a16z: Five Questions

Five Questions I'd Ask Founders If I Were a Partner at a16z.

Every week I do a deep analysis on why VC firms invest in the companies they did. To learn alongside other curious innovators, subscribe below!

Today, I reviewed some notes that didn’t make it into last week’s a16z essay on why they invested in Instagram (Burbn), Okta, and Slack (Tiny Speck), and why they passed on Uber, Square, and FTX. If you want to learn more about a16z, I suggest starting there.

I used those notes to generate five questions I’d ask founders if I were a partner at a16z.

While I don’t know whether they actually ask these questions, I have many direct quotes from current and former partners about what they look for in founders and questions they ask founders when determining whether to invest in a company. Therefore, I can extrapolate some reasonable questions.

I think this will be a helpful thought exercise for founders who intend to raise to think about your answers to some of these questions as I believe they are questions an investor would ask whether a16z or not, so it’s good to think about.

For investors, it’s good to think about the questions you like to ask founders and why and read some of these quotes from a16z partners, who are certainly some of the best investors in the world, so it’s worth reading this information and maybe adding some of these questions to your list if you think they’re effective.

Let’s get started.

1. Why are you the person to solve this problem

I’d ask this question because, as we’ve discussed many times on this blog/podcast, the founder is the primary reason for an early-stage investment. But, in my opinion, it’s not enough to be a Standford grad and, therefore, command an investment because you’re smart and accomplished.

I don’t care how much you know in general, I care about how much you know about this industry you’re pursuing. One advantage companies can have over another is their bank of knowledge, so the founder I’m investing in has to have deep knowledge about the market, incumbents, customers, and why they can disrupt the industry. 

Chris Dixon has a good quote that personifies this, which he describes as founder-market fit. He said, 

“Founders have to choose a market long before they have any idea whether they will reach product/market fit. In my opinion, the best predictor of success is whether there is what David Lee calls ‘founder/market fit.’ Founder/market fit means the founders have a deep understanding of the market they are entering, and are people who ‘personify their product, business, and ultimately their company.”

I think that last statement is important to think about further: “people who personify their product, business, and ultimately their company.”

The founder is going to be the face of the company. When you see Steve Jobs, you think of smartphones. When you see Elon Musk, you think of Space travel. That wasn’t an accident. That happened because they worked in their respective industries for decades before ultimately reaching the pinnacle of extreme product market fit and worldwide adoption.

In a winner-take-all market, as many venture-backed startups compete, the founder must have a distinct advantage. Maybe they’re a Theil Fellow and naturally a genius, but they still need to have an obsession with their craft, like when Palmer Lucky created the Oculus and became the first successful VR company after decades of failed companies trying. He started tinkering with VR headsets when he was a teenager, and researched every failed company that came before him. His success was no accident.

Speaking of Palmer Lucky, this concept of really knowing the industry they are building in is especially important in hard-tech companies like the a16z-backed companies Anduril and Hadrian. Current a16z partner and leader of a16z’s American Dynamism movement, Katherine Boyle, once said the following regarding the founders knowing the industry they’re building in, 

“Someone who came to the problem just knowing all of the intricacies of it. And all the founders of Anduril had that knowledge and expertise of here's how you have to really push the business model in order to build, you can make the same case that SpaceX had that intense knowledge of not only the technology and what needed to happen but also how to work with the government.

I think that's what we have noticed is that there just has to be a true understanding of the sector and what needs to change. And then a lot of evangelism of what needs to change as you probably saw with someone like Chris Power, when he was talking about Hadrian, these are founders that truly are evangelizing oftentimes business model change or technological change are constantly talking about it because they are at the forefront of this change.”

This quote goes into the second point of this question of why you are the person to tackle this problem. Not only do they have to know the industry to an extreme degree and be the face of the company, but they have to evangelize others to their solution.

This concept is especially true in hard-tech companies where there are a lot of regulatory and R&D hurdles before you can even sell to your first customer. It can take years before a sale. The challenge here is not only building the product that solves the problem, but in the case of selling to the government, you have to convince them why they need to diversify their defense spending and spend less on their 70-year partnership with Lockheed Martin and more on the disruptive upstart Anduril.

Anduril has become the face of the defense-tech movement. Their revolutionary technology, combined with a loud frustration with the inefficiency of the American defense program, has completely upended the defense-tech industry, which went from untouchable in VC to a very hot space in less than a few years. 

That is remarkable, and it is the evangelical type of founding team you need to tackle really challenging problems like this. 

Lastly, I’d ask this question because every founder needs to have some type of superpower.

Frankly, this is where the genius technical founder can struggle. Being a 100x engineer is certainly a superpower, but as the face of the company, you have to be excellent at selling the vision and evangelizing the company's mission. I think the engineering aspects are easier to supplement, but superpowers around branding are very valuable and certainly something I’d look for in the founders.

For example, obviously, Steve Wozniak was vital to building a successful initial PC for Apple, but without Jobs evangelizing the PC movement, and eventually the iPod movement, and then the iPhone movement, Apple would be a speck compared to what it is today. Every single one of those movements was written off as not something people would want, but Jobs’ superpowers of storytelling, branding, connecting with users, and evangelizing a wonderful vision of the future through Apple products led it to be a $3 trillion company. 

So basically, I’d ask this question because, typically, hundreds of startups have either tried, are trying, or will try the problem this founder is presenting to me. If that is the case, then there is a clear market and value proposition. That isn’t a question. 

What is a question is why this founder is the one who can personify their business with an exceptional vision and evangelize the world to join them in the mission. That ability is a true superpower and one I suspect is possible to see through an expertly crafted pitch. I don’t mean an expertly rehearsed pitch; I mean a pitch that just exudes ability, confidence, and a vision of what the new world they’re building looks like and why it’s beautiful.

2. How big can this company get

I think this quote from current a16z partner, Katerine Boyle, tees off this section well after asking why this founder is the person to solve this problem. She said,

“All of these companies, I would say, are extremely capital intensive. And so being able to make the case that, yes, this is how things have been, but here's the paradigm shift that's happening and being at the forefront of that, it's almost table stakes for founders.

You know, we often say this about deep tech companies, where there's a graveyard of companies with great technologists who've spun out of universities where the technology was great, but they couldn't make the case, they couldn't tell the story, they couldn't raise enough capital to get through the valley of death. What we've seen with the founders who've been successful in these sectors is that they are just incredible at convincing people that this paradigm shift will happen.”

Pay attention to the second half of the quote: “The technology was great, but they couldn’t make the case, they couldn’t tell the story, they couldn’t raise enough capital to get through the valley of death.” 

This is a tough reality for founders, especially for deep-tech companies, that your technology will typically not be enough to get you to a major milestone such as an IPO or major acquisition. It’s an incredibly capital-intensive space that requires a lot of investment and lobbying just to release and sell your first product.

So, I can believe in this person, and I can give them money, but chances are, as an early-stage investor, the capital I give the company won’t be enough to get them to that major milestone, so I need a lot of other investors to see what I see.

So, the founder has to be a huge promoter of the technology and persuade others on their vision for the future. They have to exude confidence that their company will be huge because of how revolutionary their technology is and how desperately the world needs it. That has to be apparent, or else these companies will fail.

If you’re reading that and thinking, I’m not a deep-tech company, so I don’t care about evangelizing a movement or growing to a massive company. I’m comfortable raising a round or two and getting to a few hundred million dollars in revenue. 

But if you take that route, you risk becoming a feature, and VCs don’t invest in features because they often get swallowed by platforms. Current a16z Jeff Jordan once said, 

“I think the problem is that if you build an amazing, amazing innovation… it really is, "Do you control the distribution or not?"

So, Comcast has that pipe into your house. I think the problem is if you build TiVo, which is an amazing world-changing thing, you have three outcomes that will eventually happen.

Number one is Comcast says, "You know what? We should buy you. You're an amazing company." But if Comcast goes and buys TiVo, then what about Time Warner Cable and DirecTV? They're going to say, "Hey, we're not going to sell TiVo anymore. It's owned by our competitor." So you have this weird case in M&A where you can have not a control premium, which is a term often used where you're paying more per share for the entire thing then you would for the marginal share. You're going to have a control discount because TiVo is going to lose a huge chunk of their sales from the competitor. 

Option two is that Comcast says, "Hey, you know what, let's partner because we're the ones that have the pipes into all the homes. We're going to take 99 cents on the dollar. And you're going to take 1 cent on the dollar." And TiVo's like, "Well, that's not fair. I want a better deal than that.” They're like, "Yeah, well screw you. We're just going to go with ReplayTV." So you don't really have that much leverage in a negotiation vis-a-vis the distributor.

And then option number three is basically Comcast says, "That's a nice little tool that you have there. We're just going to go hire Accenture or a bunch of engineers to go build a crappy version of the same thing." And basically the problem is that one of those three options always happens to the TiVo, the metaphorical TiVo in this example, which is you build this amazing thing, it changes the world, you don't control the distribution, unfortunately, and you either get copied, you get bought in an unfair price, or you get a partnership agreement which is really tilted out of your favor.

So the lesson is, I mean, it sounds crazy to give this to an entrepreneur or a true innovator who's like, "Don't build TiVo, build Comcast." Because if you build Comcast and you have a good product and engineering team, or you can actually create stuff, you have unlimited option value to go rollout TiVo, to charge more for TiVo, and so on and so forth.”

In this situation, Comcast is the platform, and they have all the leverage. TiVo essentially inspired Comcast to build a TiVo-like feature for themselves, which, since they had all of the distribution, wiped TiVo out completely. 

That’s why you need to be big as a startup. VCs don’t want to run the risk of a large incumbent just copying what you do if you don’t have any leverage. It doesn't have to be physical advantages like Comcast had; it can be a social advantage like Instagram providing a better photo-sharing experience which led to the adoption of many young users. They secured distribution because once a social network becomes the gold standard of a friend group, it has a lot of staying power if it continues to iterate and improve. That’s a network effect.

That’s why Chris Sacca’s description of Instagram Founder Kevin Systrom’s pitch is so important, as we discussed in the last episode. Systrom was adamant Instagram would get to 50 million users and had a plan on how they’d get there. As an investor, I can back that. If they do get to 50 million users, then they have a platform and cannot get disrupted.

So basically, I need to invest in companies that have the potential to be platforms. This, as current a16z partner Alex Rampell said, gives me a margin of safety as a high-risk investor. He said,

“You can try to apply a margin of safety to a wild, almost hyperbolic guess of if this thing really works, I'm going to invest in things that I think fundamentally can change the world. If they can fundamentally change the world in year five, I mean, any price that I pay today is effectively undervaluing this company relative to where it is in year five or year 10.

This quote gives some good perspective on what VC investing is. You’re buying incredibly out-of-the-money speculative options in every early-stage investment you make. You either lose your money or 100x it. There are few in-betweens.

That’s another reason why VCs only invest in world-changing companies because, in a $90 million portfolio with only about 30 companies, if I invest $3 million each, I need at least one 100x company in there, so I can 3x my fund, assuming all else goes to zero, which, is only a decent VC fund performance. I really need to be shooting for at least 5x to be a great fund.

The chances of success in startups are so low that it doesn’t make sense for me to shoot for 10x outcomes because even though that sounds easier, that 10x company, i.e, the TiVo, will likely get eaten up by an incumbent, i.e., Comcast, as a tiny feature they can add to their platform, even if it was a good business. 

I have to invest in 100x world-changing platform-potential companies because then I just need 1 in those 30 to succeed, which is a lot more plausible. 

So, essentially, I need the founder to exude a world-changing vision for their company. I want some evidence to support this claim, but it can be insanely optimistic. I just want someone who is going to go for it, and if they can exude that feeling of confidence in me and make me feel like this person is the guy or girl to really solve this problem and become a platform, then I suspect others will too, and that increases my chances of a successful investment. 

So, founders, dream big and pitch big, or else the investor will write you off as an eventual swallowed-up feature. 

3. How are you Reducing Friction for the User

I was inspired to ask this question by a simple yet very important quote from current a16z partner Jeff Jordan. He said, 

“I quickly became convinced early on at eBay that the key way to grow these businesses was product enhancements. Giving users additional use cases, functionality, take away friction, do whatever you can.”

If you’re starting a business, it has to improve the life of a user in some way. A great way to do that is to identify a grueling experience customers go through and provide them with an easier experience by reducing friction. An example is E-trade disrupting the need to call your broker to execute a trade by completing trades online with a few clicks. Massive elimination of friction to enhance user experience. 

Not only do businesses that eliminate friction tend to be successful, but they also expand markets. As we learned in the benchmark essay/episode, Uber initially thought their market would be $4.2 billion based on the taxi and limousine market. Since they created a ride-hailing experience with minimal friction by just opening an app on your phone and pressing a few buttons rather than waiting outside and hoping to see an empty cab, they drastically expanded their market, which they’re now taking in nearly $35 billion a year from in revenue. 

This is why starting a business is so hard because the most successful ones typically reduce friction, which is usually caused by entrenched incumbents, regulatory capture, or very challenging technical problems. It requires an outlier founder. 

So I’d want to hear a compelling story from the founder of what the problem is for the user currently and how they can eliminate that friction and provide a better service because if they’re right, they’ll likely capture and expand an intriguing market. 

Jeff Jordan gives an example of how much of an advantage this gives startups against incumbents not only through improved processes but also reduced marketing spend, as the frictionless user experience speaks for itself. Jordan, when describing his experience at OpenTable, said the following, 

“The best models are ones that don't really rely much on paid acquisition. The best entrepreneurs have figured out hacks to get user demand at scale through a user proposition. And one of the most brilliant hacks on this was the OpenTable hack that preceded me. The team figured it out ahead of time to build a widget that restaurants could put on their own websites to empower online reservations because the typical behavior at the time was "I want to go to The Slanted Door." Okay, let me search on Google for the Slanted Door so I can find the telephone number. Go to the website and you see this widget that says make an online reservation. It's just like, "Oh I'd rather do that than pick up the phone and have that experience of, 'Can you hold sir?' get back to you and then call multiple restaurants." Just awful.

And so we put it on there, and what it ended up doing was the diner would click on it and was redirected to The Slanted Door page on OpenTable. They would then discover, "Oh my God, I can make an online reservation at all these restaurants," and they'd come back to OpenTable. They wouldn't go back to Google. They'd quickly learn a behavior to go do OpenTable. OpenTable was getting paid to acquire their restaurant's consumers. While I was there, we didn't spend a penny on demand acquisition, and we're growing very nicely based on that. So the best models don't really rely on paid. They figured out some other way to get that distribution.”

First of all, OpenTable is just a perfect business. Reading Jeff Jordan and Bill Gurley describe OpenTable is beautiful, like a symphony. 

But to go further, OpenTable’s simple little widget they put on restaurant’s websites made the user experience so much better. How much time do they save users? Well, instead of having to Google the restaurant, find the number, wait on hold, figure out what times are available, and hopefully, have a time you can use, if not, you have to repeat the process. If you’re lucky, that takes five minutes. If you’re unlucky on a Friday night, that could take an hour. 

OpenTable’s simple widget that tells you what times are available on what dates turns that process into less than 30 seconds. It’s such a relieving experience as a user that OpenTable just became one of their favorite services. I only use OpenTable to make reservations, and I’m sure many people who started using the product 20 years ago do the same.

It became a platform that essentially is the search engine for restaurants. 

Like we talked about in the last section, I want to invest in platforms.

Platforms = big businesses = big money = happy investor = happy LPs 

So again, a great way to find a platform is to find a way you can eliminate tons of friction for tons of frustrated users. 

When asking this question, I’m looking for the founder to have some type of unique insight about the industry that shows why no one has done it before and/or why their unique product or service will reduce friction for users, causing them to fall in love with the product.

Much easier said than done, but a really important question to answer if you want to become a platform company.

And zero spend on demand acquisition like Jordan described for OpenTable would be nice too. 

4. How are you Tackling the Cold Start Problem?

The cold-start problem is a term coined by a16z partner Andrew Chen. It describes the initial problem all marketplaces have of having to get buyers and sellers on the platform to transact with one another. Not only do you need buyers and sellers, but you need enough of each to keep the marketplace fresh, or else it will move at a snail's pace. 

So, I need to know the founder has thought about this problem and has some unique growth hacks to get going. Hopefully, he or she has heard Tinder’s solution to the cold start problem as a masterclass of jumpstarting growth. Andrew Chen tells the story as follows,

“They tried to invite a bunch of friends off their address book. Didn’t work. And so what they realized was, “Well, maybe we just need a bunch of people. How do we get a lot of people, hundreds of people onto that app at the same time?” And one of the co-founders had a friend on the USC campus that was a very popular, very social person and said, “What if we just did this birthday party for this girl, and it’ll be this really amazing, really sick, just birthday party? It’ll be sponsored. We’ll just go all out, but we’re going to put a bouncer in front of the door and we’re going to make it so that you have to install Tinder in order for it to happen.” 

And so the way that Sean and John and all these guys tell it, this was the party, because what happened was they got a couple hundred people all to go to the party. They all installed Tinder and they didn’t use the app that day, but the next morning they woke up and they had this app and they were like, “Oh, there’s all these cute people that I hadn’t talked to last night. Now I can kind of like swipe through them and I can message them. 

Holy shit, that’s amazing.” And then from that, they were able to take over the rest of USC. And once you figure out how to build — so I have this concept in the book that I call an atomic network, which is what is the smallest network that you need that can retain and be engaged and be functional? And they figured out that it’s 500 or maybe they could even go with a smaller party, it would’ve worked, but a couple hundred. Basically just if you could build one atomic network, you can then build a second one and a third one.”

Genius stuff by the Tinder founders. If you’re a marketplace business, you need a plan around the cold-start problem. Unfortunately, it’s not possible to scale slowly because users will leave if the marketplace is stagnant. Like the Tinder founders, you need to get a few hundred on the site at once and work on spreading the word as fast as possible to get more people on. 

So, I want the founder to have some unique strategy that solves this dilemma. 

Hopefully, they can create a strong referral program off of their first users from their initial growth hack. By doing so, they have the potential to create viral loops, which essentially is the catalyst of network effects, which we talked so much about in the Benchmark essay/episode.

Andrew Chen describes the importance of viral loops as follows. 

“Viral loops are important because they are extremely scalable, free, and don’t require a formal partnership. This is based on users directly or indirectly sharing a product with their friends/colleagues, and having that loop repeat itself.

The important point here is that loops aren’t just conceptual, but you can actually measure their efficiency as well. If you can get 1000 users to invite and sign up +600 of their friends, then you have a ratio of 0.6. But that’s just in the first cycle of the loop. But then those 600 new users generate 0.6*600=360 new users, who then generate 216, and so on, until the entire cohort is +1500 signups total from a base of 1000. Wow! That’s meaningful because then for every user you get through other means, you’re amplifying their effect.”

Viral loops are obviously hard to pull off. I think the best way to go about this is through a very effective referral program or have such an interesting app that they have to tell their friends about it. Facebook required you to have ten friends upon signing up to encourage referrals and created a viral loop. Other companies like Uber gave free rides or ride credits for referring a friend. The best-case scenario is Instagram, which essentially just exploded from day one with users obsessively telling their friends to download the app.

All of these plans are viable. Obviously, the least amount of paid marketing, the better, but it’s much better to pay for a referral program than for generic Facebook or TikTok ads because, at least with referral programs, you know your user likes the product enough to want to bring on their friends, and their friend will likely enjoy the product as well, assuming they have similar interests. It’s a more targeted marketing strategy, so if you aren’t growing quickly via word-of-mouth, I would suggest an enticing referral program. 

I’d ask the founder this question to ideally hear an entire plan around how to address this problem. Ideally, they have a Tinder-like plan to adopt many users at once, and if that doesn’t work, they have some other plans in their back pocket because, again, they have to move fast.

I’d also be looking for the founder to explain some of their follow-on marketing strategies to try to get some viral loops going. Hopefully, they have some data from users, but if not, I want them to have some ideas on how to create some viral marketing. It’s a vital first step for a marketplace, so I need to know the founder knows that and isn’t getting too ahead of their skis. 

The worst-case scenario is to keep getting a few hundred users onboarded but not growing quickly enough, making the experience lackluster for those users and causing them to leave. Ideally, my capital turbocharges their marketing ability, and they can enhance that experience for customers before it’s too late. 

5. What’s the Mission?

This is similar to a question we asked in the Sequoia essay about why the founder is starting this business. That question has to do with the mission. More often than not, the founder has some inspirational story about why they’re starting the business. Not all the time, but sometimes.

I don’t think this is always necessary; you don’t have to be obsessed with B2B SaaS and have to make this new CRM platform, or you’re never going to be happy with your life. I don’t think anyone is that passionate about B2B SaaS. If they are, that’d just be weird. But also, I guess, maybe a massive signal to invest.

But when tackling really hard technical problems like many deep-tech companies that a16z invests in, there has to be ferocity around the mission because these problems are so damn hard that you have to be Moses-like with your mission to attract early employees to be just as crazy as you and fight to achieve this mission. Katherine Boyle describes her interpretation of ferocity around the mission as follows.

“The thing that I always look for is something that I call seriousness. I divide it as a unique combination of capability and will where there is just such a ferocity in the founder that they are going to run through walls, that they are going to get it done where it's not just, this is an interesting story, or this is someone who has a thesis about it, but it's someone who you just have 100% faith is grinding and working ridiculously hard to move mountains.

Oftentimes the story that's being told has never been done before, and is going to be incredibly difficult to do. But if you don't believe that the person has the capacity to not only do that himself or herself, but also be able to recruit just extraordinary talent who are on board with that mission, oftentimes it will be impossible. The thing that often is lacking and founders who may want to take on these sort of noble missions is how serious are you about this mission?”

So hopefully, I can see this in the founder’s pitch. I should be able to see it in their eyes and hear it in their voice that they feel destined to complete the mission and they cannot see a world without their company in it. Couple that with technical excellence, and you have a no-brainer investment. 

Most founders know this and/or exude this energy. It’s why they’re crazy enough to start a company in the first place. However, many founders in this position may not have actually sat down to solidify what the mission is.

So, I’m also asking this question to see if they’ve taken the time to do that. If they have, then great, let’s discuss that further, but if not, I’d want them to hammer that out shortly after our meeting. I’d still invest if I can see their passion around the mission and they can build a great product, but afterward, I’d want them to solidify that mission. Current a16z partner Martin Casado explains why this is important as he says, 

“It's very important at some point in time to kick everybody out of the room, sit there for three days and then write down the very lucid, very description vision of the company, like why it matters and what you're doing in a way that you deeply believe in a way that outlines the future and outlines kind of the why together. It doesn't have to be the path, just the future.

And then you use that to kind of drive everything about the company from recruiting to culture setting to early sales to marketing, to speaking to analysts, etcetera. And so I do think that in early stages it is just a crucial exercise to do.”

I think the earlier you can do this, the better. I understand time feels so precious, and perfecting the product may feel more important than perfecting the mission and culture of the company, but the product will change. You’ll release updates every month and even completely new features or designs at times. 

What likely will never change, however, is the mission of the company, and that mission is engrained in the first employee you hire. If you’re flip-floppy with your mission, your early employees won’t align with your late employees, your investors will have different perspectives on strategy, and your customers won’t completely understand your company. 

There has to be a clear image in everyone’s mind who interacts with the company through a simple one or two-sentence mission statement. 

I hope the founder has nailed this by the time I meet with him or her. I think it’s vital to solidify the culture, which is something you don’t want to worry about when trying to build and scale your company. So, if the founder hasn’t nailed this, I would be pressuring him or her to get going on this as soon as our meeting ends, and I’d recommend the Martin Casado style of sitting down for three days and just making that vision for the company crystal clear and ultra impactful. 

Conclusion

So those are the five questions I’d ask if I were a partner at a16z based on what I’ve read from current and former partners. I hope you enjoyed this thought exercise, and that it helped make you a more prepared founder or investor. 

As always, you can find the podcast version of this essay on SPOTIFY or APPLE PODCASTS. Additionally, all my notes are at allthingsvc.blog if you want to read more. For short snippets of the podcast episode, you can check out my YOUTUBE page. Lastly, for other snippets and just random thoughts that pop in my head, follow me on X (Twitter).

Next week, we will return to our traditional deep dive format on another new VC firm that exploded into the scene with a massively successful first fund. Make sure you subscribe so you don’t miss it!

Thanks for reading and have a great rest of your day!