Healthcare Matters

I ran across an interesting interview that I thought might shake loose our collective “Olympic cobwebs” this Monday morning. Interesting stuff here for sure. For the sake of brevity, I grabbed excerpts that I thought would be most interesting. First a little background:

The Interviewer: Peter Thiel hosts the interview. He is the superstar Silicon Valley investor, who among other things, has famously dismissed university as a waste of time and money, and even offered students cash to drop out. He is gaining additional notoriety these days because Stanford managed to convince him to come and teach a course on entrepreneurship that has become all the rage.

The Interviewee: Marc Andreesen, who along with his colleagues developed Mosaic (the first graphical browser) back in 1992 has made a name for himself on the lecture circuit and, as a VC. He is now famous for his thesis on software and “how it is eating the world.”

The Source: Blake Masters is the co-founder of Amicus Labs. He is a recent graduate of Stanford Law. This post reflects excerpts that first appeared at his blog.

Is Software Eating the World? Marc Andreessen’s most famous thesis is that software is eating the world. Certainly there are a number of sectors that have already been eaten. Telephone directories, journalism, and accounting brokerages are a few examples. Arguably music has been eaten too, now that distribution has largely gone online. If it’s true that software is eating the world, the obvious question is what else is getting or will soon get eaten? There are a few compelling candidates:

• Healthcare has a lot going on. There have been dramatic improvements in EMR technology, healthcare analytics, and overall transparency. But there are lots of regulatory issues and bureaucracy to cut through.

• Education is another sector that software might consume. People are trying all sorts of ways to computerize and automate learning processes.

• Another promising sector is law. Computers may well end up replacing a lot of legal services currently provided by humans. There’s a sense in which things remain inefficient because people—very oddly—trust lawyers more than computers.

It’s hard to say when these sectors will get eaten. Suffice it to say that people should not bet against computers in these spheres. It may not be the best idea to go be the kind of doctor or lawyer that technology might render obsolete. It was fun to watch humans beat computer chess systems for a while, but it hasn’t gone too well for humans on this front now since 1997.

Peter Thiel: Did you think in the ‘90s that future would happen sooner than it did? Marc Andreessen: Yes. The great irony is all the ideas of the ‘90s were basically correct. They were just too early. We all thought the future would happen very quickly. But instead things crashed and burned. The ideas are really just coming true now. Timing is everything. But it’s also the hardest thing to control. It’s hard; entrepreneurs are congenitally wired to be too early. And being too early is a bigger problem for entrepreneurs than not being correct. It’s very hard to sit and just wait for things to arrive. It almost never works. You burn through your capital. You end up with outdated architecture when the timing is right. You destroy your company culture.

Peter Thiel: In the early and mid 2000s, people were very pessimistic about ‘90s ideas. Is that still the case? Marc Andreessen: There are two types of people: those who experienced the 2000 crash, and those who did not. The people who did see the crash are deeply psychologically scarred. Like burned-my-face-on-the-stove scarred. They are irreparably damaged. These are the people who love to talk about bubbles. Anywhere and everywhere, they have to find a bubble. They’re now in their 30’s, 40’s, and 50’s. They all got burned. As journalists, they covered the carnage. As investors, they suffered tremendously. As employees, they loaded up on worthless stock. So they promised themselves they’d never get burned again. And now, 12 years later, they’re still determined not to. This kind of scarring just doesn’t go away. It has to be killed off. People who suffered through the crash of 1929 never believed in stocks again. They literally had to die off before a new generation of professional investors got back into stocks and the market started to grow again. Today, we’re halfway through the generational effects of the dot com crash.

That’s the good news for students and young entrepreneurs today. They missed the late ‘90s tech scene, so they are—at least as to the crash—perfectly psychologically healthy. When I brought up Netscape in conversation one time, Mark Zuckerberg asked: “What did Netscape do again?” I was shocked. But he looked at me and said, “Dude, I was in junior high. I wasn’t paying attention.” So that’s good. Entrepreneurs in their mid-to-late 20s are good. But the people who went through the crash are far less lucky. Most are scarred.

Peter Thiel: What’s the one thing that younger entrepreneurs don’t know that they should? Marc Andreessen: The number one reason that we pass on entrepreneurs we’d otherwise like to back is focusing on product to the exclusion of everything else. We tend to cultivate and glorify this mentality in the Valley. We’re all enamored with lean startup mode. Engineering and product are key. There is a lot of genius to this, and it has helped create higher quality companies. But the dark side is that it seems to give entrepreneurs excuses not to do the hard stuff of sales and marketing. Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a “viral marketing strategy.” Peter Thiel: We’ve discussed before why one should never take it at face value when successful companies say they do no sales or marketing. Because that, itself, is probably a sales pitch. Marc Andreessen: Startups are like sausage factories. People love eating sausage. But no one wants to watch the sausage get made. Even the seemingly glorious startups only seem that way. They’ve had crisis after crises too. Things go horribly wrong. You fight your way through it. What matters more: what processes you follow? Or who is with you in the bunker? Entrepreneurs don’t think about this enough. They don’t vet their VCs enough. Peter Thiel: And regarding the development of a board of directors, if you want board to do things effectively, it should be small. Three people is the best size. The more people you have, the worse the coordination problem gets. If you want your board to do nothing at all, you should probably make it enormous. Non-profit organizations, for instance, sometimes have boards of 50 people or more. This provides an incredible benefit to whatever quasi-dictatorial person runs the non-profit. A board of that size effectively means no checks on management. So if you want an ineffective board for whatever reason, make it very big.

Question from audience: Is it big wave? Or do waves come industry by industry? Marc Andreessen: Industry by industry. Some industries like finance, law, and health have oligopoly structures that are often intertwined with government. Banks complain about regulation, but are very often protected by it. Citibank’s core competency could be said to be political savvy and navigating through bureaucracy. So there are all sorts of industries with complex regulatory hurdles. It’s fun to see what’s tipping and what’s not. There are huge opportunities in law, for example. You may think those are ripe now, and they may well be. But maybe they are decades out. In VC, you literally never know when some 22 year-old is going to prove everybody wrong.

Question from audience: How do patents relate to the software-eats-the-world phenomenon? Marc Andreessen: The core problem with patents is that patent examiners don’t get it anymore. They simply don’t and can’t know what is novel versus what isn’t. So we get far too many patents. As a tech company, you have two extreme choices: you could spend your entire life fighting patents, or you could spend all your money licensing usage. Neither of those extremes is good. You need to find the balance that lets you think about patents least. It’s basically a distracting regulatory tax. Peter Thiel: In any litigation, you have four parties. You have the two parties, and you have the two sets of lawyers. The lawyers are almost always scared of losing. The defense lawyer will talk the client into settling. The question is: do we get somewhere when people are willing to fight to the end to beat back bad patent claims? Or do you have to concede and basically have a patent tax? High litigation costs could be worth it if you only have to fight a few times. The danger is that you fight and win but fail to set any sort of deterring precedent, in which case the suits keep coming and you’re even worse off. Marc Andreessen: There are some areas in tech—drugs and mechanical equipment, for instance—where patents are fundamental. In these areas there are long established historical norms for who gets to do what. But in software, things change extremely quickly. The big companies used to have huge war chests full of patents and use them to squash little guys. Now they’re fighting each other. The ultimate terminal state of big companies seems to be a state in which they build nothing. Instead, they just add 10,000 patents to their portfolio every year and try to extract money through licensing. It’d be nice if none of this were the case. But it’s not startups’ fault that the patent system is broken. So if you have a startup, you just have to fight through it. Find the best middle ground strategy.

Question from audience: The web browser came out of universities. 10 years later Google came out of Stanford. Do you look at university research departments while searching for great future companies? Marc Andreessen: Sure. A lot of stuff we’ve invested in was developed in research labs 5-10 years ago. Looking at the Stanford and MIT research labs is a great way of assessing what kinds of technologies might become products in the next couple of years. Synthetic biology is one example. That might be the next big thing. It’s basically biology—creating new biological constructs with code. This freaks people out. It’s very scary stuff. But it actually seems to work, and it could be huge.

Again, many thanks to Blake Masters, who authored these notes.

—Tom Finn