Scott Kupor of Andreessen Horowitz says its hard for small cap companies to weather the volatility of public markets.|Scott Kupor of Andreessen Horowitz says its hard for small cap companies to weather the volatility of public markets.
For small companies, with a $1-2 billion market cap, it’s gotten very hard to go public, according to Scott Kupor, managing partner at Andreessen Horowitz.
“IPOs have been in the doldrums for some time,” said Kupor, speaking to Financial Times editor Robin Wigglesworth at CB Insights’ Innovation Summit. Small companies, which are more heavily affected by one or two major trades or short sales, “have a strong preference to be in the private markets longer,” he said.
With recent growth concentrated in private markets, investors that traditionally focused on public markets have been shifting their attention. “If you’re at Fidelity, or T. Rowe Price, and you’re having to beat the Nasdaq in order to keep your job, you’re having to go into the private markets to get that growth,” said Kupor.
But while these institutional and VC investors are reaping all the gains of private market growth, it’s concentrating capital in the hands of the few, and individual investors can’t participate.
“Empirically more IPOs means more job growth,” said Kupor. “We’ve un-democratized investing in this sector. The people who can afford to invest [in today’s growth in the private markets] are university endowments, or funds, and anyone outside that asset class can’t get access to that growth.”
At a certain point, though, as well-funded private companies such as Uber continue to raise money in the private markets rather than going public, they may face pressure from a) employees, and b) investors who expect to liquify their shares at some point. So what are some of the impediments to today’s startups going public? The US has a number of qualified candidates, Kupor and Wigglesworth noted, citing our CB Insights Tech IPO Report 2017.
In part, Kupor said, we’re seeing the rise of technology product startups with long lifecycles, such as Snap Inc., whose progress might not be accurately reflected in quarterly earnings reports.
“There has to be some balance between the short term-ism that we have today [in the stock market] and the recognition that many of these startups are technology product companies that have to invest in R&D … there have to be ways to make sure these companies don’t feel like they might be at odds with their shareholders,” he said.
Furthermore, Kupor said there may be more emphasis in the public markets on companies’ actual profitability. Investors are no longer attracted to companies that show skyrocketing top-line growth, as they may have been four or five years ago; instead, near-term profitability prospects are more important.
We’ve gone from “growth at any cost, [to] … growth at a certain cost.”
Robin Wigglesworth, Reporter, Financial Times: Oh, great. We’ve got a clocking tick.
Scott, managing partner, Andreessen Horowitz: Oh, we’re already behind schedule.
Robin: Yeah. Okay. So we’d better jump straight into it. So, Scott, thanks so much for being here. By the way, can you tell Marc to get back on Twitter? Because every time he retweets me, it’s gold.
Scott: Oh, okay. That’s what you wanted.
Robin: It’s fantastic, yeah.
Scott: You want some publicity. Okay. All right.
Robin: No, no, no. He’s magic. So, obviously, I’m sure some people have been vaguely following your press conference on the other side of the country, and we do have a new administration coming in. Obviously, some of this is sensitive, but I’d like to hear your thoughts on what kind of policies you think we’re gonna see, what kind of impact that’s gonna have on the Valley, on your firm and some of your portfolio companies, and whether you’re seeing any sort of sense of these animal spirits coming back. It seems anecdotally to be there, but I don’t know if you think it’s real.
Scott: Yeah. So, as we talked about, I’m not gonna get into any political stuff, because that probably wouldn’t be…it might be entertaining, but might not be fun. But, look, I think the way to think about it, which is structurally, which is if you have the legislature’s in the Republican Party, you have the administration in the Republican Party, I think there is an itch and a desire to actually do something substantive from a policy perspective. And I know that sounds obvious, but I think that’s a new thing that we haven’t had for a long time.
So, you know, in my other job, I am part of the NVCA, the National Venture Capital Association. So, at least for us, I think the way we think about it is there is gonna be a lot of stuff that’s gonna happen. Probably the vast majority is gonna happen the first 12 months of this year of the new administration. And I think, you know, if you believe what has been said, then I think it’s pretty logical, which is, you know, there is a bend towards deregulatory as opposed to increased regulation. There’s a bend towards, you know, financially leveling the playing field, whether that’s corporate tax changes or it’s repatriation. And then I think, you know, how that impacts our business, you know, is TBD. But in general, I would say, you know, if the environment is pro-innovation, you know, relatively light from a regulatory perspective and pro-capital formation, I think that’s generally a good thing for technology and certainly for the startup business.
Robin: Do you think that’s gonna pan out that way?
Scott: I have no idea. In fact, it’s funny. I was reading, you may have seen it last night, Howard Marks from Oaktree, right? He does his memos, which I always eagerly await. And basically his memo yesterday was anybody who talks about forecasting is kidding themselves. They actually have no idea what they’re talking about. So, I think I will take, you know, comfort or solace in his comment, which is, look, I have absolutely no idea, and I certainly don’t pretend to be able to forecast it. But I think there’s a strong desire, certainly, you know, by particularly the congressional side of things, to actually do something substantive, having obviously been in an environment for the last, you know, seven or eight years where the ability, given kind of, you know, the divided government, was pretty limited.
Robin: Yeah. Especially this part of capital formation, I’ve lost track of how many conferences I’ve been to where there’s been talk about capital formation… it goes on and on and on about it. What would you like to see? So, forecasting aside, what would you like to see come out of this new administration, Congress, Senate that you think would actually be helpful to innovation, company formation here in the U.S.?
Scott: So, the big trends, which obviously you’re well aware of, that we have is we have, you know, we’ve gone in the U.S. from roughly about half the number of publicly listed companies that we had, you know, probably 15, 20 years ago, right…so, I think it’s order of magnitude, 3500, 4000 publicly listed companies today, and there was close to 8000 companies before. And at the same time, you know, you’ve had obviously IPOs just, you know, quite frankly, in the doldrums for a long period of time. So, you know, just to give you a sense, at least in technology, right, we had from 1980 to 2015, so about a 35-year period, median of about 50 IPOs in tech per year. And, of course, you know, we had things like the bubble in 1999, 2000, where you had probably, you know, 800 IPOs. And I don’t think we’re going back to that nor should we. But certainly in the, you know, last couple of years, we’ve certainly even tailed off from that number. We’re well below the median.
I think there’s two issues. One is kind of the capital formation issue for smaller cap companies is it’s very hard to be a small-cap company today in the U.S. public markets. And small-cap has lots of definitions, but, you know it’s probably $1 billion, $2 billion, $3 billion. If you’re a small-cap company today below that threshold, you have no research coverage, right? You have no analysts who follow you. You have no market makers who make a mark on your stock. You have no sales and trading guys who are talking to clients about it. And so you could, in theory, go public, but you effectively become orphaned in many respects as a public company.
And so, to me, that’s the biggest thing that policymakers, as probably a combination of the SEC and Congress could do, which is to think about why is it that the small-cap market has, you know, effectively dried up from a liquidity perspective, and what could we do to increase liquidity? There are some things you should know that are going on right now, like this Tick Size Pilot and other stuff. And I don’t wanna go into too inside baseball and stuff, but I think there’s things that can be done. And I think the bigger strategic question for the U.S. is, look, long-term, do we want to be a central place where companies get formed and they go public? And, you know, going public, empirical study shows that more jobs get created. And so we are at risk of both the number of publicly listed companies dramatically shrinking, the number of new companies going public shrinking. And, you know, I think that has a long-term implication for global competitiveness for the U.S. and certainly for job creation and growth in the U.S.
Robin: So, I totally take your point on that, you know, being a small company is not easy. You’re a small listed company. But it’s not easy being a small company anyway. If you’re a small $1 billion, $2 billion private company, you don’t have any research coverage. You don’t have any market makers in your stock. So, if you can raise capital that way and somebody just ignores you for the next five years, I don’t really see the problem with that. Is it just that you can’t list? There’s no interest for investors?
Scott: Well, so I think the big problem is, you’re right, which is, yes, all those things exist in the private company context, too. The difference is in a public company context, you get a report card every day, and that report card comes in the form of the stock price, right? And what happens in the small-cap market is if you don’t have sufficient liquidity, then any time somebody tries to buy the stock, you know, they drive the stock price up, and any time somebody tries to get out, the stock price goes down.
And you can imagine, just as a CEO of these companies, you’ve got two problems. One is just from an employee management perspective. Yeah, you’ve got volatility that’s pretty significant in the stock, which certainly has implications for employee morale and how employees think about stuff, and your ability then to raise capital is constrained as a public company, right? Because it’s very hard for you to go raise capital as a public company if you don’t have that kind of institutional support. Because, again, those types of events, you know, you get short-sellers and things like that in the market that could dramatically drive your price down in that scenario.
So, what’s happening is, I think what we see, which is companies have this strong preference to be in the private markets longer, because they don’t have to deal with those things. And to your point, the capital availability has been there. Now, I think the challenge that companies are seeing, which is if you extend, you know, for a very long time in the private markets, we create new problems, which is how do we truly deal with employee liquidity? How do we truly do things like acquisitions where it’s very hard to do private-private company acquisitions, just because, you know, I have to convince you what you’re worth, and, you know, you have to decide what I’m worth. And at least we have one of those problems solved in the public market. So, I don’t think this is a stable long-term place where we are. I think we have to solve this problem because it has very significant implications.
Robin: Yeah. There’s one thing I’ve always wondered is whether it is actually that big of a problem in that do you seek pain? I mean, I don’t wanna fluff you Americans too much, but, you know, I think maybe…there’s an argument this is a sign of the vibrancy of the U.S. capital markets that companies can grow. As in when I look at the United States, I do not see a problem with innovation. I do not see good companies dying because they can’t raise money in the private or public markets. And, in fact, there’s such a vibrant venture capital industry that you’re part of, private debt markets, bond markets, credit markets. I mean, banks will support you. So, actually the fact that IPOs are happily dying off, could it be that that’s a symptom of the vibrancy of U.S. capitalists rather than a sign that, you know, woe is us, the world is about to end?
Scott: Yeah. No, look, I think it’s a fair point. And yes, I agree. You know, nobody should cry for us in the U.S., obviously. We’ve been a huge beneficiary of technology. I think the problem is it’s not sustainable over the long term for a couple of reasons. Number one is in order just for the kind of flow of capital formation to keep happening, and, you know, you want vibrant public markets, right? I mean, as much as we all like to puff our chests up and say, “Hey,” you know, “venture capital is really important,” we know, you know, in terms of its contribution, in terms of dollars in the financial community, it’s tiny, right? It’s a fraction of dollars that gets spent. Now, it’s weight in terms of what it delivers in terms of jobs and other stuff obviously well exceeds what the dollars are.
But I think if we want New York and we want the U.S. to be vibrant, you know, capital markets and be able to attract money from, you know, lots of different places, and therefore kind of fuel, you know, growth and formation, I think you have to have a public market that works. Look, we’re in a trend that’s been going on, as I said, for 20 years, where, you know, we are shrinking dramatically. And at the same time, there are good experiments like, for example, AIM in London, for example, which, you know, people…you know, there’ve been critics of that at various times, but, you know, there is new capital formation happening in the smaller cap space in some of those markets.
So, I think that’s kind of problem number one. I think problem number two is just when you think about kind of the flow of money, at some point in time, money has to recycle into the system, right? And so, to me, the two places where that has to recycle, one is employees, right? At some point in time, and you see this today in the private markets, some of these companies who have been private for a very long time are looking at are there ways where I can get partial liquidity to employees, right? So, we see in our own portfolio kind of tender offers and things of that sort where we say to employees, “Great. If you’ve been here for four years, you could sell 10% of your stock at a predetermined price. Once a year, we’ll bring a buyer in.” And I think that’s a nice way to kind of release the pressure valve a little bit. But at some point in time, that’s still not sufficient and doesn’t really create a real liquid market.
And then, look, for all the people who invest in venture capital firms, at some point in time also, you know, those people have to see that money coming out the other end in order to then be willing to put it back into the front end of the system. And so, at some point in time, you know, a vibrant liquidity market as well as kind of broader capital formation in the public markets, I think, they have to kind of play together to make the system work.
Robin: But aren’t we just getting to see essentially a blurring or breaking down of that barrier between private markets and public markets? And I talk to a lot of big asset managers who’ve all had to go through their lawyer to get the prospectus amended so they can invest in private companies. I mean, their worry is that they’re seeing all the growth in the private markets, and when somebody comes to the public market, it is to cash out people like you, essentially. So, they worry about they’re losing all the juice, and they’re just getting…I mean, some of them want stable, mature, and boring companies, but most of them want some growth as well.
But I think it’s just kind of interesting, you know, you see French capital firms occasionally playing a little bit in the public markets and vice versa. So, is this still something we’re gonna see continue to break down and that’s kind of sort of how we solve this?
Scott: So, I think one of two things is gonna happen. So, I agree with you. Yes, exactly what you’re describing is what’s happening, which is this is why you see Fidelity and T. Rowe having been active in these markets. This is why you see sovereign wealth funds doing direct investments in these markets, which is there is a dearth of growth in the U.S. public markets, you know, save a very small number of companies, right? So, last year, you know, FANG or whatever, you know, acronym you wanna use, right…there was a relatively small number of companies, at least in the tech space, that were growing, and then there was a small class of IPOs that also provided growth.
But you’re right, if you’re Fidelity, you’re T. Rowe and your charter is, “I have to beat Nasdaq by some margin in order to keep my job,” you’re having to go into the private markets in order to fund that growth. Now, as you point out, the structural problem with that is there are limitations, you know. They can only have 5%, 10% of their assets, depending on whether they’re mutual funds or what their regulation is. So, I think one of few things have to happen. Either the SEC and others have to say, “Okay, let’s truly relax these barriers between public and private markets and eliminate or change some of those ratios of how many of your assets have to be publicly listed assets versus how many of your assets can be private assets,” so, kind of change those ratios, give them more flexibility. Or I think we have to figure out how to do we get these companies into the public markets to a point where those institutional investors can take advantage of them.
You know, I think the real policy angle behind all of this, as I said, is, you know, it is the case empirically that more IPOs means more job growth. It’s also the case that, you know, we’ve kind of un-democratized, if that’s a word…I don’t know if that is. But we’ve un-democratized investing in this sector, which is the people who can invest in growth companies today are either, you know, university endowments or foundations or family offices, people who are, quite frankly, you know, either wealthy or have very large financial resources, or that small percentage of, you know, kind of the 5% in the Fidelity mutual funds, right, of normal people. But anyone else outside that group, which actually happens to be about 96% of the U.S. at least, can’t get access to growth because the amount of growth in the public markets isn’t there, and their ability to access growth in the private markets is essentially shut off based upon the regulatory environment.
Robin: So, do we need some sort of JOBS Act 2.0 then, something like that?
Robin: I mean, what would that include, that breaking down or formalizing or deformalizing this artificial barrier between companies?
Scott: Yeah. I think that’s exactly it. And we’ve been talking about this. And, you know, there have been a couple of policy groups that are interested in this, which is the JOBS Act, and, you know, Kate Mitchell, you know, was the leader of that, you know, in both her capacities as a venture capitalist but also in the NVCA. The JOBS Act did a great job, I would say, you know, we’ve used the colloquialism of kind of creating an on-ramp onto the IPO freeway, right? So, what the JOBS Act did was it did things like, as you know, confidential filings, which I’m sure in the journalist community don’t like it, but at least in the, you know, entrepreneurial community, have been very positive. You know, they’ve done things like testing the waters, so the ability for you to go talk to institutional investors before you go out. And so all those things have made the process of getting public easier.
What we haven’t solved is what does it look like once you become a public company. And that impediment, I think, is what still causes people to say, “Hey, I’d rather stay private,” if not…so, the things in my mind that a JOBS Act 2.0 would focus on would be what are the structural issues from a capital markets perspective that we need to think about, and some of these are these small capital liquidity issues we’ve talked about, that once you get public, make it easier.
The other big thing, of course, which is a whole another topic, is how do we deal with kind of long-termism versus short-termism in the markets, you know, and making sure that companies that have to make innovations for a product cycle perspective have shareholders who understand the long-term implications of that, and aren’t kind of, you know, putting pressure on them, you know, as we’ve seen kind of, you know, the strong engagement of the activist community, for example, in the tech stocks today. So, I think those are the structural things you have to at least look at to see can you create kind of the, you know, once you exist as a public company environment, to make it look more friendly.
Robin: Yeah. Well, I mean, actually I say this as a financial journalist, but being public must be an utter headache all the time. But, I mean…
Scott: Well, I think it’s…
Robin: …on the short-term side, I mean, people are short-term. But it’s all the reporting…
Scott: Sure. It’s all right. I mean, look, there’s tremendous benefits, of course, with being public, which is, look, you have access to capital. You have the opposite of having a report card every day, the opposite of the negative side of that is, look, it’s a great side benefit, which is you get a report card every day and somebody tells you how you’re doing. So, there’s great reasons to be public. And I think the goal, like for our industry, it can’t be the case that our companies stay private for a long time. I think the answer is they should be public companies, because that’s how they will grow and become big institutions. That’s how they get the discipline that’s required of kind of dealing with quarterly targets. But there has to be some balance between kind of, you know, the short-termism that we have today and the recognition that many of these companies are product technology lifecycle companies. And there are times where, yes, we’re gonna have to kind of invest in R&D or we’re gonna have to make acquisitions, and those are gonna be EPS dilutive in the short-term. And there has to be a mechanism by which we can make those investments without companies feeling like they’re almost at odds, in some cases, with their shareholder bases.
Robin: Yeah. Moving a little bit to Andreessen Horowitz, but staying on the same theme, I remember that CB Insights had a list of sort of potentially unicorn IPOs and the listing is coming through the pipeline, and you’re number one on that list. It’s been interesting. Can you tell us a little bit what’s coming down the pipe there, and how they are approaching what you’re telling your companies, and how about they should approach going into public markets given all that we’ve discussed now?
Scott: Yeah. So, let me answer the second part of your question. Because the first part of your question, unfortunately, there’s not a whole lot I can tell you about what’s coming down the pipe. And we appreciate all the work that CB Insights has done. But, you know, I’ll leave that one to CB Insights. They seem to know what the pipeline looks like. I think what’s happening here is, and the advice we’re telling them is consistent with what we’ve been talking about, which is, just to give you a quick historical context, we did about 50 tech IPOs in 2014, we did about 30 in 2015, and then I think we did 16 last year or something. So, we’ve been on this real downward spiral. And, you know, I think everybody would like to believe, of course, that we’re gonna hopefully reverse that trend in ’17 and ’18.
The real lesson though from kind of that downtrend is quality matters. And so if you look at it empirically, if you look at kind of the IPO classes from 2010, 2011, 2012, and I think up through almost ’13, the revenue growth performance of those classes and the actual operating income performance, meaning, kind of, you know, reduction in losses, and hopefully, in many cases, profit generation, compared to the 2015 class is dramatically different. So, you essentially have kind of 2014, 2015 cohort of slower top-line growth, and, unfortunately, you know, less good operating performance. So, you’ve had two, you know, bad things happening, right? People aren’t getting the growth they want, and the kind of cost of that growth has been higher.
And so I think what a lot of the IPO investors have said is, “Look…” and this is a normal thing, of course, that happens in IPO cycles. “Look, we want IPOs. There’s a tremendous institutional demand for new issues, but we want them in a certain way,” right? “We want companies that can grow.” But whereas, maybe, you know, four or five years ago, we said, “Growth at any cost is okay.” You know, we want kind of growth at some reasonable cost.
So, I think what that translates into if you look at companies today, you know, $100-plus million revenue businesses is probably, you know, the right, at least, minimum threshold from a maturity perspective for these companies. But on the growth side, you know, I think public investors are very happy with 35% to 50% kind of forward couple-of-year growth rates on the top line versus, you know, you don’t have to do 75% to 100% top line. And, you know, look, if you can do that, that’s great, but I think 35% to 50%, but with near-term sight into profitability. And, you know, near-term, to me, you know, people might debate this, but I think that probably means four-ish quarters or so from when you go public, you ought to at least be able to be forecasting cash flow generation, or, you know, hopefully even better, maybe P&L profitability generation.
So, I think, the good news…I kind of described the market, and this is a simple colloquialism, but I think it’s a good market for good companies. And I would contrast that from, you know, we had a great IPO market for a long time for, you know, almost any company. And that’s not entirely true, but, you know, the criteria were relaxed. And then we went into an environment, you know, quite frankly, in last year where it became a very tough environment for almost any company. There was a very small sliver of companies that could get out. And I think we’re in a good discriminating environment where investors are saying, “We want the product. We want to invest in growth, but we also want to see that actually you can balance top-line growth with actual operating margin improvement.” And if you can do that, then, quite frankly, I think this is a very attractive IPO market for people. And, you know, if CB Insights and others are correct, right, there are a lot of companies who, I think, meet those criteria in terms of where their businesses are, so, the pipeline, you know, could be very robust. And, you know, again, I think the market is very open and willing to accept those companies.
Robin: Yeah. But people who are already excited about Snap, and maybe that’s sort of just being that bang that focuses people to attention and get some momentum back into it. So, do you think it’s gonna be a decent year then, a decent couple of years?
Scott: Yeah. I guess I should fall back to my same Howard Marks quote, which is, you know, anything I predict, I’m sure it will make me look like I know absolutely nothing. I would say it this way, which is I think that there is tremendous institutional demand right now for new issues. There are companies who, I think, recognize what the criteria are for what is acceptable in the public markets. And whether this will all happen in ’17 or ’18 or ’19 I think is a function of, look, you know, it takes time to do this stuff right, and they have to get, you know, their auditing systems in order and stuff like that. And there’s other reasons about where they are in the product cycle that might matter. I guess I’ll save myself by saying modulo something like a global macro problem that…who knows what that could be, right? And I’m sure there’s a whole list of things that could happen. It at least appears that the markets are actually open and willing and receptive to that type of product.
Robin: Yeah. I’d be interested in hearing a little bit about everybody else. Obviously, nobody likes bringing up the competition, and obviously, “The Journal” is a terrible newspaper, but who else do you think out there is doing something cool or interesting that you kind of wish you guys were doing, either on the VC or companies that you’re very excited about that you are not involved with that you think, from afar, “That’s pretty interesting?”
Scott: That’s a good question. Look, the stuff we’re not involved with today, which, you know…there’s two big things we’re not doing today which, you know, maybe in time we think about. One is we don’t do much, if at all, outside the U.S. And that’s not a normative statement about what the opportunity set is. In fact, I think the opportunity set is very interesting. And probably the most interesting data point on that, just so you know, is about 15 years ago, 90% of venture capital dollars were in the U.S., in terms of deployed in companies. Today that number is just north of the 50%. I think, like, 52%. And so, I think, in general, that’s a net positive thing from a global technology perspective, which is the world is getting flatter, and there is actually capital formation and innovation happening in a lot of different places. Obviously, it has longer bigger policy implications for the U.S., too, which is, look, you know, there are things that probably we need to do to make sure that we continue to be at the forefront of a lot of these businesses.
But so, I would say, the stuff that’s interesting that we’re not doing today, which is mostly a practical issue, is we’re not doing much outside the U.S. And, as I said, that’s less normative. It’s more we’re a relatively new firm. You know, as you know, we’ve got a lot of moving parts, because we have kind of, you know, a big kind of, you know, post-investment organization that works with our company. So, for us to go into a new market, we couldn’t just drop an investment partner into a new market, right? We’d have to think about how do we do it in a way that’s consistent with the brand and the value that we want to bring, which means we have to think about all the other services that go along with that. And, you know, I would never say never on that, but it’s just not, you know, right now, there’s enough for us to do, enough for us to kind of perfect in the U.S. here that that’s a priority.
The second thing that we’re not doing today, which maybe we ought to think more about over time, was when we started the firm, Marc had this rule, which is we shouldn’t do things that can ultimately blow up. And that should be an investment criteria, so…
Robin: It’s a rule of thumb.
Scott: Which may or not may not be a good rule of thumb. But, you know, what that’s kept you out of, for example, is there’s all kinds of really interesting things. And I am certainly no expert, but there’s really interesting things happening not just outside the U.S. from a geographic perspective, but outside, you know, this hemisphere, into space. And, you know, unfortunately, today, some of those things do have that risk that they could, in fact, blow up. And so, you know, we’ve looked at a bunch of stuff. We just don’t have the right kind of people, I think, today to really understand and invest in those areas. But it certainly seems like, if you’re thinking kind of 5, 10, 15 years in the future, that there’s a lot of interesting things in an area that some venture capital firms are doing today and very successfully so far that I think could be quite interesting.
Robin: Just pivoting back to sort of outside of the U.S., you actually did invest in a Colombian grocery company. Rappo, was it?
Scott: Rappi, Rappi. Yes, yes.
Robin: Rappi. Rappi.
Scott: We did. And we also have, as you probably know, we have two companies in the UK, TransferWise, in the, you know, money transmission business.
Robin: Yeah, another developing country. Brexit and all…
Scott: Right. Exactly, right. Yeah. So, right. If you think about developing and developing countries, that’s exactly right, yeah. And improbable.
Robin: Let’s see what happens after the Brexit, you know, it might change.
Scott: Right. Exactly. Right. That may change.
Robin: They could converge down to Colombian levels.
Scott: Yeah. So, the way I would describe our international practice today is it’s not that we will never do it. It’s that what we don’t do is none of us has a charge where we say, “Okay. Let’s go to the UK every month and go on a prospecting trip,” or, in the case of Rappi, “Let’s go to,” you know, “South America and do that.” We’ve tried to be responsive, which I think you have to do in this business is when you get introduced to somebody or you meet somebody who’s doing the really interesting things, and, you know, you have to kind of go do the work and say, you know, “Can I overcome the challenges that we just have?” which is, look we’re not as well set up, you know, in those markets given the services offering that we have.
But, look, I think that’s a lot of business is, you know, people ask us, as you did, which is look, to predict what the next best thing is. I’m not sure we really know. And in many cases, I’m not sure that’s our job. I think our job is to make sure that we are always looking out for who are the most interesting entrepreneurs doing the most breakthrough thing from a technology perspective, and then let’s go actually do the work to figure out do we think those can grow into big businesses. And so, in some cases, that might take us into a market that’s outside the U.S.
Robin: And this broad picture as well, and in closing…we’re kind of running out of time. I’m not sure if I’m gonna let anybody else ask any questions. But artificial intelligence, I remember I got, I’m trying to remember, into Narrative Sciences. And I got a presentation from them made roughly a year ago that scared the bejesus out of me to see what algos can do with writing. So, I’m not worried about my job quite yet, but I’m not sure if my kids are gonna be doing journalism. What industry, do you think, are gonna be most transformed by artificial intelligence in some form or fashion? Which are gonna be hit first?
Scott: Yeah. I’m gonna do a shameless plug, if that’s okay, which is my partner, Frank Chen, has done a lot of work on this, and there’s a lot of stuff publicly available for those of you who want to look at it. He’s got an odd Twitter handle. I think it’s @withfries2, which I don’t know what the origin of it is. But anyway, you can find it.
And so, you know, a lot of what I’m gonna talk about, quite frankly, is really a lot of the generation of his ideas. So, I think the way to think about it is to go back to kind of think about, okay, what is artificial intelligence good at, right, and what does it mean. Because I don’t think it’s necessarily industry-specific. I think it’s application-specific. And so, if you think about what, at least, I believe computers are really good at today and getting better at is computers are pretty good at vision recognition and getting better. And computers, you know, probably the top three things in my mind would be certainly vision recognition, and then, you know, general, obviously, you know, data analysis, analytics and stuff like that, right, you know, being able to do computational stuff that’s, you know, kind of obviously beyond, you know, the ability of mere mortals to do.
So, if you think about that, then I think there’s logical implications where you might see AI, you know, kind of develop first. So, there’s interestingly enough a lot of things, like big markets, like precision agriculture, for example, where, again, you’ve got a combination of, you know, a vision, and, you know, computational stuff happening. Frank, in this presentation talks about there is a cucumber farm, I think in Japan, that is using TensorFlow, you know, which the, you know, Google’s…or now the open source version of a lot of the AI infrastructure, to do inspection of cucumbers as they come out of the, you know, through the kind of assembly line to kind of sort them into appropriate funnels and stuff.
Robin: So, cucumber inspector jobs are still an option.
Scott: Cucumber inspector jobs, right.
Scott: So, that’s the next job. If any of your kids were thinking about doing that, right, they have to stay in shape. So, yes, that’s a micro example. But as I said, look, I think there’s really interesting applications there in agriculture.
Look, if you think about medicine and health care, right, you know, what do doctors do? When you go to the doctor, what do they do? Basically, they visually inspect things, right? They say, you know, that mold looks like it probably, you know, shouldn’t be there or shouldn’t do something. And then they try to do, you know, computational stuff in the sense of, you know, figuring out through symptom analysis and other stuff what do they think you have. And then therefore, based on their computational knowledge, what application of treatment do they think is most appropriate. It’s not that physicians are going away, but there are applications of that where, I think probably, you know, machine learning in particular, and, you know, kind of, you know, a version, obviously, of artificial intelligence could be very effective in really helping improve delivery, particularly in places where people don’t have access, right? Not everybody is lucky enough to have access to university medical centers and things of that sort. So, I think, you know, medical practice generally.
And then, you know, we’ve got some investments on, you know, what I call the more biology side around people using machine learning to search for new drug compounds. A company called twoXAR that we have in our portfolio, Freenome, which is doing, kind of, you know, artificial intelligence to help figure out how do you kind of marry genetic information about a potential cancerous tumor with what’s the appropriate treatment application. So, there’s lots of those things. So, I think almost any industry you can probably think about, those are probably the criteria to start with. And clearly, the automotive industry or transportation generally, right? So, there’s a lot of people using, you know, machine learning algorithms to try to do autonomy for cars, autonomy for delivery vehicles, or autonomy for drones.
So, I think the applications are endless, and it will, you know, if it’s what we all think it can be…I think it’s, quite frankly, just a natural evolution of what we’ve seen in technology. I would almost date it back to, as Frank has done in his presentation, you go back. What was the Industrial Revolution, right? The Industrial Revolution was basically the application of technology and business processes to help improve cost efficiency and delivery of goods, you know. Then you’ve got information revolution, right, in the U.S., you know, during the ’50s with computers and all through the PC Web industry. Same idea, which is how can technology help improve and ultimately drive cost down. And I think that’s probably what the promise, at least, of AI is it’s a natural evolution of saying, “Okay. What is technology? And what are technology and computers good at in ways that they can actually dramatically improve quality and reduce the cost of delivery of goods and services?” And it seems like, at least, you know, the technology is now getting there.
Robin: Yeah. But journalism, still golden? It’s still okay?
Scott: I think journalism is still good. Right. I mean, you know, certainly people are working on those things, as you’ve seen, but…
Robin: Yeah. Exactly.
Scott: …that’s probably not the top priority.
Robin: No, no. Exactly. That’s good. So, we have one minute for a very quick question.
Cameron McCurdy, CB Insights, Host: Yeah. We’ll ask two very quick questions. First: what, in your opinion, makes corporate VCs do well and what doesn’t, given your experience sort of interacting with corporates and corporate VCs?
Scott: Yeah. So, look, corporate VCs, as you probably know, given the crowd here, corporate VCs have grown tremendously over the last 10 years, like, you know, if you look at kind of…basically growth in the venture capital industry has come in two areas. One is sub-hundred million dollar funds, so kind of seed-ish category. And then corporate venture capital. So, I think the corporate venture capitalists that have done a very good job is they make the investment and they view it primarily from a financial lens, despite the fact that there are strategic opportunities. But what that means is then they are not asking for things from a company that make the company uncomfortable.
And so, let me just give you an example. Like, in the old days, right, in the kind of free, you know, much more, I think, sustainable corporate venture capital world, corporate venture caps would ask for things like rights of first refusal on acquisitions when they made an investment in a company, or they’d ask for some very specific information rights. And the concern for a lot of companies was always, “Hey, look, I’m basically selling the company before I’ve actually sold the company by taking an investor of this sort,” and, you know, it might scare away other potential investors and acquires it over time, and therefore, it might limit the opportunity set for the company. And I think where the corporate venture capital community has done a tremendous job and the people who’ve done very well, which I think there are a lot of them, is to recognize that, look, you know, you can get the benefits that you want as a corporate venture capitalist through an investment with appropriate information rights and all of these other things, but you don’t need to, in some cases, overreach on some of these other areas that make it more difficult for the companies to kind of be comfortable with that, and also, you know, may impact the kind of growth of the business over time.
So, there’s probably a lot more there, but I think that corporate venture capital has become a real important player in the industry, and my sense is it’s gonna get bigger, in part because we’ve seen so many new strategic areas of technology application where, you know, corporations understand that this is really important for them to follow in their business.
Cameron: How will policy on things like privacy and security hinder new startup formation?
Scott: Yeah. So, it’s a very good question. I mean, the answer’s look, I don’t know. We don’t know in this administration, obviously, what that’s gonna be. You know, I think one of the things that the government has done a good job of in, and certainly something that I hope that, and I certainly expect that we’ll see continue through the new administration, is they did a very good job of trying to kind of, you know, bridge some of the gaps, quite frankly, between Silicon Valley and VC from a policy perspective. So, you know, particularly on the defense side, there are a lot of new initiatives where they were trying to figure out how do they improve the procurement cycle, for example, and reduce complexity around that in the Valley, and a lot of conversations that were happening around things like security, particularly in the wake of the Apple, you know, kind of iPhone locking, you know, problem.
So, there’s no question that’s a real issue. I think the good news at least is there is some foundation that was laid in the last administration for how to kind of bridge those gaps, and, you know, at least I would certainly hope and expect that this new administration also would realize that, you know, it’s to everybody’s benefit to make sure that there is at least a dialogue between the government and the major technology companies on these things like security and privacy and others. And we may not all ultimately agree on the outcomes, but, you know, we ought to actually work collaboratively on this. And I feel pretty good about that.
Scott: Yes. I get paid to be an optimist, but…
Robin: Exactly. Well, thanks, Scott. I really appreciate it.
Scott: Thank you. I appreciate it. Yeah. Thanks for the time.
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