.

exclude the MAG seven. So it's just staggering numbers. To your point about some of the biggest and best companies in the world being in the private markets, the ten largest private companies represent forty percent of that five trillion of market cap. So this is a massive power law game, and the best of the best companies at that stage of their life cycle just happened to be in the

private markets and not in the public markets. Right now, that private market kind of five trillion of market cap, that sector of the economy has grown ten x in ten years. At the same time, the number of public companies. You guys have probably covered this before. The number of public companies has been cut in half over the last twenty years. So this is just a massive shift in the composition of the public markets and the private markets, and the best of the best companies, as you said,

largely are sitting in the private markets today. The other thing that we look for, you know, we're a growth fund, but growth means a lot of things. We look for companies that are growing, you know, sort of hyper growth. We call it hyper growth, growing very very fast. You know, the average investment in our growth fund has grown about one hundred percent. If you look at the public markets today, there's only three companies in our universe that are growing

over thirty percent. So if you actually want to invest in the highest growth, most promising companies that could be that next mag seven, chances are they're in the private market. So this is this is just a big shift in the dynamics. You know, certainly in the last twenty years, but even the last ten or fifteen. So that's the numbers behind the trend. The question is why, and you know, there's there's lots of reasons why this is the case.

I mean, you mentioned it right at the outset. There are structural reasons in the public markets that make it harder to be a public company now than it was twenty years ago. I think the biggest thing is the private capital markets are deeper and more liquid than before, so there's less of a need for a company to go public until they need much, much, much much more capital In the private markets. For the best of the best companies, they kind of have the access to the

capital that they need. It's a pretty compelling pitch for the founder to be able to stay in the private markets, have liquidity over time, if you're one of a select few can access capital, you know, in the private markets cheaply, you can kind of steadily control the stock price movements, you can regularly run tender offers, and you know, for a company, probably the hardest thing aside from access to

capital is employee management. And if you can get pretty close to the dynamics that you get in the public markets without volatility, it's pretty compelling to remain in the private markets.

you have to file quarterly paperwork. Like not the paperwork, which I actually sympathize with because I hate filling out forms and things like that, but like, what are the reasons that the public market is perceived to be so much more difficult or so much more of an operational headache I guess than private.

and so you'll want to wait longer. Public markets, investors, investment banks, research organizations are tilted much more toward large cap companies or at least mid sized companies today and less so towards small cap. So if you're a small cap company, it's just very hard to get the attention of investors. You know, they can't write very large checks and build huge positions in you. You know, it may not be worth the investment banks time or the research

analyst time to cover you. And so you know, if that's the case, it's hard to get the attention of good investors and make your stock price grow over time. So those are a couple examples of the structural challenges.

Like my comp just got cut by seventy percent. That's a hard dynamic for a founder to have to deal with. And if you can minimize some of that volatility in the private markets as a founder, I understand why you would do it.

private market on hyper liquid or something like that. Talk to us a little bit about the sort of the plethora of options that employees have now in private companies and getting that liquid and so they actually get some real money.

They hit your account. You have for some of the highest paid people, you know, hundreds of thousands or millions of dollars that hit you hit your account every quarter, and that's liquid. It's already netted of tax and so you can turn around and sell it and it's like cash comp or in the case of those companies, they've appreciated tremendously in value over the last ten years, and so the employees you know, who help the stock have

been handsomely rewarded. Then they get RSU grants stacked on top of those, so you kind of have this like waterfall of RSU grants over time and increasingly, you know, over time, your orderly net deposit can go up. And so if you're a private CEO competing for talent, that's what you're competing with. And those companies are flushed with cash, and so they're able to pay a lot in stock based comp to their employees, and so that's a difficult

dynamic to compete with. That's one of the strongest forms of the argument for telling a private company CEO that they should go public, because that is a very compelling financial reward for your employees in that public market situation. In the private markets, the way it typically works is you get you know, you get these RSU grants. Sometimes they stock up over time, but generally they're ill liquid until you go public. Now, what's happened over the last

I'd say six or eight years. Is companies will do tender offers in the private markets where they offer to buy a certain percentage of employees vested stock in the private markets, so they'll set the price, they'll work with somebody like us, and they'll say something like, hey, you can sell twenty five percent of your vesteds doc that you have in this tender offer, and you know, we'll do it once a year. And so that's a decent

substitute for what I described in the public markets. It's not a perfect substitute, but for you know, the employees or potential new hires who are true believers, I think it's enough to combat that RSU public market dynamic in compensation scheme. And you know, it's worked pretty well. SpaceX has, you know, famously done a really good job running twice a year tender offers for their employees, and you know they've had tremendous employee satisfaction, ability to hire, retention, et cetera.

And some of the biggest tech companies have followed suit. And I would argue that there's a trade off that the founders and the private markets are making, where often if they were public, they probably would have a higher stock price, so maybe they're taking a little bit more dilution, and so maybe employees would benefit a little bit more in valuation in the public markets. But it's not a massive gap, and it's a it's a pretty compelling.

are still much deeper. So if you need to raise fifty one hundred, two hundred billion dollars like some of the big big companies may want to do to pursue some of their goals, chances are they'll end up in the public markets.

you some pre ipo anthropic shares and like that. I don't do that, but like, I know that there's a lot of interest in there. And you mentioned that if you really want massive growth at this level, that it's the only ones that are growing super big are the private companies. Talk to us about the emergence of SPVs and these third party entities, and you don't even know who's on your cap table and how founders are thinking about this phenomenon.

going to shoot you straight for the SPB industry, you know. Look, it works when you know times are good, and it can be horrendous and bad. You know when times are bad. You know, Androl is one of our companies very close with we're one of the largest investors, and they have famously, you know, gone to war with some of the SPV hucksters who are trying to assemble capital to do a deal through some obfuscated way around them, and they say, look, we want to know exactly who's on our cap table.

You know, we want to make sure that we're doing right by our shareholders. And so it's a risky maneuver. You know. It's not to say that there's not some that are good, but we try to avoid it and we try to counsel our founders to stay away from it as much as possible.

large investors are LPs. There's some of the largest institutions in the world. They trust us to make investments, and they actually like the fact that they're investing in a

fund that has some degree of diversification. SPVs are inherently risky because they're they're single company and so you know, if that company happens to not go well and you invest in a sixteen ZES funds, you can live to fight another day because we have a number of other companies that are going to do really well at the fun level of returns will be good in an SPV. If that happens to not work for whatever reason, it could be devastating if you put a large amount of capital into it.

the crowds effect. You're just getting a bunch of tech bros investing in tech bros, and that can kind of be a self reinforcing cycle.

the world. Later into their life cycle, then you know, we would have been able to ten years or so ago. Interesting data point if you look at the returns generated by dollars in the private markets historically over the last call it like seven years of good IPOs. About fifty percent of the dollars of gain in an IPO come from the seed through series B, and then fifty percent of the dollars of gain come from the series C

and later. As companies have stayed private longer, that will massively shift to the series C and later, and the seed through B will be you know, a smaller proportion of the dollars of gain. Similarly, if you go back ten years and you look at all the companies that have gone public, there's a little bit of like time lag in this. So just with me, the best companies that were going public ten years ago generated eighty eight percent of their overall dollars of return in the public markets.

So if you just took total market cap creation, only twelve percent of it was happening in the private markets. If you look at the recent crop of IPOs in the last five years, fifty five percent of their market cap creation happened in the private markets. Forty five percent happened in the public markets. So there is a massive shift that's taken place in terms of where value creation happens. That's benefited us in terms of pricing. We've invested in

a portfolio of great companies. I've listed all the some of our investments of our biggest investments, our companies like Data Bricks and SpaceX and Waymow and open Ai and Andoral, you know, Strike and Flock Safety and companies like that. If you take our portfolio on average, it's growing one hundred percent and we invested at twenty one times revenue.

Now I've recognized their flaws with revenue multiples and all that, but I would say, if you could let me have a career, an entire career of investing in market leading, great technology companies where we could buy them at twenty one times revenue and they're growing one hundred percent, that would be an incredible trade or an incredible investment opportunity.

And so in terms of valuations, I feel like there is a discount to being in the private markets, and you know, founders, I think understand that for the most part and make that trade off. But it's definitely a dynamic that we see. There's one more thing that I would call out. You know, I mentioned earlier that only three companies in our universe and the public markets are actually growing greater than thirty percent. There is a dynamic where I do think it's hard for public market investors

even to grock really really high growth rates. So if you're growing like sixty percent, I think automatically a public market investor is going to build a financial model that says sixty fifty forty, thirty eight percent, and then they're going to value you as such, and then they'll pick an exit multiple at year five, and they'll apply it to twenty percent growth, and they'll probably say at that point you'll be twenty percent margins, and they'll be happy,

and they'll call it a day, and they'll have your stock price be that when in reality, you know, if you're a great company, you know, like Data Bricks that's still growing north of sixty percent, like you're worth probably

three to four x difference in value. If you grow sixty percent, fifty five percent, fifty two percent, forty eight percent, forty five percent, like it's it's probably like a three x or four difference in how you're valued and so I do think people like us with a longer time horizon in the private markets may have an easier time of actually grocking that very high growth rate. You know,

Data Bricks is growing sixty five percent. If you look at the public markets, you know, really only Palenteer is you know a software company that's growing that fast. I think they're growing seventy percent. They're about the same size as Data Bricks, and their valuation multiple is thirty five times or something like that. And so that's the one example where maybe public market investors are attributing a really

high valuation to very high kind of hyper growth. But for the most part, I think it's pretty hard for them to grop that. And so again, you know, we have conversations with the founders of these companies in the private markets. You know, I think we understand it. I think we understand multi product and you're less likely to find, you know, a full public market of folks who will give you credit for that hyper growth.

quarter before, like on a year over year basis. So sitting aside public or private, it does feel like there's just this phenomenon where really gigantic companies grow at shocking, shocking top line rates year after year in a way that maybe even still investors might not appreciate. I have a question for you something I've always wondered. Okay, let's say one of your big portfolio companies goes public eventually,

you know, Stripe or something like that. How does a GP or how do how does the firm think about selling at that point? Is it okay? You're you're private market investors, so you get out fairly soon. You know, on a whole dead do they get distributed and then it's up to the LPs to think about it? What is the cell decision like once a company is no longer private.

Like that company it's worth almost two trillion dollars going to accelerate to thirty percent growth. Same with Google, north of twenty percent growth. So if you can find those opportunities, I would say Stripe is a good example of this. Previous generations of this would be like Visen MasterCard, Like if you had a strong thesis that those would grow at north of twenty percent for fifteen years, you would value it a very different way than if you thought

that that growth would tail off over time. So, yeah, I think it's great that you brought up Google, and you know, we think about the large cap companies to try and inform what could go right with the best of the best of the companies and the private markets for us to not just over five years, but over ten plus years. So to your question about distributions are selling when our companies go public, our LPs, our investors tend to like to have distributions as opposed to us selling.

You know, many of them have public desks or public operations on their own, and they would prefer to take the stock and you know, manage tax consequences on their own, or maybe they have a long book that wants to hold it, and so, you know, we tend to distribute companies. I would say, for the most part, when our companies go public, I'll speak from the growth fund, you know, where we're coming in at a more mature stage at the company. Just because the company goes public doesn't mean

that we will exit. Now. We always seek to return capital to our LPs, and we want to make sure that we're doing that on appropriate time horizon. But often, you know, we'll find situations in the public markets where we think our companies are massively undervalued. You know, I'll give you an example. One of our best companies was a company called Samsara, which does fleet management video tracking

for drivers. They're the market leader. Second time founders. They were the founders of Moroki, which sold the Cisco So they're an exceptional team doing great. They went public right at the tail end of twenty twenty one, and the IPO market was starting to freeze and they were the last IPO and so we ended up being the largest

buyer in their IPO. So all of the public funds, you know, Fidelity, TROW, some of them invested, but we ended up actually being the biggest buyer and then we held that for a long period of time even though it was in the public market. So we'd like to think about, you know, what is the future of the company even if they're in the public markets, and we would buy us to hold it a little bit longer

if the founder's still running the company. We place a tremendous amount of value in founders running companies, which I'm happy to talk about. And if we think the growth prospects are really bright, you know, will tend to sort of buy us to hold a little bit longer.

so you want to go do it there. So in the case of building, for example, data centers in space that will require a tremendous amount of capital over time, you know, you can get a lot of that capital in the private markets, and you know, maybe at some point it makes sense to tap the public markets to get that. You know, if you have huge ambitions, sometimes it's easier to get debt and alternative forms of financing

in the public markets as well. And then lastly, you know, if you feel like the competition is really fierce for your employees, and you know, I described that dynamic of you know, quarterly RSUs and you know stock currency that might be a little bit easier to manage in the

public markets. That would be another reason. It's not just employees, it's also if you want to do meaningful m and A. You know, there's probably a little bit of a benefit to being in the public markets and having a public currency that you can use where you know, you don't have to debate with the sellers what the value of your equity is because it's in the public markets. You know, there's a there's a daily stock price. So those are a few of the dynamics.

with one of our public companies. And after going public, you know, sometimes there's sort of a brand benefit that you get brand halo, you're better known, you know, an IT buyer trusts a little bit more in your future. So there are some of those dynamics that exist. You know AI. First of all, I think these have the potential to be some of the best businesses ever created. They're run by exceptional founders. They're building products that have

grown at rates that we've never ever seen before. So you know, they're kind of speed running the process of company growth in a way, getting to be bigger and more consequential, much much faster than the previous generation of companies. So you know, maybe that means they should be in the public markets a little bit faster too.

the simularity. You don't believe that we're on the path to Adrian. You don't think you think we're done with our you think we're almost at the end of our mission and that our value won't be ten Is that like? Is there any anxiety on the part of employees at a real like mission driven fast growth companies of like I want to dip my too in the water. I want to hedge a little bit. I want to hedge my own company. I want to diversify away from my own company.

proportion of your overall buildings. You know, we never really see a chance for employees to send a design that way where employees say, oh my gosh, I'm out, I want to sell one hundred percent of my stock. In fact, you know, we don't have data on this, but I would suspect that in the public markets, you know, employees are probably selling out of their stock grants at a

higher rate than in the private markets. Yeah, and I think you know, if you're if you're at one of these companies in the private markets, you probably have a greater degree of confidence. You know, if you're a good employee, you could you could always go to Google or Facebook or Meta and click coupons. But I think that most of the time the good ones are are true believers.

We do have companies where the founders. One of my favorite things is when the founders just say I'm not selling a share, and you know, that is like the ultimate extreme point of confidence. We spend time with a very high profile internet CEO of the previous generation. It's now a public company, and one of the meetings we were talking to him about secondary and he was so resolute. He was like, I'm not selling a share, Like why would I sell a single share? Like I'm so confident

it's going to go up. I don't want to do that at all. And that's a pretty strong signal of confidence in the future of the company. So we look for some of those signals when we invest. You know, my my partner, Exter Impel, wrote a good piece many years ago to your point on real estate and buying a house and affordability that showed Bay Area stock prices, you know, of like the megacap stocks index against home

values and it's like perfectly correlated. So you know, home price appreciation is kind of tethered to the local economy in a way, and so you know, it's not totally surprising that you see you see it move in that direction.

lot nowadays. How do you decide this is actually like a good business model versus this is just something that has AI in the name and is getting some attention.

This is the biggest thing that we look to. There's a billion people plus using this technology getting extremely large surplus or value out of it. The companies are the fastest growing that we've ever seen. You know, active users spends something like thirty minutes a day on it, and you know there's a tremendous amount of surplus that comes with that, even if you're paying as a subscriber for those So on the consumer side, you know, I think

the capabilities are extreme. They're very, very good, just now starting to scratch the surface on the capabilities of you know, sort of doing work on your behalf. And so I think we're going to see a ton of progress on that front over the next year. But the demand signals

that we see are probably not. Probably, they are definitively the best that we've ever seen in my career, you know, certainly much faster than you know, the Internet phase or mobile social, you know, cloud SaaS, e commerce, any of those, so tremendous amount of value on the demand side, that's the biggest thing we look for. On the supply side, you know, look the build out. There's there's there's a

ton written about the buildout of infrastructure that's required. It's you know, it's larger than you know, the US highway system overall, you know, five trillion dollars over the next five to seven years. The thing that I say about the supply side is we don't need to make the decision on investing every single one of those dollars. As an industry today, the industry can monitor demand and we can make decisions about capex as we go. Cycles are

not five years long. Cycle times are more like twelve months, and so if we see a weakening of demand or a lack of payback in some of this infrastructure build out, then you know, that's fine, we can we can adjust course.

The people who are I think there's probably a misconception about the people who are in charge of these these companies and you know, at the center of all this like us, like we, and they are all sort of ROI C or return on capital minded people like We're not gonna, you know, invest a bunch of capital if we think there's not going to be a high return from it. So, you know, to the extent that there is some overbuild or you know, signs of a lack of demand to meet the supply, I think the industry

will adjust. You know, we've written about this before. You know, if you can trast this build out with the fiber build out so far, if you put a GPU or a TPU online, it immediately gets used. And this holds for actually very old GPUs and TPUs. Google's disclose this about their TPUs. They are ten years old. You can pretty easily find pricing of two generations to go GPUs on the market, and the price of these have all held.

So there are no dark GPUs. No one is building data centers that aren't being fully utilized right out of the gate. You know, contrast that with the Internet build out. The Internet build out was characterized by dark fiber, and so you know, you had to lay all this groundwork before you actually had any signs of demand, and so obviously there was there's a mismatch in supplying demand. So that's the sort of overall kind of view on supplied

demand dynamics. I'm very, very optimistic. I think we're in the early days of figuring out really interesting applications to build on top of this technology. And you know, in terms of model capabilities, models are improving at a like eye popping rate. You know, they can basically double their ability to complete long form tasks over six to seven months.

And so you know, if you were to just arrest model development today, I think we would have the chance to build ten to twenty years of really interesting applications on top of it.

another company or so forth. Who in your view, and you're thinking about private or public companies who that's not an AI lab, What types of businesses survive and which ones are not going to survive if they don't own intelligence in the raw.

still king in most industries. There will be companies that compound their knowledge of industry specific workflows, industry specific data that they attatched to, and so oftentimes that won't be what the model companies choose to pursue. You know, customers buy solutions, they don't buy some discrete workflow or just a database or a system to take action. So the most important thing is industry context. You also need a throat to choke, right. I think that's going to be

increasingly important for customers. You know, So support, maintenance, integrations, data partnerships, user community I think are all important things for companies that are building applications that are not model owners. And I think in most verticals and many of the functions in an organization, there will be independent companies that

do that. Model companies are going to be an arms dealer to most industries for some tasks or work that are highly horizontal or general, so something like general knowledge management inside of a corporation. The model companies are probably pre well positioned for that. But you know, things like legal work, medical work, customer support tasks, you know a lot of stuff that will happen in sales, accounting, finance

like those are. I think those are going to be independent vendors, and the model companies are going to be arms dealers to those. So that I think is the future of applications for companies that do not own models. I think it's a very bright future. We've invested a lot in some of these leading companies, but I think both the model companies and those companies will be big and successful. On the software side, yeah, I mean, look, the software industry has been crushed in the public markets.

We could debate whether it's overblown or not, but I'll give you my diagnosis of the situation. You know, not particularly on valuations of specific companies, but here's what's going to happen with the software companies and the public markets. I think the issue is not that there's going to be a ton of new software in the future, there is going to be a ton of new software in

the future. The whole story of SaaS and cloud was that the market grew seven x in size, and some of that was captured by incumbents, some of it was captured by startups. The issue is, are the incumbents that are in the public market it's going to actually be the ones that capture that And by the way, I think it'll be much bigger than seven x this time. So why is it, you know, sort of a question of whether those incumbents have the chance to do it.

First of all, it's probably going to be much harder for them to grow right all the new budget Basically in any buyer organization is going toward AI initiatives right now now. It doesn't mean that they're ripping out their software systems. Gross dollar retention remains extremely high for these incumbent software systems, and I think it will for a while. But if you look since twenty twenty one, net dollar

retention of these companies has steadily declined. If you look at the amount of revenue that the entire software industry is adding in twenty twenty six, the amount of revenue that open Ay Andthropic alone will add is going to be greater than the amount of the total revenue added

by all of the software market. Like that's SAP into a salesforce workday service, now all those vendors, So the growth is actually going toward AI initiatives, and so you know, yes, they may not be getting ripped out, those incumbent vendors, but it's going to be much harder for them to find growth. So you know, from a product standpoint, they're not going to get torn out, but they really run the risk of value getting built on top of them.

So those are going to be systems of record, but you just build new vendors, build new products that can take action on top of those. And I think that's a real risk for the software industry right now. If building software, the process of building software becomes much faster, there's another dynamic where every vendor can basically increase the

amount of skews they offer rapidly massively. And so if you are a platform vendor of choice and you sell a bunch of software in this domain, are everyone in the in the nearby domains will also have those products, and they'll all try to sell those new products, and it'll get more competitive, So I think that's a dynamic that's that's really a risk for them. The most powerful change that I think is going to happen, which we're only seeing early signals of, is a business model shift.

So when these technology shifts happen, you know, new user interface, new workflows, new data that you access that favors you know, newcomers, you know over incumbents. When you pair it with a business model shift, that massively favors the newcomers, right because it's so hard to react if you're one of the incumbents. And so the big shift if you if you just take a spectrum of business models that's happened. You know, we used to sell license maintenance software. We move that

to you know, seat based subscription. Then with the clouds, a lot of companies have become consumption based pricing models. And in the future with AI and a lot of domains, is going to be outcome based pricing. You can see this first in the customer support industry because they're sort of verifiable tasks that those companies have to complete. But to the extent that we actually get to the point where the predominant way that that enterprises want to buy

is via outcomes and they can measure those results. I think it's gonna be really tough for.

you know this is. I've thought about this with like when people look at the public markets and they say, well, yeah, it's not that overvalued because you know, most of the public companies are making a lot of money. If you were to sort of like build one index of big private and public companies, you'd have a lot of market cap on companies that aren't making money yet, and that would very much like sort of skew your view of this sort of like total valuation of the universe of tech.

the balance between private and public starts to reverse. But because so much of the excitement right now is about AI, which you know, is capital billions and billions and needs huge polls of capital, I guess the counterpoint to that is, like there's a self reinforcing trend in the private market, which is like, if that's where all the growth is, if that's where people are making all the money, it

tends to attract even more capital. So I don't know, maybe maybe AI means that private capital grows even more and so AI can keep tapping it.