Marc Andreessen on On Investing in Immensely Complicated, Large-Scale Projects

A Snippet Of: Marc Andreessen - Invest Like the Best (2021)

Investing in Immensely Complicated, Large-Scale Projects

Marc: [00:48:15] You’d do it by process of elimination, work backwards, which is why did you need Apple to do the iPhone? Why wasn’t the iPhone a startup? There are a lot of big advances over the last 30 or 40 years. To your point, especially in these more complex fields and they come out of these big companies that entrepreneurs tend to be building the software. It goes back to this thing of, why do you have these large scale industrial conglomerates? Why can’t you have more startups that are Tesla and SpaceX, is ultimately the question. Part of that is you read the story of Tesla and SpaceX and it’s the story of just a couple of things jump out at you. One is this story of just unbelievable drama, and stress, and risk. Elon almost lost both companies at different points multiple times. Very tenuous whether those companies could raise money at this point in time. The classic venture backed financing model, you’re raising your round of money every two or three years, you need to assume you’re doing it with a new lead investor each time. If you need five, or six, or seven rounds of financing to get a complex product to market, but if you can’t raise that third or fourth round of financing, it’s game over, you lose the whole company. So I would say this is a criticism of Silicon valley that I give a little bit of credence to, which is these big, hairy, audacious projects that involve lots of moving parts, they are just hard to do with the classic venture financing model because of this need to raise multiple rounds of capital.

What would be the alternative to that? What would be the counterfactual where you could have told Elon Musk up front, “We’re just going to pre-commit $5 billion to build Tesla or SpaceX.” By the way, oh, this is the other thing with Tesla and SpaceX, which is they’re the only examples. Why are there a hundred more Teslas and SpaceXes? Why are there not companies building automated machine factories building thousands of houses for a fraction of the cost of today? Or why are there not these huge new universities or robotic automated hospitals? All these things that the world pretty clearly needs, where are the startups to do those things? Why do we only have Elon and why do we only have cars and rockets? And so it’s like, okay, well, what if you had a system in which you could pre-commit 5 billion and you could pre-commit 5billion and youcould pre−commit s5 billion to a project like Tesla, or SpaceX, or any of these other projects, and you were willing to do that because you knew that if the thing works, it would do what Tesla have SpaceX have done, which is you would generate equity value far in excess of that.

So you put five billion into Tesla over the course of, whatever, its first 10 years, and then if it worked, it’s worth 500 billion on the other side and you make a hundred X. That’s a venture scale venture capital style proposition that actually looks quite attractive. So then it’s like, well, what would it take to basically make an upfront commitment to somebody for $5 billion? Okay, that’s interesting. So question number one is, could you raise the money to do that? And actually in the old days, the answer to that probably was no. In the current world, the answer that is probably yes. There are a set of high end VCs or private equity firms that could probably raise that money to have a program like that. There’s this global savings glut, there’s just trillions of dollars in accumulated capital out in the economy that just doesn’t know where to do.

There’s 15 trillion of negative yield in government debt in Europe. There’s these giant sovereign wealth funds that have no idea how to invest their money. And so, if they had a chance to invest in another dozen or a hundred attempts to have a new Tesla, they probably would go for it if you had a responsible plan. So, okay, could you raise some money to do it? And then, there’s the what’s the responsible way to pre-commit $5 billion, right?

Patrick: [00:51:07] Right. How to you let the entrepreneur draw it or something?

Marc: [00:51:09] Right, exactly. And there’s an old idea that I think could be brought back and it’s a term called project finance. And it’s basically how you finance a dam, or a bridge, or a new highway, or something like that. It’s tranche money. It’s tranche money corresponding to milestones. You basically have a plan, the plan has very specific milestones along the way, the burn rate escalates over time. You’ve got these milestone check-ins over time, and then you pre-commit the money, but the money gets released in chunks so the money gets released conditional on progress.

You predefine the plan in a much more rigorous way than the general venture-backed startup does, and then you unlock the money as you go, and then basically you would build a portfolio of these investments. So you would probably start, you’d raised some huge funds, you would nominally commit five billion each to a whole bunch of projects, and then you would basically take its course, and a bunch of the projects would not hit their milestones, hopefully relatively early in the process. You’d kill those projects. You would end up funneling most of the money into the set of projects that actually that were making the right kind of progress.

And this is a doable thing, it’s a doable methodology. It’s actually like how, if you’ve ever read Augustine, what was his name? It was the former CEO of Lockheed wrote these great books about large-scale project management and it’s basically, at least how they used to build the fighter planes, it was a very similar process.