0:33 Intro. [Recording date: May 1, 2014.] Russ: I want to start with your career. You were at the heart of the first browser war, between Netscape and Internet Explorer. That seems like hundreds of years ago. It's a little more recently than that. Give us a brief thumbnail of what happened to Netscape and how you escaped from that war. Guest: Yeah. So, Netscape was founded exactly 20 years ago this month. So, it's a sort of special time for me. Netscape as a company grew incredibly quickly: we grew from 0 to 3500 employees in 3 years. It was actually really funny--Netscape was always thought of as a small little browser company. People used to come to visit us on the campus and they would just be completely flabbergasted at all the buildings, all the people. And the reason we had all those people was in addition to browsers, we built a very broad range of internet software and the internet services at that time. So we were one of the first companies that did internet e-commerce systems, we were one of the first companies to do internet publishing; our systems or software at the time powered a lot of the big newspapers, including the Wall Street Journal. We actually are the company that built cryptography into the web, and so the way that people do encryption now is us. We created core technologies like Javascript. For a couple of years we were the largest internet advertising business in the world, with the Netscape website and Netscape formal[?]. And so that, collective of us grew to about $600 million a year in revenue within 4 years of the start, and then actually ultimately what happened was we sold the company to America Online (AOL) in 1998. So the entire thing was start to finish in 4 years, which felt like an eternity at the time but in retrospect was [?]. Russ: And what happened to Marc Andreessen at the time of that sale? Did you go with that sale or did you leave? Guest: I actually became the Chief Technology Officer of America Online. AOL at that time actually was the most valuable internet company, and so AOL within a year after our sale was a company that was worth $170 billion on the stock market and that was a company that was in the dialup ISP (Internet Service Provider) business--if you recall that. They had 25 million dialup ISPs, and that was right before they were able to broadband, which was going to just completely destroy the dialup ISP business. For those who believe in efficient market hypotheses, one of the counterexamples would be dialup ISP, worth $170 billion dollars head straight into broadband, which made no sense at all. Russ: Well, it didn't last that long. Guest: It did not last so long. What happened was, the management team at AOL actually figured that out. They realized it. And so, actually what happened was they traded their equity, which they knew was going to collapse in value--they traded it for Time Warner equity. And they bought Time Warner. And so that led to the famous AOL-Time Warner merger, which was one of the great catastrophes in recent business history. I stayed for about a year--we have this sort of tradition in the tech industry where your company gets bought, you have a period of indentured servitude where you stay for at least a while to help make sure the integration happens. And so I stayed for a year and then I left and started my second company. Russ: Which was? Guest: Which was actually the first cloud computing company. So, this now turn to cloud computing was something we helped kick off in 1999. That was a company called LoudCloud. And that was really the first company doing what today is done, things like Amazon, with services. That company also grew very fast, we grew from a standing start to quite a large business in the course of the first year. And then we hit the dot-com collapse like running into a buzz saw. So, half of our customers were dot-coms which virtually all went bankrupt. And then the other half were big companies, our clients were big companies who were in a panic because they felt like they had to compete with the dot-coms by launching all kinds of new internet efforts, and when the dot coms went bankrupt most of those big companies said, Oh, I guess this Internet thing isn't serious; I guess it's all going to go away. And they shut down most of those efforts. And so we almost lost that company. My business partner, Ben Horowitz, has actually recently written a book, which is now a best-seller, called The Hard Thing about Hard Things. It's a business book and it actually tells the whole story about LoudCloud, where he was a business partner--he was the CEO (Chief Executive Office). And it's a dramatic story, because we almost lost the company. We almost went bankrupt. And then through kind of a series of near-miracles we were able to do what's called a 'restart'--we basically completely restarted the company as a public company and a completely different business. And then ultimately grew it to be a successful software company. And then Hewlett Packard bought that company in 2007 for about $1.6 billion. Russ: Was that your main use of your time in that 1999-2000-2007 period? Guest: Yes. So I was basically, those were--yes. I started those companies basically back to back. And so Netscape was basically a company in the middle of the boom, 1994-1998, and sort of rode the upward momentum of the '90s-type boom. LoudCloud was started at the very end of the boom--we started in September 1999. So we had 6 months before everything caved in. And then most of LoudCloud, most of us, which became [?], was pretty robust and so we just kept on going all the way through the crash and just kind of kept slugging away through 2002, 2003, 2004 when things got really miserable in the tech industry. And then we sold the company kind of right at--kind of right as the industry was coming out the other end, in 2007; headed straight into the credit crisis. So in retrospect it was probably good timing. [?] Russ: When did you start Andreessen Horowitz, the venture capital firm? Guest: Yeah. So we started the planning for the firm, we started about a year and a half planning and thinking about it through. It was part of that process actually in 2007. So, my partner Ben and I spent some weekends kind of writing the business plan and thinking through all those strategic things we ended up, worked out. And then we kicked off the fund-raising process in March of 2009. And I remember that very distinctly because March of 2009 was the low of the stock market in the credit crisis. And so nobody was raising a new venture capital fund in the spring of 2009. It was not a time when investors wanted to hear about a new venture capital fund. In fact, many of the large investors in venture capital and private equity were in a liquidity crisis in their own businesses, including the big university endowments where they were having real trouble meeting their commitments back to their sponsoring organizations. So it was one of the more--people have told us it was the harshest, most hostile time to raise new capital funding in 40 years. Of course, we are contrarian or perverse, depending on how you look at it, and we said, Well, then it's probably going to be a very good time to raise venture capital funding. Russ: Sure. It'll be a low. Guest: Buy low. Exactly. And in fact we were. There were only two venture capital funds that got raised in 2009 the entire year. One was ours and the other was Vinod Khosla raised a new fund--he's one of the top venture capitalists in history of all time and he raised-- Russ: Who is that? Guest: It's a gentleman named Vinod Khosla, and he runs his own firm called Khosla Ventures. He previously was a partner at Kleiner Perkins. He was one of the partners at Kleiner Perkins who made them so successful in the 1990s. And then before that he was like co-founder of a company called Sun Microsystems-- Russ: I've heard of them-- Guest: which was a big successful technology company. He's one of the legendary tech entrepreneurs and investors of all time. I think it was straightforward for him to raise new funding. It was harder for us. We were able to raise it. In fact that turned out to be a very good time to raise a fund because it put us in a position of investing a lot of people who had stuff for investing.

8:44 Russ: So, even though 2009--I'd say you've been around now, the firm has been around now for about 5 years, it's been 5 of the least pleasant years in the American economy that weren't called a recession. Officially the recession ended in 2009, but it's been a pretty mediocre run for the U.S. economy since then. But the technology world has been doing okay. And you've invested, according to the Internet at least--and the Internet never lies--you've invested in Facebook, Twitter, LinkedIn, FourSquare, and so on. Which are pretty successful companies. My question is: Does that make you feel smart? Or, is investing still a very humiliating and uncertain process? Guest: Well, venture capital is kind of guaranteed to be humiliating, because the most successful venture capitalists of all time typically tank about half their investments. By which I mean, if you take any of the top-performing venture capital firms over the last 40 or 50 years and if you get inside their portfolios, look at their portfolios, even in the top firms, like the ones that return amazing returns over long periods of time, typically they lose half their companies. Right? In other words half their companies go under and they either return nothing for the original investment or they return a fraction of the original investment. And so it's the kind of business--it's a feast or famine business. And in the same portfolio you have both feast and famine. You'll have a company that gives you a 10x or if things go your well, 100x, 1000x return; and you'll have 6 other companies that are failing. The sort of twist, then, to how you spend your time, is you spend most of your time actually dealing with your companies who are struggling and trying to help them. Because it's the companies that are struggling or failing that actually need the most help. The companies that are succeeding are generally doing just fine without you. The companies that are failing are really the ones that need help and support. And so a lot of what you end up doing at the job is supporting struggling entrepreneurs. It's kind of continuously humbling. You are a trouble shooter. There's always something going wrong. Psychologically--we talk about this with our partners--you have to be psychologically prepared for the opposite. It seems like it's going to be a life of glamor and excitement. It's more of a life of struggle and misery. And if you are okay with that--because it's part of the package--then the overall deal is pretty good. Russ: Yeah, I'd still call it nice work if you can get it. Guest: Yes. Yes. It beats all the jobs I had when I was a teenager. Russ: Exactly.

11:14 Russ: But what's interesting to me as an outsider is that you don't get particularly--you learn things, I'm sure, as you go forward, but you still fail at least half the time. It's not like: Those 5 of the 10, those were the losers; now next time I'll miss those; I won't invest in those. But you still have to fail 5 out of 10; you don't know which 5 they're going to be. Guest: Yes. So the reason for that is--we think you can draw a 2x2 matrix for venture capital. And this is probably true for all investing, but it's certainly true for venture capital, which is, you can basically draw a 2-by-2. And on one axis you could say, consensus versus non-consensus. And on the other axis you can say, successful or failure. And of course, you make all your money on successful and non-consensus. Right? Now from this point of reason is because it's very hard to make money on successful and consensus. Because if something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate 'non-consensus': in sort of practical terms, it translates to crazy. Right? You are investing in things that look like they are just nuts. Like, who would believe--right? And it's kind of continuously the case [?], who would believe the thing would work at the time when the VCs are investing--if you see companies, the whole thing was considered to be a joke. When Internet started up, the one thing that was for sure was that nobody would ever make any money on the Internet. Right? They would never be a business. Russ: Right. It was just a toy for communicating a little bit or interacting, but there's no revenue stream that's going to come from it. Guest: Certainly not. And obviously the one thing you know for sure is that nobody's going to buy anything over the Internet. Hackers might steal your--so, you go on and on and on. And then google, e-bay, [?] at the time, venture capitalist [?] made e-bay investment. And a lot of people thought that's crazy--who is going to buy something from a seller halfway around the world that they've never met before? That's just nuts. Russ: And it's used. It's not even a new thing. It's often a piece of--it's garage sale material. Guest: Yeah, exactly; that's exactly right. And that continues in the present day, and more recently you have these things, Airbnb, we're very involved in it, Airbnb is an idea [?]. Even a couple of years ago a lot of people were like they Airbnb, it's this idea, rent out the back room in your house and then a random stranger is going to show up and stay in your room. That's crazy, right? You would never do that. You would never rent out the room; you would never stay in a stranger's house. And it turns out that Airbnb, it turns out people love this and it's growing like crazy. And the revenue is exploding. Now, the corollary to it, of course, is crazy does not mean correct. Crazy often just means crazy. And so you get some of those. Russ: I used to teach a business plan class in a business school, and one of my students submitted a business plan that, in the financials over the life of the company, made no money for the foreseeable future. And I said, That's a little bit discouraging to a potential investor. And the student said, Oh, well all the best companies don't make any money, so that's a plus, not a minus. So that's the challenge. Every crazy idea is not successful. It's kind of a reverse causation confusion there.

14:36 Russ: Despite all that, you've made some very successful bets, presumably on non-consensus companies that at the time--140 characters as a form of communication seems like a ridiculous, does seem like a very ridiculous idea. Are there some you missed that you regret that you want to talk about? Are there some lessons you learned that now you can't believe that those are the mistakes you made back then? Guest: Oh, sure, sure, sure. So, as a corollary to this, the mistakes that we make in a field like venture capital, the mistakes generally aren't investing in something that turns out not to work. This is something that [?] in particular really struggles to figure out. It's like you are putting all this money into something that fails and wasn't that a mistake? That's generally not the problem. The problem is what you just said, it's the big hit that you missed. And so every venture capitalist who had the opportunity to invest in Google and didn't just feels like an idiot. Every venture capitalist who had the opportunity to invest in Facebook and didn't feels like an idiot. The challenge in the field is all of the great VCs over the last 50 years, the thing that they all have in common is they all failed to invest in most of the big winners. And so this again is part of the humility in the profession. Which is, you literally as an investor in most of these things, you can make, if you invest in some of the hits, you can make a long list of those you missed; and those are the ones that drive you crazy. I was not a professional investor prior to 5 years ago, so, you know, we'll see in the [?] of time which ones I missed [?] experience. One of the things we do a lot is we try to back-test our theories against history. And so--because we sit around all day long and say, What are we looking for? How do we know if it's going to be great? And so, we sort of debate criteria for investment all day long. And one of the questions I always ask us--and I'm not sure of the answer--is: Would we have invested in Google when they were raising venture capital? And the reason--I actually wonder if that's the case--and the reason is a good friend of mine was at another venture firm that passed on Google when they had the chance to invest. And he said--I said, Why'd you pass on Google? And this is back right around the same time it happened, so I know that it's [?] as opposed to just revisionist history. He said, 'We passed on Google for three reasons. He said, There are three reasons. Number one, absolutely no business model. They had absolutely no idea how they were going to make money. Number two, they were the two most arrogant founders we'd ever met in our lives. And number three, very high premium valuation.' And he said, had there been only two of those three problems, they would have still invested. But all three problems together prevented them from doing it. And in venture capital, that's a $20 billion mistake. But-- Russ: If those are your three rules, you might save enough money on the other $30 billion that you would have thrown away. Well, $30 billion is hard to throw away. That's not a good answer, maybe. But you see my point, though. Guest: Well, but that's precisely--you've identified the exact problem, and the problem with the problem. Which is that it's a game, the key characteristic of venture capital is the returns are on a power-log distribution. So, basically, here's the way to think about it in the math. There's about 4000 startups a year, [?] a year, that want to raise venture capital. Of those, maybe 400 will get funded by top venture capital firms. Of those, about 15 will be responsible for over 90% of the profits for that entire year of companies. Russ: Yeah, that says it all. Guest: So, it's a feast or famine business. If you do invest in Google and you invest in the 100 losers, you are a spectacular success. If you don't invest in Google and you invest in the 100 losers, you are a horrible failure. And it turned out the only decision that mattered was, did you invest in Google or not? And of course, the corollary to it was: You never know when Google is going to show up. Right? One of the weird things about Google was they showed up in 1999. So a couple of things about Google that would have made it hard at the time, which was if you believed there was a bubble in 1999--which a lot of people think that they believed, at least in retrospect--like that would have been the last time you would have wanted to invest in a money-losing company run by arrogant founders with premium[?] valuations. And yet that was the one to do. Second thing is, Google was like the 35th[?] search engine. Right? There is this whole thing about first to market, you know, and the innovator, and that whole thing. And like, there had been 6 years of search engines before Google, many of whom at that point were large public companies, and were considered very successful companies. Yahoo, Lycos--there were a whole bunch. And like Google was like late in the game. Now, it turns out they were late in the game with a fundamentally better product. So like my friend Peter Kiel[?] likes to say: It's not first to market that matters; it's last to market. You want to be the last company, because you want to be the company that basically shuts down all following competition. Russ: If you can do that. Yeah. Guest: Yeah. Exactly. But what he says is that's the key to getting all the investment returns. Which is: you want to be able to so good that it basically forecloses all future competition. And that often is not the first company. And so if you think about the decision past that you would have--a lot of people think that if they had seen Google in 1999[?] they would have been smart enough to make that investment. But the actual decision path that you would have had to follow in your own head to get all the way to the idea that investing in these guys with no business model in that time, in a field that had already a kind of competition, was a good idea--like that was a leap. And it's no coincidence by the way that that investment was made by two of the smartest VCs of all time, John Doerr and Mike Moritz. That was a leap. That required real foresight, deep thought process, and a risk tolerance that most people simply don't have. And so, on our best days that's what we aspire to be like. We aspire to take the bets that other people won't make. We aspire to go way out on the edge of risk. A friend of mine once said, Marc, you are ruined; your investor capital or whatever, you'll never be able work in any area of financial services or investing because in every other area of investing it's all about reducing risk. Whereas in venture capital it's all about increasing risk. The big danger is you are not far enough out on the risk curve. Russ: How much did Doerr and Moritz put into Google at that point? Do you know? Guest: They put in about $25 million, between the two of them. And they bought, I believe $25 million bought somewhere between 15-20% of the company. And so that would have gotten diluted down over time. So that would have translated to, probably, let's call it 10-12% of the company today. And Google today is worth $340 billion. Russ: That's a good deal. Guest: So, that's $25 million turned into--if they held stock, which some of them didn't, but if they had held the stock all the way through, 15 years later--somewhere between $350[?] billion. Russ: That'll pay for a lot of mistakes.

21:30 Russ: What do you think was--you are suggesting that what made Google better than--and I'm old enough--as many of our listeners are--that's what's great about the Internet. I'm not talking about the Korean War now. I'm talking about the 1990s. I remember Lycos, and Yahoo, as search engines. People still use Yahoo sometimes as a search engine. But you are suggesting that Google dominated that market because they had a "better" product. What was better about it? Guest: So, my friend, Bill Joyce[?] says, The key difference is that it had the--it works future. It worked. If you remember doing searches back in those days, unlike most people [?] systems, you would do the search and you would most likely get back, basically, you would very often get back useless results. And the programmers at those companies worked really hard to try to get you back the results, but like a lot of the time you got back just like, you just got back noise. And what had actually happened, it turns out, was, users got trained to not expect much from their search engine. Right? So they had gotten trained that their results were not going to be very good. And so users actually do that many searches, and when they did, the spent a lot of time going through it trying to find the right results, you know, out of the first hundred. The people who really understood this stuff--number one, you could use Google early on, if you had early access to it, and you could compare the results and you could just see that they were better. And it was very visible and very visceral. And of course, better results, not only better results, people were going to use it a lot more. And so people would use Google a lot more than they would the other ones. And then, if you were a computer scientist and you had access to these guys and you talked to them, you would find out they had a completely different kind of approach than the previous search engines. They had this innovation that became famous called 'Page Ranks,' where they just had a computer science breakthrough, an actual technological breakthrough, in how to do the scoring, to get to the best results. And it turned out those things were discoverable. This is one of the things we find--you had to be very close to the company to realize this. This was very hard to call from the outside. And a lot of people who passed on Google, passed on Google without ever getting to the point where they learned the details. But it turned out the details really mattered, because they really did make a big difference. Russ: Right. The elevator pitch--'I have a better search engine'--is not that compelling. Because the question would be how much better, and who cares, and then what. The answer to all those questions, like you say, from the outside that was probably very hard to discern. Especially the 'and then what?' Because the ability to monetize that product was not obvious at all. Even if you got into the guts of the algorithm. Guest: Yeah. And then, by the way, even then you would have had to invest not knowing how they were going to make money. Because they didn't have that second part. They figured that second part out. One of the things I like to say is we live in a one-of-many parallel universes; and we know how some played out but there exist universes in which [?] played out. And there are many other universes in which Google never figured out how to make money. Russ: Yeah. Guest: And crashed and burned, and would be a cautionary tale today. And there are just twists of fate that happened along the way where they were able to figure out this ad words algorithm to be able to make money. But had they not figured that out--and a lot of people didn't think they would be able to figure that out--we would be having a very different conversation today. And so it's one of the things, again it goes back to what's humbling about what we do, is--it's limits of knowledge. There are real limits to what you can know. Which, by the way, means that if you are going to operate in the field and if your requirement for investing in something or backing something or going to work for something is you are going to know for sure that it is received[?], you are never going to do anything. There is no return above the risk. Russ: One of my favorite stories is how Fred Smith supposedly--it may not be true--after he got turned down for the last time by Chicago banks to borrow money to keep FedEx afloat, was in the Chicago airport and ready to return to Memphis to tell his employees that it was over. Instead took a plane, I think to Reno, and put all of his money, which included, I think, his sister's trust fund money, on--I don't know, red or black, or whatever--and made enough money to cover his payroll that week. And they made it. And I always think: What would have happened if he hadn't looked up at the board of departures and noticed a flight going to Reno? And if Doerr and Moritz hadn't made that investment, would Larry Page and Sergey Brin be doing something different right now? Would they have eventually gotten to where they are? I don't know. Guest: Interesting one. That company--nobody will admit it today, but that company was very acquirable in the beginning, before the [?] business model. There were any number of big technology companies that could have bought Google for small amounts of money and Larry and Sergey could have gone on to be big level engineers at Yahoo. Then again, it's a twist of fate. Russ: A fate worse than death. Guest: That's what some people would say. Russ: Compared to--[?] midlevel engineer, Yahoo, but compared to what they became. Guest: That's exactly right. And so, again, this comes back to limits of knowledge, which is like, how many great entrepreneurs are there who just haven't realized that they had a path that didn't involve going with a company. How many of the business failures that we can all name were like one step away from success and they just didn't figure out that one step? And those are the questions we'll never know the answers to. Very [?]; and they cause us at least to be, we have this theory at our firm, a sort of, what you call, a software term of what we call late by [?] decisions. Which is to say, we try to make delay making decisions on these things until a way is possible. Because you really never know. There is a very, very high risk that you are going to be incorrect, and you really want to delay making a decision till you get every piece of data you possibly can. Because it just is so hard to tell.

27:27 Russ: So, in 2011, you wrote a piece for the Wall Street Journal called "Why Software is Eating the World." Explain your argument and why the evidence continues to accumulate that you were right. Guest: So, the argument basically has to do with the evolution of the computer industry. The computer industry is sort of one of these industries where it's sort of had the [?] model for a long time, where computers historically would get built for the biggest customers, which were big companies and big government agencies. And they would cost tons of money. And then 10 years later, 20 years later, somebody would [?] them up and do a cheaper form factor and then make them available to smaller companies and then, kind of 40 years into the computer industry the PC (Personal Computer) came along, which was the first thing that individuals could buy. And then in 20 years after the PC, the smartphone came along. And the smartphone is a big breakthrough, because the smartphone is the first computer that is packaged up and delivered in the form where everybody on the planet can have one. And so, the way I think about it is the two giant, twin, kind of dominant stories of our era are, number 1., the enormous rise of the developing world, and the, you know, introduction of billions of people into what we would consider to be the modern economy. And then, in parallel with that, intertwined with that, is the smartphone revolution, which is: Everybody on the planet getting what is the equivalent of a supercomputer from 20 years ago in the form of a smartphone, in their pocket. Russ: That they have with them all the time. So everybody has one and has it all the time. Guest: And have them all the time. And they are all on the network. They are all connected. They are all on the Internet. And so we've gone from a world in which most people didn't have computers, right--the PC only ever got to about a billion people, out of 7 billion people total. The smartphone is going to get to all 7 billion. Two big things happening right now in real time: One is that in both India and Pakistan the price of smartphones now has plummeted to $35. And so all of a sudden it's a $35 consumer purchase, which is within reach of a large number of people. And then second is, even in the poorest parts of the world, [?] revealed consumer preferences, even the poorest people in the world will choose a smartphone with Internet access even over indoor plumbing and electricity, given the choice. And you hear the people working in the field in the most poverty stricken parts of the world who are [?]. And so you really do have this kind of universal computer for the first time. Everybody is going to have one. These things are shipping in the billions now. By the end of the decade everybody on the planet is going to have one of these things. So, everybody's going to have a computer. Everybody's going to be on the Internet. And that's a new world. That's a world that we've never lived in before. We have no idea what that world is going to look like. It's brand new. One of the things that you know is that all of a sudden, if you can conceive of a way to make a product or a service, and if you can conceive of a way to deliver it, through software, you can now actually do that. So, I'll give you an example, [?] banking is one example. Which is, historically the idea of having an online-only bank that was only delivered through software would have been considered lunacy, because most people don't have computers, so you need branches; you need tellers; you need ATMs (Automatic Teller Machines). You need this big physical footprint to build a bank. Today, you can just make this simplifying assumption: you could just start a bank and say, I'm only going to make the bank available online; it's only going to be available to people through their smartphones. So it's just going to be software. And there won't be anything else to it. It will be just software. And all of a sudden, you could have a bank with an addressable[?] market of 7 billion customers entirely in software, without any of the physical overhead of how today's existing banks operate. And so this is the software [?] the world faces, which is: we now for the first time can basically go field by field, category by category, industry by industry, product by product, and we can say, what would they be like if they were all software? And then entrepreneurs in virtually every field we are talking about are attempting to do that. And so there are entrepreneurs attempting to do software-only financial services, software-only education, software health care, and obviously then the media industry is transformed to software, e-commerce, retail is being transformed to software. And this is sort of where I disagree so much with people who are worried about innovation slowing down, which is that I think the opposite is happening. I think innovation is accelerating. Because the minute you can take something that was not software and make it software, you can change it much faster in the future. It's much easier to change software than it is to change something with a big, physical, real-world footprint. Russ: If only we could stay in digital hotels. Because the biggest cost of a hotel is, they've got to replace the furniture once in a while. But for so many other things, the furniture is digital, so it's a piece of cake. Guest: Yeah, exactly. So what's happened is, all of a sudden software professionals--and not just in the United States, all over the world--software professionals, software entrepreneurs, are looking at industries where historically, industries that have not been tech-driven, industries that have not been Internet-based, and they are looking at those industries and they are saying, Now is the time. Now is the time to build a software bank; now is the time we build a software school. And there are entrepreneurs all over the planet who have figured this out, and they are going straight for it. And of course our job as venture capitalists is to fund them. What are the consequences of this? Many things. Number one, consumer welfare is on the rise way more than I think people are willing to give it credit for. I think that the universe of opportunity that opens up to you once you have a smartphone in terms of your ability to get all these services, your ability to get information, access to global markets, education--from a consumer welfare standpoint, this is Nirvana. This is like everybody has the magic box from which they can get access to all this software. Like, that's amazing relative to all the physical limitations to the way many things used to work. So, consumer welfare is on the rise, very fast, and on a much broader footing than people believe. Even the poorest rural villager has access now to resources, [?] financial security, he didn't have access to 10 years ago. So, that's an enormous sort of consumer welfare change. Rate of evolution increases I think in a lot of industries because software can mutate much faster. Prices can come down very fast in a lot of industries. One of the things that I think is very interesting economically right now is I think price deflation across the economy is a much bigger factor than people think, because you take a product that used to be hardware and you make it software, where there used to be a retail store you make it software, and you take out huge parts of costs, which means prices fall. And then I'd say probably what the final thing is, entrepreneurship is on the rise, because everybody in the world who can write software, which is a large number of people, can not be an entrepreneur if they want to. And can go after these opportunities in many fields.

34:16 Russ: So, you've been very enthusiastic about Bitcoin. And we recently did an episode on Bitcoin. You've actually compared Bitcoin to innovations such as the personal computer and the Internet. Very bold claim. What's the source for that enthusiasm? Guest: Yeah, so this is not a claim that I have made about anything else in the last 20 years. So this is the first time I have said this. That indicates sort of the depth of seriousness with which I take it. Bitcoin and the ideas underneath Bitcoin--Bitcoin is an instance[?] of this broad topic which is in the computer science world is called 'cryptocurrency', which is sort of this area of R&D (Research and Development) that has been going on for 20 years. One of the things about Bitcoin that's important to understand is it's not just an overnight thing that somebody just dreamed up. It's the result of 20 years of really hard work on the part of a lot of brilliant computer scientists that finally catalyzed in the form of this Bitcoin thing. There's a very deep intellectual background behind Bitcoin. The big breakthrough is in this idea that's underneath Bitcoin, underneath the currencies, the idea is called 'distributed trust.' And so the idea basically is, take 7 billion people, put them all online with their smartphones. Now in theory you have the ability to do business with anybody on the planet. But how do you know who do trust? And how do you do trusted transactions. Right? For example, how do you spend money from Point A to Point B, knowing who is sending it, knowing who is receiving it, knowing that the money isn't being--it's digital money that isn't being copied along the way, which is called the 'double spending problem.' And then how do you do a transaction with digital money in a way where everybody else around you is able to verify that that transaction actually happened? And so people can't say, I was frauded, or I never got the money, or whatever. How can you do that in a way that doesn't require centralized institutions, in a way that a bank or a credit card company or a payment processor-- Russ: Or the Department of Justice. Guest: Well-- Russ: The police. You need--it would be great if you could avoid the police. Guest: Yeah, exactly, that's exactly right. Contracts. Well, let's talk about this for a second. So, the way contracts work in the United States is you sign a piece of paper. Well, okay, what happens if somebody forges a signature? Well, you call the cops, you have a lawsuit, you go through like all that stuff. Right. You are working with the police, with contract law, and with courts. So you immediately fall back on the centralized institutions and you hope they get to the right outcome. Well, what if you had a digital contract that was unforgeable--so, once you signed it, that was it; it was provable after the fact that you signed it and nobody else could have signed it. Russ: And, what you signed you had to keep. That there was no uncertainty or virtually no uncertainty that you'd keep the promise that your signature represented. Because that's the other piece that's always uncertain. Guest: Well, so the first thing is just being able to interact. There are consequences to many of these things. But the first thing is being able to interact. So, let me give you the basic concept--let's just state the basic concept of ownership. So, who owns what? Who has title to what? Again, in the West, we take it for granted: we've got title, like real estate titles, we've got title agencies, we've got contract law, [?], and all the rest of that. And ultimately, yes, there's enforcement--if somebody trashes somebody else's house, there is enforcement. But we have very clear ways of determining who owns what. Of course, in a lot of the world-- Russ: They're very expensive, those titles. When you buy a house, a frighteningly large amount of money has to go to prove that you are actually buying and selling the house that you both have in mind. It's a big set of institutions around it. Guest: Exactly. Yeah. Now, in much of the rest of the world, and much of the developing world, there isn't clear title. De Soto has written about this a lot; it seems to be a big problem in India--there's some, I don't know what the number is now but there's some large percentage of Indian real estate and [?] where it's just not clear who owns it. This is sort of a generalist tone[?], but of course if you can't have land as the basis of capital then all the other things economists talk about[?]. So then you kind of say, We need to have a system through which everybody in the world can establish ownership and have a consensus view of who owns what; and then they can have a way to transfer ownership from one person to another in a way that can be validated and can be trusted. Without having to recreate these giant, centralized institutions, which might take decades to build, in systems where the government is not strong enough to do that yet. Or, might just be prohibitively expensive. And it may not be possible to have what we might consider a modern title system for land in the world where incomes are much lower. Which might be part of the sort of development trap, is this may just not be possible--it may not be cost effective [?] required to let people develop economically. And so what if we could do this digitally? What if we could just do that on the Internet, for free? Well, we can send email back and forth for free, messages back and forth. Why can't I send title back and forth? And there were a set of breakthroughs that had to happen around trust, around cryptography, that had to happen, that in fact happened over the course of the last 5 or 10 years. And then the key breakthrough was this breakthrough, the Bitcoin breakthrough, by this sort of anonymous inventor, Satoshi Nakamoto, who came up with this idea of the blockchain, which is kind of this trust model for establishing who owns what, who controls what, who has committed what, at different points in time. So, that's a really big breakthrough. You can think about that breakthrough--Bitcoin, people think of it as digital money. And it is digital money. But it's deeper than that. It is potentially also digital contracts. It's potentially digital title, digital ownership, digital keys, digital assets--you know, you need media files, which is a large [?] big problem on the Internet, single copies of media could be done this way. And then also digital stocks, digital bonds, digital loans, digital insurance contracts. And so you can kind of see where I'm headed with this, which is this kind of distributed trust breaks through [?] a wedge that the technology has now made possible. And now what's going to happen, and is happening right now, is hundreds and thousands of entrepreneurs starting companies to do software-based contracts--software-based [?], software-based title, all of these different categories, using this underlying [?]. And that's what's going to happen in the next 5 years. And that's what we're funding.

40:40 Russ: What could derail that? What do you think threatens the viability, not of Bitcoin per se, but of this cryptocurrency, distributed trust breakthrough? Is that breakthrough, is it over, we're done, it's solved, we don't have to worry about it any more? Or are there things you think are still uncertain about it? Guest: So, at the highest level it's hard to see it stopping. And the reason it's hard to see it stopping is it's just math. It's just math, it's just bits. And so, it's like stopping the Internet itself. Like for example, you watch [?] countries, Turkey going through this right now, where they are, something happens politically and they decide they want, they don't want bad behavior on Twitter or on YouTube, so they ban Twitter. And then the next thing you know is hackers in that country find 3000 different ways for people to still be on Twitter. Or all of the behavior then just use YouTube. And then they ban YouTube. And then increasingly they look like they are doing terrible things to their citizens. And then at some point they reach the point where they just need to shut the entire Internet off. But the problem is, if you shut the Internet off, you tend to drive everybody into the street. And that's the last thing you want, if you are trying to prevent the revolution. And so, you know, if you are North Korea, and you can prevent people from using the Internet, you can stop all this stuff. But I don't know how modern countries can actually shut off the Internet. I think we are past that. And so, sort of shutting off the Internet, you have to somehow take a very aggressive path to intercept these bits. It's like trying to prevent people from talking. It's like, you can try. Except there are an enormous number of people who want to make sure that the free flow of information doesn't stop. Russ: But there's--you are talking about the government response. But what about the private hacking response. Do you think the ability, just to take an example, just to hack into somebody's Bitcoin wallet is going to be--is that going to be a problem in the future? Or is that "solved"? Is the problem duplicate money--I forget the technical term you use, more than one copy, I pay somebody and then they can somehow buy two different rugs with the same coins. Are those technical problems? Do you think they are over, they are solved? Or do you think there are other risks involved technologically? Guest: So, those problems are solved in theory. So, this is a complicated question you asked, fairly complicated [?]. So the problems are solved in theory. And the reason we know that those problems are solved in theory is, like I said, this isn't just no right thing[?]. This is something people have been working on for 20 years. And every step of the way they've been trying to break it, they've been trying to build it. Bitcoin itself has been out for over 5 years, and many of the best hackers in the world have spent the last 5 years trying to break it. And there's been a huge financial incentive[?] to break it. And it has not been broken. And so, can I prove beyond a shadow of a doubt that it never gets broken? No. Do I know that many of the best hackers in the world have been trying for years and have been unable to break it? Yes. In the real world, how do you know that something is secure? There is some point that something is secure because people have tried to break it and have failed. How do you know a vault is secure? Well, people haven't figured out how to open it. So, theoretically it's in a very good place. Like it's [?], and by the way, we feel it's like in a place we are able to back companies that are being built on it and [?] we are deep in this world, we are deep in the security world, we have a lot of hackers so we track this stuff very carefully. And nobody's making any progress cracking it. So, so far so good. Then of course, [?] years ago that goes by, you have more and more assurance. Because you have more and more evidence that it hasn't been broken. Now, that's in theory. And that's important. Important that that [?] in theory. Russ: It counts. Guest: Right? Then there is practice, which is that it has to get implemented in the real world to get used by normal people. And so there you get into things like your Bitcoin account is going to be protected by a password, and if you pick the wrong password and your password gets easily guessed by a hacker, then somebody can take all your bitcoins. And that's still the case. But of course that's the case. Because that's the case with everything. You do that with your email; people can read all your email. If you leave your car unlocked with the key to ignition in the middle of the street and come back in a few hours it probably won't still be there. And so it sort of reduces down to this broader question of making sure that the digital systems that we use are generally secure. And there is all kinds of work going into that throughout the industry, using new kinds of authentication methods, using fingerprints, retinal scanners, all these different approaches to make this more secure. And so, at some point you do have these kind of practical issues. But it's certainly every bit as secure as online banking system, as an example, like, it's [?] more secure than an online bank. It's more secure than the Obamacare website. Like, you know, it's more secure than most commercial websites. It's sort of beyond the point where you usually worry about this in terms of building a business. And then you just need to work with your users to make sure they are doing responsible things.

45:40 Russ: If Bitcoin were widely used and accepted, and I think it's on the road to being that payment system, would you be comfortable with large chunks of your wealth in your Bitcoin wallet? Guest: Oh, yeah, yeah, yeah. Definitely. Well, so, bear in mind also, it's very clever about Bitcoin. The money doesn't actually have to be online. One of the [?] if you are in Bitcoin is you don't actually have the money in the wallet. Bitcoin is numbers. And so you can actually store your bitcoin in a safe-to-be. You can print your bitcoin out on paper and store it, say, out of the box[?]. Right? And so there is a variety--there is [?] called cold-storage. There is a variety of cold storage methods. And there are actually companies now that are going into this business, a sort of Bitcoin in cold storage. It's like a safe-deposit box business. Right? The safe to store your family jewelry in, a safe deposit box at the bank. Well, yeah, it's fine [?]-- Russ: More or less. Guest: Yeah. More or less. And by the way, the other thing is there is insurance. You can insure your jewelry. There will be a variety of different insurance mechanisms through Bitcoin. And so you'll be able--both Bitcoin wallet companies themselves are going to have insurance; and then you yourself will be able to buy insurance. Again, these kind of risks. And so it'll become, like anything in the real world, it will become a combination of--you don't carry all your money around in your back pocket with you for cash every day. You store some of in a bank account; you store some of it in gold or a safe deposit box; maybe you store some of it maybe if you are really[?] your front porch. And you know, it's kind the same thing with Bitcoin. Like you can do that. You print it out on paper and bury it in the proverbial [?] storage [?]

47:11 Russ: Let's shift gears. Let's talk about the news business. You've written about that recently. Most journalists are very pessimistic, worried about journalism. They're the people who work for newspapers, that I talk to. Other kind journalists obviously are less worried. You are optimistic about the future of journalism. Why? Guest: Yeah, so I take a very different perspective on this. It's a perspective based entirely on business and economics, and I'll try to describe why. So, if you kind of study the history--the news business is kind of an old business. It's been around for about 500 years. [?] for about 500 years. For the first 450 years of the newspaper business, it was a brutally competitive business. One of my favorite books--there's a book called Infamous Scribblers, which is a history of the news business in colonial America, and it's sort of a good slice and pie[?] and thing[?] of what it was like to be in the newspaper business, like, you know, in colonial Philadelphia like 1770. Which is like when Ben Franklin was in business. And what you realize is, it was a brutally competitive business where any given city would have 15 different newspapers and they would all have a different subjective point of view and they would all be, some of them would be political attack kind of organs and people were writing under pseudonyms. I think Franklin himself had like a dozen different pseudonyms that he would write under to prosecute different agendas. And it was kind of this whirling free-for-all of kind of activity and news and information and efficacy and politics. It was kind of this stew. It ran that way for 450 years. By the way, it created very large empires in the process. So the first empire, Pulitzer [?] empires, were very big businesses based on that kind of approach. What happened, really, I think, especially in the United States, after WWII, the news business consolidated into an oligopoly structure. And particularly in the news business it consolidated into local monopolies. And so what happened--this is due to scale economics, per city--in any given major city in the United States basically over the course of a couple of decades, you went from 15 newspapers to 5 newspapers, ultimately down to 1 newspaper. And so you have the Chicago Tribune in Chicago, and the L.A. Times in Los Angeles, and kind of so on and so forth. And it was only the largest cities that would have a few different newspapers. But even there you'd have a big, dominant one, like the N.Y. Times. So then 50 years passed where, if you are a journalist, by definition you are working for a monopoly. And those of us who have worked with, you know, companies over the years, there's a big difference whether you are working with a monopoly or with [?] versus interacting or working with a company that is a competitive business. Russ: Yep. Guest: And, right--it's the difference between working with a company that has to compete[?] every day, versus a company that doesn't have to compete. Right? Every monopoly has the same model: Which is, we don't care because we don't have to. Russ: Yep. Guest: And so we have these companies--and they were, you know, they were businesses like any other, and they have[?] monopolists. And so they can act like monopolies. And they had generations of managers--two or three generations of managers passed. And at a certain point you only had people going to work for these companies who wanted to go to work for a monopoly. And, by the way, it works. Businesses got better and better. The newspaper business actually didn't really start to collapse until after 2005, right? These companies actually grew tremendously, even through the initial stages of the [?] boom. They had very, very big margins. You know. So the business executives certainly had some money--[?] expense account, big fancy buildings, lots of long lunches, like the whole thing. So, then, right, what happens of course, the distribution of technology changes. Right? The reason these all centralize[?] in monopolies is because of the scale of economics distribution, right? Having the printing press and the fleet of trucks that would actually get the newspaper out. Right? You had a scale of managers[?] if you were the sole provider. The Internet stripped the monopoly status on the distribution side out from under all of these companies. And then all of a sudden-- Russ: And then they took the revenue stream away from them, too. So you had the ads and the classifieds. Guest: Well, they did something very specific there, which was it wasn't so much that you had new online newspapers that did the same thing that the offline newspaper did. It was that the product got unbundled. Because in the old days, people had a sort of romantic view that a newspaper was like this bastion of democracy, all the stuff that the journalists like to talk about. The reality was most of the newspaper was big grocery store ads. Right? And the car dealership ads. Russ: And the want ads. Help wanted. Guest: The want ads. Declassified ads. The sports scores. The stock quotes. The funny pages. The horoscopes. Dear Abby. The entertainment news, TV listings. It was this bundle of information. And they'd censor [?] information, all be in a bundle, made sense for all the revenue streams associated with all those components to be in a bundle because of the costs of distribution. Because it didn't make any sense to have 20 different specialist newspapers each covering those different topics. It made sense to have one with everything bundled in. You put that on the Internet, and all of a sudden, to your point, Craig's List takes all the classifieds. And Yahoo Movies takes all the movie listings. And Yahoo Finance takes all the stock quotes; and ESPN.com takes all the sports, and kind of on and on and on. And so the product got unbundled. The distribution monopoly fell away. The competitive battle started immediately, right? And the competitive battle has been really fascinating. You had newspapers competing with newspapers, who didn't used to compete. The New York Times and the LA Times never used to compete. And today they do, because as a user on the web you can go to either one, equally. And of course the New York Times never would have viewed CNN as a competitor in the old days. But in the new world, NYTimes.com and CNN.com are just two different websites. And so you have competition across media channels. And then you had this kind of great unbundling taking place, and you had the revenue vanishing. So it felt like a perfect storm. Like, if you are inside one of these media companies [?] newspaper publisher, it's like 'Oh my God, the entire thing is collapsing.' And there's a lot of truth to that. But the root cause, I believe has been misdiagnosed. The root cause is you were used to being a monopoly. You weren't used to competing. Right? So what's the root answer to this entire thing going to be? It's going to be to compete. It's going to be to take the stance of every business in the world that actually has to compete for a living and figure out fundamental questions: what's my differentiation? What's my competitive advantage? What's the appropriate cost structure? Who are my customers? What do they want? Where am I unique? Where am I not unique? And so it's a time when we need proprietors for news organizations that are like the proprietors in the 1930s [?]. We need proprietors and owners and managers who are full-on capitalists, full-on aggressive business people who are very good at slicing up markets and identifying revenue[?] opportunities, very good at rationalizing cost structures, and all the things that you have to do in a normal business. And of course this causes the journalists to just freak out, because they are like 'Oh my God.' The whole point of objective journalism is you are supposed to have separation of Church and State and the [?] objective journalism, and now business people are going to charge and sort of ruin the whole thing. And I take the exact opposite answer, which is: The way to guarantee high-quality journalism is to have it be a business. And if you don't have a successful business, then you have a charity. And in the worst case you have a bankruptcy. And so you have to solve the problem as a business. The good news is that the market is much larger than it used to be. Right? And this is something we think a lot about in tech, which is, you think about venture capital, you think about what's the market side of what you are going after. The Internet has caused you all these problems, but the Internet has given you a gift--which is a much larger [?] market. Right? And so even the New York Times, historically its total market size was the people it could distribute a physical newspaper to in New York. Today its addressal[addressable?] market is the entire world. Right? Hundreds and hundreds of millions of people around the world who need to know what's going on. And so these businesses need to be reconstituted around market segments that have a need for differentiated products. But many of those market segments are orders of magnitude larger than it used to be. Business and finance news will be the leader in the recovery, because the rise of the number of people globally who need business and finance news is growing very fast. And of course those people have expense accounts so they can easily afford to pay for information that's valuable to them. So I think Wall Street Journal from here is going to do really well; I think that the Financial Times, probably under a new owner, at some point is going to do really well. I think that--and then there's a variety, by the way, new startups in business and finance news that are growing very fast, and they're going to do very well. And then general news and other categories of news will follow. Russ: It's an inspiring story. I happen to agree with it. I think you're right. There's a lot of romance about being a journalist that I think isn't even true--the objectivity part and supporting democracy. We do need journalism to--journalism is useful for exposing tyranny and corrupting and I think it will continue to do that. So, I'm like you, an optimist.

56:14 Russ: How about--we're low on time but I want to hear your thoughts on two areas that I think everybody cares about, which are health care and education. We've talked a lot about MOOCs (massive open online courses) on this program. Do you think they are real or overblown? Are they going to revolutionize education in the ways that we've been talking about? And is software going to change health care in the next 5-10 years in the way--I think it will, but I'm curious what you think. You're smarter than I am. Guest: We'll see. So, I think the answer to education is a broader question. So, I think, the question is, the real question, is a broader question, which is: the existing educational system, especially at the college level, works pretty well. And so, what I always tell people is, if you can go to Stanford, go to Stanford. Like, I'm not sending out on my frontiers[?] don't to go to college. Go to Stanford. Go to Harvard. University of Illinois--great school. Go to Perdue. Go to U. of Washington. You know, these are great. And by the way, there are lots of great private high schools, public high schools, that are very good. And, you know--like, it's great; if you can get there, it's great. There are a very large number of people in the world, a very large number of kids coming up, who are never going to go to any of those places. And we know that because the numbers just don't work. Right? Russ: Yup. Guest: So, if you just run the math on how many, you know, how many people are there in the world today, you know, it's just 5 and below who are going to hit the, you know, high school and college market, you know, in terms of age, you know, 5, 10 15 years out. And the one thing we know for sure is they are not going to be on physical [?] campus, versus university state school campus in the United States. They are either not going to get educated--which would be a disaster for the entire planet; or they are going to have to get educated in a different way. And the only way to scale the education system to be able to meet the needs of everybody on the planet who needs to be educated, the only way to do that is through software. Right? It's a ridiculously cost-prohibitive exercise to try to figure out how to replicate the campus model for the number of kids who are going to need to get educated. So, the way I think about it is, over a 20-year period, we have to solve this problem of software. Like, in large part of the future of the planet [?] solve this problem through software. So, you know, it becomes a moral issue quite quickly. So we have to figure out how to do that. So, the argument almost a complete waste of time is, you know, would you rather have a MOOC or sit in a lecture hall at Harvard? Like, I think that's a myopic[?] question. Russ: I couldn't agree more. People say, 'Well, face to face is so much better.' I say, 'Yeah, if you have a good teacher.' How many people have a good teacher? It's much better to have a great teacher on the Internet than an awful teacher face-to-face. Guest: Exactly. Russ: There's no comparison. Guest: For an [?] face-to-face. Russ: Because they don't show up in some parts of the world. Guest: Yes. Exactly. And so, that's the big thing. That's the big thing that has to be tackled. The other thing was that it was really--I think there are two kinds of students. You know, the thing you hear about American education, different about American educators, especially in top[?] institutions is, you don't understand, you are naive, like kids don't want to get educated; they only want to go to class reluctantly; they are not on their tails all the time; they won't even do their homework; they are partying all the time. To me, that is like a symptom of people who are rich[?] and lazy. Like, very much larger number of people in the world who do not have that problem, and whose parents do not have that problem. Russ: Yup. Guest: Where the difference between educated and the quality of life-- Russ: life and death, yeah-- Guest: life and death. It's absolutely fundamental. And everybody knows it. And there's no allegiance. And so, this whole thing where people lack motivation, primary[?] education, yeah, rich Westerners lack motivation, but like everybody else in the world is going to have motivation in spades. And does today. Russ: Yeah, they are kind of [?] Guest: Yeah. And so we just have to figure out, we collectively have to figure out, and this is, you know, this is a challenge. Companies play a role here. Governments play a role. Non-profits are playing a really big role--what [?] I'm a huge Kahn academy fan, a lot of people are and what he wants to do over the long run is going to be just tremendous. By the way, teachers[?] play a role. One of the huge opportunities, and you are obviously an example of this, but the best teachers in the world are going to be able to have a much bigger impact. Right? [?] Make more money. There's a lot more people. Exactly. And so this is one of those things where the best teacher, a lot of the best teachers are going to get really fired up. I don't know what this means for them, and the impact it can have on the world. So, they are going to play a big role. So that plays out.