Marc Andreessen & Clayton Christensen: "Venture capital is abundant, opportunity is scarce"

Years after Clayton Christensen flipped Marc Andreessen’s world upside down, the two finally sat down for a conversation in Silicon Valley. Andreessen was taught the algebra of business: “If big companies are well run, startups can’t take them out.” You must wait until a company is poorly run to attack. Christensen, with the publishing of bestseller Innovator’s Dilemma, taught the world “the calculus of business,” Andreessen complimented: “for my generation… flipped [the algebra of business] on its head.”

The Harvard Business School professor and Innovator’s Dilemma author joined the founding partner of venture firm Andreessen Horowitz at the Startup Grind Global Conference for a dive into the disruption of venture capital and of Silicon Valley’s greatest technology companies.

So what is the calculus of business? Big companies that are well run are very focused on their current customers, becoming sustaining innovators, and making them “blind to innovative disruptors,” said Andreessen. Thus, “the gap that opens up is a matter of competence, rather than incompetence,” - and Andreessen Horowitz has made it its work to fund companies targeting lumbering industries like banking, government, logistics, and communication.

The two philosopher kings got personal with Startup Grind founder and CEO Derek Andersen, sharing how their own industries are being disrupted - kicking off with Christensen making a wish for Harvard to move to Silicon Valley, and if not that, inviting Andreessen to quit the venture betting game and do something productive: become a HBS professor.

Watch the full chat with Clayton Christensen & Marc Andreessen here, and catch the highlights below.

The Evolution of Christensen’s Disruption Theory

Christensen’s theory of disruptive innovation has evolved since the publishing of the Innovator’s Dilemma, adapting to new case studies and becoming something of a Valley buzzword. More important, the theory has expanded to previously untouchable industries like education (Udacity), media (Brit + Co), hotels (AirBnB), and even government (, an Andreessen Horowitz-backed company).

The law that colored the entire conversation was Christensen’s view of growth, which comes in three flavors:

Disruptive innovation makes creative products more affordable and accessible. It’s desirable in capital-rich economies, as it creates overall economic growth and job opportunities in exchange for (often risky) investments. Though these products - like supercomputers - usually start out poorly distributed and prohibitively expensive, miniaturization and sustaining innovation usually puts these inventions into everyone’s hands - like the iPhone, packing as much power as a 1985 Cray-2 supercomputer.

As a contrast, sustaining innovation is the process of fine-tuning your company’s business to increase margins, optimize your workflow, and specialize your staff. Though tough to watch, Jack Dorsey’s development team firings have - hopefully - made the company more sustainable by both increasing margins (by cutting total spent on salaries) and focusing the product road map.

Last, a specialty of Japan and China, is efficiency innovation: specifically, doing more with less, like Uber aims to with the deployment of a self-driving fleet. The catch: efficiency innovations increase free cash flow, but cut jobs - often dramatically.

Christensen urged founders and investors to reconsider “measuring success by… how quickly you can get your money out,” and to focus on jobs to be done - processing payments, for example - rather than trying to cover lending, investing, and saving as banks have. His warning came with an example: “the New York Times,” he illustrated, “by trying to do everything for everybody, is going off a cliff.” Instead, “by focusing on jobs to be done, Silicon Valley companies are disrupting even banks and media.”

Watch the full keynote by Clayton Christensen on "The State of Disruption" for the 5-point theory.

Is Venture Capital Being Disrupted?

“Capital has become abundantly cheap,” but this doesn’t mean we can be careless with it, pressed Christensen, continuing to say MBA are often taught mistaken “doctrines of finance” that stifle innovation; namely, “Whist thou can waste inputs that are abundant and cheap, thou must husband carefully the use of input that are scarce and costly.” In layman’s terms: sand is cheap, so use it at will; platinum is expensive, so use it carefully. With a rise in not just venture funds but also venture investors, Silicon Valley is experiencing a “venture investor” bubble — new money from new investors making investments without the rigor of experience, often driven by buzz.

“The return to VC over the last 15 years has been nearly zero. Maybe we shouldn’t husband the use of capital,” quipped Christensen, “and perhaps we should aggressively put capital to work.” So has venture capital, with a glut of new and often dumb money dumped into ventures now struggling on the open market, engineered its own downfall?

Not so, argued Andreessen: “The critical crisis in the economy at large is not that Unicorns are overvalued, but that there aren’t enough of them.” To contrast the $50 billion in bets placed on venture backed companies, Andreessen referenced the ailing bond market: globally, there is $6 trillion in bonds out in the market returning negative yield, demanding investors “pay to own them.” If just a fraction of a percentage of this money was put towards innovative ventures, he suggests, the returns both financially and technically could yield to more Googles and Facebooks - even if a majority of these investments totally fail, as the odds predict. Andreessen’s summarizing quote of the night: “Capital is abundant, but opportunity is scarce.” 

Andreessen is excited, rather than threatened, by “co-opetitors” like Y Combinator, which he sees as ultimately diversifying and bringing innovation to the venture capital market. With the cost of capital so low, the usual $5 million deals are no longer of great interest, so the launch of Y Combinator’s follow-on Continuity Fund was not a competitive move - it was simply inevitable.

The Rise & Fall of Silicon Valley Unicorns

Despite the abundance of money, Christensen fears a fall of the Unicorns - companies theoretically worth at least $1 billion - not because they’re being run poorly, but because they’re all being run perfectly - and extremely similarly. “If smart people have a vigorous theory about how the world works, they’ll fail less,” he says of entrepreneurs. But when you continue to “teach the theory, it creates a problem” - namely, Christensen began, “if everybody does everything right [and the same way]…” —“it creates a new opportunity for disruption,” finished Andreessen.

If the model of building and funding companies is becoming a repeatable science, both the industries of founders and investors are opening themselves up to be shaken up by true innovators. Looking to data-driven funds like Social+Capital (which legendary fund KPGM attempted to acquire), creative investment diversification initiatives like YC Research and the YC Fellowship, and even the rise of university venture fund, it seems like the “venture investor bubble” is already seeing new challengers.

Andreessen’s solution to the keeping companies competitive: focus on empowering founders. “We think founders are critically important,” he argues, with “the top 50 technology companies over the last few years all being run by the founders.” Rather than stubbornness, founders have conviction: since the founder remembers the company when it was nothing - and knows it can easily return to nothing against a disruptive entrant - he or she has the moral leverage to do what needs to be done, even when it’s heresy, Andreessen argues, nodding to Steve Jobs. 

But pushed about the recent ousting of founder Parker Conrad from Zenefits over compliance issues, Andreessen deflected. Yet it’s hard to believe COO David Sachs and a board of expert investors had not seen the compliance problems month if not years ago. Asked if Conrad might “pull a Jobs,” returning to revitalize the company, Andreessen admits, “this is a business for the aggressive,” and that any CEO’s changes are “always a matter of specific personalities.”

Even posed against the will to power of great founders, Christensen's view is more than theory: as venture building continues moving towards a formula, the “companies getting disrupted fastest are our own companies,” said Andreessen of Silicon Valley founders. “Most good startups have about 5 years of business before they get locked in to serving a particular customer,” creating an opening for new companies to disrupt the original disruptors. 

Examples are making both the editorial columns and front pages: Apple, Twitter, or Google - now each at least a decade old, are battling a creative slowdown, doing their best to remain disruptive innovators against the pressure of public markets to optimize for profitability and efficiency.

Are Today’s Tech Giants Slowing Down?

On higher education: we’re focusing too much on consumption, versus non-consumption. When the alternative to college becomes good enough - whether it be through MOOCs of the kind offered by Udacity (another Startup Grind guest), technical skill programs like Hack Reactor, or entrepreneurial incubators like 500 Startups - people will pay a premium for it. “Harvard is getting disrupted,” warns Christensen.

On Apple: The move from 2 year cycles of disruptive products has given way to a 1 year cycle of sustaining and optimizing innovation - smaller, faster devices with cosmetic tweaks rather than true movements towards breaking new ground, suggested Christensen and Andreessen, though both agree it’s hard to argue with Apple’s success in valuation.

On Twitter: “Lots is going right at Twitter,” said Andreessen, “and it’s a sign of the times that we have a 10 year old Silicon Valley company doing $3B in revenues and have 350 million users, and we’re like, ‘it sucks’.” Twitter’s challenge, then, is remaining innovative at a size when most companies would inadvertently become optimizers.

Twitter has two options, tweetstormer Andreessen suggests:

First, to accept that the network effect is slowing, and growth has peaked. If the size of the network is maxed out, the company should evolve to sustaining innovation, and increasing efficiencies - perhaps improving the advertisement business or tweaking tweet discovery. Christensen’s warning: “If they go after sustaining innovation, they’re sure to be done really fast.”

The alternative - and founder Jack Dorsey’s current course - is to remain disruptive, making the controversial moves necessary to keep Twitter growing. If Twitter can evolve the product, it will grow the size of its pie, and there will be no ceiling to its success. Here’s where Jack is putting his money, says Andreessen.

A crowd favorite: Andreessen finally confirmed his tweet storms come not from an intern sweatshop, but directly from him. 

On Google: Though the company is vigorously pursuing disruptive innovation by dumping money into moonshots, Christensen wondered if Google is underperforming on efficiency improvements. “What Alphabet needs is not more technology,” but more business models that work,” criticized Christensen, but added, “Creating new business models within old business models is the hardest thing to do.”

Traditionally risk-loving, Andreessen is excited by Google as an extension of his own preferred use of capital: “Google has $60 or $70 billion in cash, so by default it just sits in their accounts, maybe with negative interest,” Andreessen said with a nod to the $3 trillion in bad bonds, “so to be able to take $3.6B a year and put it into moonshots — if they get one or two or three of these moonshots to pay off, the total returns on their capital will be so much higher.” 

Long Term Investing: Friends, Family, and Principles

Christensen, author of the equally successful How Will You Measure Your Life, ended on a personal note: “disruption occurs even when you do everything right,” both in life and business, he said. “I look at my students and not a single one had a strategy to get divorced or alienate their own children. But many of them implement that strategy - even though they don't want this to happen.”

Why? When you’re a productive person driven by achievement, Christensen suggest, you naturally invest time and energy into outlets with tangible returns - most often, your work. But when you go home and with your family, the feedback loop is much less tangible than a promotion, a salary raise, or an award. “The causal mechanism behind this is the impulse to seek immediate and tangible evidence of achievement."

Telling a story of how he lives what he writes, Christensen finished, “It is easier to hold to our principles 100% of the time than 99% of the time.”

Read next: our book notes on How Will You Measure Your Life, by the Director of Startup Grind LatAm