Twenty years ago, a 22-year-old Marc Andreessen co-founded Netscape, the company behind the first commercially successful web browser. Netscape went public the next year, making Andreessen wealthy and marking the start of the dot-com boom of the 1990s.
Today, Andreessen is a prominent venture capitalist at the firm Andreessen Horowitz. I asked him to talk about how the stock market has changed over the last two decades. In the 1990s, it was common for small companies to have initial public offerings (IPOs), in which they offer their shares for sale to the general public. But today, companies wait a lot longer to hold their IPOs.
For example, Netscape went public when it was worth a little more than $2 billion, and this wasn't unusual. For comparison, Twitter waited until it was worth about $25 billion before it went public last year. Facebook was worth more than $100 billion when it had its IPO in 2012.
Many companies aren't going public at all. For example, Google bought the home automation company Nest earlier this year for $3.2 billion. Two decades ago, Nest would have been more likely to hold an IPO.
In this interview, conducted on June 12, Andreessen offers his thoughts on why companies are waiting longer to IPO. He argues that the shift is bad for ordinary investors, who no longer have the opportunity to invest in fast-growing technology firms. He also offers his thoughts on the work of Thomas Piketty, a French economist who has studied the growing gap between rich and poor.
The transcript has been edited for length and clarity
Timothy B. Lee: The day you took Netscape public in 1994, it was worth around $2.2 billion ($3.5 billion in today's dollars). Recently, companies have been waiting a lot longer to go public. What do you think has changed?
Marc Andreessen: There's been an absolutely dramatic change. What you say is exactly right. Twenty years ago, IPOs had gotten democratized. You had Microsoft able to go public at less than $1 billion valuation. If you invested in Microsoft's IPO and held you had the prospect in the public market of a 1,000-times gain. There were a whole bunch of other comparable situations over the years. With Oracle, most of the gain was in the public market. In prior eras, the same was true of IBM and Hewlett Packard. These companies primarily grew up in the public market.
Ironically, you just had a much calmer market. You had a much bigger percentage of mutual funds instead of hedge funds, and you actually had more individual participation in the market a lot of the time. It's dramatic how much individual participation has dropped relative to funds. Individuals who wanted to be in growth stocks, institutions like mutual funds that wanted to be in growth stocks who would be longs. [E.g. they were buying assets and holding them in hopes of long-term investment returns.]
You also had a relatively benign regulatory environment, pre-Sarbanes-Oxley [corporate governance legislation enacted in the wake of the Enron scandal] and before all the other kind of corporate reforms that had taken place. In that environment it was actually quite hospitable [to be a public company].
Basically that all started to change after 2000. A whole set of "closing the barn door after the horse had run out" kind of things happened. Sarbanes-Oxley happened. The irony of Sarbanes-Oxley was that it was intended to prevent more Enrons and Worldcoms but it ended up being a gigantic tax on small companies.
Timothy B. Lee: What is it about Sarbanes-Oxley that makes it so burdensome?
Marc Andreessen:The compliance and reporting requirements are extremely burdensome for a small company. It requires fleets of lawyers and accountants who come in and do years of work. It's this idea that if you control everything down to the nth detail, nothing will go wrong. It's this bizarre, bureaucratic, top-down mentality that if only we could make everything predictable, then everything would be magic, everything would be wonderful.
It has the opposite effect. It's biased enormously toward companies that are big enough to hire fleets of lawyers and accountants, biased against companies that are very young and for whom there's still a lot of variability.
The second thing that happened is Regulation Fair Disclosure. The idea is that as a company officer, you are not, under extreme penalties, permitted to give one shareholder information that another does not have. It has really curtailed the ability of companies to communicate with shareholders. It puts everything under more scrutiny with a lot more risk.
You might say that's a good idea, shareholders should be treated equally. The problem is the shareholder base itself has changed dramatically. You've had a dramatic rise in hedge funds. Very short-term trading and dramatic rise in short-selling [investors betting that a stock's price will fall]. If you're a public company, you become the shuttlecock between warring longs and shorts. They bat your stock around like it's a chew toy.
Most American retirement savings is invested in the public stock market. That raises the societal question of how are we going to pay for retirements.
The shorts will just make stuff up. They will make up rumors and innuendo and stuff you wouldn't believe. I went through this personally myself. Crazy levels of personal rumors, all kinds of just horrendous things. There's this tremendous gaming of the stock price. They use Yahoo message boards and chat rooms.
So then you're the company, and you're dealing with these crazy rumors and all this crazy activity every day. A rumor comes out that your executive is ill. A rumor comes out saying that you lost a big contract. A rumor comes out that you're running short of cash. Normally someone would call you up, [ask if the rumor was true], and you'd say no. But under Regulation FD you can't do that. So the running joke is what you need to start putting out a daily fact sheet saying here's all the things that are said about us that's not true.
It's technically illegal to manipulate the market. But there are hardly ever any cases [enforcing these laws]. Basically the hedge funds run absolutely wild and do whatever they want.
And then there's like 8 more of these things. There are these really abstract, theoretical approaches to corporate governance that wind up being embedded in your business. And the rise of continuous internet journalism, so you're in this continuous 24-hour news cycle about everything involving your company.
Timothy B. Lee: Why is a fluctuating stock price such a big deal? Can't the CEO just ignore it?
Marc Andreessen:This comes across like I'm complaining about how hard it is to be public and of course the answer is that you need to suck it up.
But for young companies, everything is connected: stock price, employee morale, ability to recruit new employees, ability to retain employees, ability to sign customer contracts, ability to raise debt financing, ability to deal with regulators. Every single part of your business ends up being connected and it ends up being tied back to your stock price.
The problem is when your stock price gets hammered by any of this stuff, when your stock price gets hit by a false rumor, that in itself can destabilize your company. These companies that go public too quick are at risk of going into a death spiral at any moment in a way that's super intense and very difficult to get out of it because it becomes self-reinforcing.
And the kicker on all of this is: God help you if you ever need to raise money again. The shorts will drive your stock to zero to prevent you from raising money. So you are in extreme mortal danger if you're public and you need to raise money.
The result of all that is the effective death of the IPO. The number of public companies in the US has dropped dramatically. And then correspondingly, growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor.
Most American retirement savings is invested in the public stock market. Most Americans can't invest in private companies and most Americans can't invest in venture capital and private equity funds. They're actually prohibited from doing so by the SEC. If you both prohibit them from investing in private growth and wire the market so they can't get into public growth, then you can't be invested in growth. That raises the societal question of how are we going to pay for retirements. That's the question that needs to be asked that nobody asks because it's too scary.
Timothy B. Lee: Do you think this is something that can be reversed?
Marc Andreessen:My belief is that there are a set of market reforms that could happen that would reverse all this. The problem is that all the political momentum is in the other direction. There's a reason for that. When there's a problem, the answer is presumed to be more regulation — even when the regulation was the problem in the first place. This is the central flaw in how the government operates.
This is so powerful in the conventional wisdom right now. I love the Daily Show like everyone else does. But literally [Jon Stewart's] answer to every issue is Congress should pass a law. [People think you can] solve any problem by passing enough laws.
I don't see the world getting less dramatic. I don't see the world calming down.
The loop we're in now is that people are getting upset and disappointed by the stock market. There are no growth stocks, which means there's no growth. Stock market returns have been weak for 15 years, which is exactly what you'd expect if you took all the growth out. Everyone is upset the stock market isn't performing. The worse the results get, the more regulation you get. It's in its own kind of doom loop. Unless something happens to shock the system a lot, our assumption is it gets worse, not better.
This has had a big influence on how we set up our firm. We've set up our firm to basically not have to take companies public. We basically have a 15-year lockup on our money, which is longer than you used to do with private capital. One of the reasons why our funds are so much larger than venture capital funds used to be is because we have to have the firepower to finance companies through the point of time where we take them public. For our investors this is kind of fine. Our investors are these big institutions, university endowments, high net worth family money, private foundations. They're fine. They can invest in us. They can invest in venture capital. Joe retiree, who works hard for 40 years and has his money in the public stock market, he can't do that.
Timothy B. Lee: This relates to another topic I wanted to ask about. You've had some harsh wordsfor Thomas Piketty, the French economist whose new book is trendy in liberal circles right now. Do you think he's right that we're going to see a growing gap between the rich and the poor in the coming years?
Marc Andreessen:The funny thing about Piketty is that he has a lot more faith in returns on invested capital than any professional investor I've ever met. It's actually very interesting about his book. This is exactly what you'd expect form a French socialist economist. He assumes it's really easy to put money in the market for 40 years or 80 years or 100 years and have it compound at these amazing rates. He never explains how that's supposed to happen.
Every investment manager I know is sweating the opposite problem, which is: what do I do? Where do I get the growth? I can't get into the public market, so I have to go into the private market. The problem in the private market is there isn't much growth. Maybe a dozen hedge funds. After that they're not that good. The returns degrade down to S&P 500 levels.
Timothy B. Lee: That's not so bad is it? The S&P 500 has returned 6 or 7 percent real growth for the last few decades.
Marc Andreessen:Yeah, 6 or 7 percent. But if you look at the last 15 years they're much less than that. Jeremy Siegel put out his book about how there's never been a 10-year period where you lose money in the stock market — right at the beginning of a very long period where you lose money for 10-plus years.
Piketty thinks it's really easy to compound capital at scale. There's just a lot of evidence that that's not true. The shining example of that is: where are all the big companies and the big families?
If you look at what's actually happening in the Forbes 400 and the Fortune 500, churn is accelerating. One year it's some real estate family, and then the next year it's like, "There's Larry Page, where did he come from?" Somehow Piketty looks through that to a world where all this change is going to just stop. [He has] this idea that normal is 18th-century feudal France, and we're going to go back to it.
He does this other dodge where the 20th century doesn't conform to his theory, but that's because of the wars and economic dislocations. And so it's like the 21st century is predicted to be much more peaceful and calm. I don't know about you but that's not what I see happening. I look around the world right now and I see exciting things happening that's causing a lot of changes.
It's not an accident that Piketty named his book after Das Capital. It's a very "capitalists are evil, it's all going to roll up to a few rich people" kind of thing.
The other irony in the book is that on the positive side, [people around the world are] rising up from what we would consider destitution, to what we would consider lower-class lifestyles on their way to middle-class lifestyles. Conversely, Iraq is falling again.
So I don't see the world getting less dramatic. I don't see the world calming down. I don't understand why that would be the expectation. At what point is all of this progress and change and disruption going to stop to basically let rich people cement their gains and then earn these great returns in perpetuity. When is that supposed to start?
Maybe that's what happening in France, but it doesn't map to anything I see. What's happening in France is the opposite, which is that all the rich people are leaving, as a consequence of the government he's advising. The irony here is very deep.
Timothy B. Lee: Piketty's argument doesn't require extraordinary returns, does it? He finds the historical return is around 5 percent. The long-run return in the US stock market has been higher than that.
Marc Andreessen:If you actually get regular compounding growth of stocks of that form, then basically what you have is an economic boom — a sustained boom in productivity. If the gains from the market exceed the gains from economic growth, the delta is productivity growth. That's the math. This is why I say he has so much more faith in the progress of capitalism that even the capitalists do.
What all the capitalists are worried about is where's the productivity growth. This is where Piketty's analysis is actually a very optimistic analysis. It suggests you're going to have a gigantic productivity boom. Isn't that the world we want to live in?
Think about what happens in that world, though. Unbelievable progress, unbelievable productivity growth, unbelievable increase in standard of living all across the planet. Somehow as a consequence of that, everything is going to stabilize and we're going to go back to feudal France. At that point it becomes Marxist logic.
There's a missing step in there where everyone but the hereditary elite gets screwed. And he never explains that part. Because if you're having all this economic growth, and everything is getting better, but somehow you're in this dystopian world where there's a few rich people and a lot of poor people, that doesn't add up. It's a really, really Marxist way of looking at the world.
It's not an accident that Piketty named his book after Das Capital. It's a very "capitalists are evil, it's all going to roll up to a few rich people" kind of thing. Marx was wrong. That's literally not what happened. For it to happen now, with the economy being the way it is now, which is so much even more dynamic than it was in Marx's time, [seems unlikely].
If you talk to anyone in the French socialist party, their worldview on how capitalism works is completely backwards from anything you see in the real world. Piketty has taken that and created abstract models and marshaled some data and presented it in book form.
Update: Andreessen originally told me that stock market returns had been "flat" for 15 years. While inflation-adjusted returns have been below average during this period, they have been positive (for example, S&P 500 returns averaged 2.2 percent from January 1999 to December 2013). With Andreessen's approval, I've changed it to say that stock market returns have been "weak" instead of "flat."