Episode 4: a16z & DST

a16z and DST

This "off the record" podcast is available only to the avra community and please treat this as confidential.

Takeaways‍

(20 minutes)

DST’s Investment Strategy (Rahul):

• Focus on investing in transformative tech globally, emphasizing people-centric approaches over pure financial models.
• Invested in 120 companies globally over 15 years, with approximately $16 billion invested in total. Current activity is out of Fund 9, averaging ~$1 billion per year.
• Top 3 criteria in this order:
  • Personal growth of the founder
  • Product and market opportunity
  • Traction - specifically growth and retention
• Highlights an example with Glean, a company Rahul invested in, emphasizing its visionary leadership, innovative product approach, and ambitious market potential.

Andreessen Horowitz Growth Fund (David George):

• Established in 2019, the Growth Fund was created to support companies through their entire lifecycle, from private stages to IPO and beyond, ensuring A16Z could participate at every stage and prevent dilution of their ownership in standout companies.
• The Growth Fund currently has approximately $15 billion in assets under management (AUM), making it a major player in the growth investment space. The fourth fund alone is sized at $4.2 billion, with significant dry powder available for future investments.
• Top 3 criteria for investment:
  • Uniqueness in product
  • Uniqueness in distribution
  • Can the technical CEO be a commercial killer?
• Discussed examples like Waymo, Roblox and Figma, highlighting exceptional products, network effects, and market disruption as key determinants for investment.

Investment in Roblox (David): 

• Roblox was an organic growth business at its core, with strong pull-market dynamics and dual network effects:
  • Social network effects among users.
  • Marketplace network effects, as user growth improved the quality of games, which further attracted more users.
• David appreciated the uniqueness of Roblox’s platform, which allowed developers to create self-contained economies, making it fundamentally hard to replicate.
• David also believed that the founder was quite mission oriented and wouldn’t sell early. It took the company ~10+ years to get to a $2.5B valuation and the founder did not give up along the way. 
• David and his team utilized a mix of conservative assumptions and upside potential analysis to justify Roblox's valuation at $2.5 billion in 2018.‍
  • Base Case: Conservative Modeling‍
  • Worst-Case Scenario: They modeled scenarios where key upside factors, such as aging up (appealing to older demographics) or improvements in game quality, might not materialize. Even in this conservative outlook, they projected a minimum 3x return, which offered downside protection while maintaining confidence in the investment's fundamentals.‍
  • Upside Considerations: While they avoided over-weighting probabilities for unknowns, they did identify key drivers for potential outsized returns:
    • Aging up of users from the platform’s core child demographic to teens and adults.
    • An improving international presence and localization efforts, driving user acquisition globally.
    • Dramatic enhancements in the quality of games as developer participation and monetization opportunities increased.‍
• Market Misunderstanding: At the time, the market undervalued Roblox, viewing it as a niche “kids’ gaming platform” with uncertain long-term viability. Andreessen Horowitz recognized it as a unique and generational platform for user-generated content with an economic engine that could scale globally.
• ‍Open-Ended Market Opportunity: David’s belief in Roblox’s capability to create a fully self-contained developer ecosystem anchored the decision to pay a premium relative to ARR. This strategic commitment was supported by the conviction that the business could grow exponentially.‍
• Outcome: At the time of the Series D investment in 2018, Roblox’s market was misunderstood by many investors, especially concerns over content issues and limited scalability. Andreessen Horowitz saw the long-term potential, investing at a $2.5 billion valuation, exiting with a market cap of $38 billion in 2021.

Investment in Glean (Rahul) 

• Rahul’s thesis: Glean is an enterprise search platform designed to improve workplace productivity by centralizing information retrieval across tools and systems. The goal is to provide a seamless, Google-like search experience tailored to enterprise environments. It starts with organizing enterprise data to make employees more productive and is expanding into building broader enterprise tools.
• Founder-Centric Approach:  Rahul emphasized his "DCF model of a founder's personal growth," analyzing Arvind’s potential as an entrepreneur and his trajectory:
  • Vision and Execution: Arvind displayed a strong focus on product innovation, leveraging deep technical expertise gained from his time at Google. His relentless focus on product excellence resonated with DST’s people-first investment approach.
  • Learning Coefficient:  A critical factor for DST is a founder’s ability to learn and grow. Arvind demonstrated adaptability, particularly in building an organization. For example, he recently brought on a strong head of sales and finance, signaling an ability to address skill gaps within the team effectively. WIthin one year he made dramatic investments in GTM to scale to the enterprise
  • Mission Orientation: Arvind showcased a “crazy streak” of ambition and paranoia, pushing continuously to refine Glean’s vision despite early successes and personal success from Rubrik and Google. This is a founder that does not care about his personal balance sheet and doesn’t rest on his past laurels.  This intensity reassured DST that the leadership had the resilience and drive needed to overcome organizational challenges and competition.
• Market and Product Opportunity:
  • Market Pain Point: Glean tackles a well-defined problem: knowledge workers spend 1-2 hours daily searching across disconnected tools. Enterprises need better information retrieval systems to boost productivity.
  • Product Innovation: Glean’s platform offers an intuitive, enterprise-specific experience by unifying multiple apps under a central knowledge repository.
  • Market Size and Adoption: The potential market includes tens of millions of knowledge workers globally. With comparisons to enterprise tools like Microsoft 365 (400 million users), Glean’s ambition to scale to tens of millions of monthly active users is realistic.‍
• Metrics Driving the Valuation:
  • User Retention and Traction: Glean demonstrated high user retention, a signal of strong product love and market fit. Its customers increasingly relied on Glean as the “starting point” for enterprise search.
  • Growth Scale: Although ARR was not disclosed (public reports suggest $40m ARR at the time of the round) , Rahul oriented the valuation around Glean’s long-term capacity to capture market share and user mindshare.
  • Base Case Underwriting: DST focused less on current ARR multiples and more on a 5–10-year view of Glean’s revenue trajectory. For example, valuation modeling targeted a minimum 3x return on the base case (from $4b in 4 to 5 years), with upside for significantly larger outcomes in terms of user adoption and revenue.‍
• Valuation and Upside Considerations:
  • High Multiple Justification: Although public companies typically trade at far lower multiples of ARR, DST factored in:
    • The transformational potential of Glean’s product.
    • Confidence in Arvind and the team to execute long-term, supporting high future ARR.
    • Comparisons to historical cases, where such valuation premiums often align with generational companies.
  • Competitive Differentiation:  Glean is setting a foundation to move beyond enterprise search into broader workflow integrations, which increases its long-term potential as a core enterprise tool.

Lessons from crucible moments

• Long-Term Vision vs. Short-Term Pressure: CrowdStrike made a bold decision early on to heavily invest in a cloud-based infrastructure, even when it hurt gross margins and made financials look less appealing to investors. This positioned them as a differentiated player when competitors like Cylance and Carbon Black stagnated with legacy systems. However this was a difficult decision. For a period of time the other two competitors were quite ahead of CrowdStrike and CrowdStrike had only 20% in gross margins. It was a very difficult period for CrowdStrike and the founder raised money only through sheer will. But it was the right focus as they emerged as a winner for making that bet.
  • Founders must be willing to prioritize long-term strategic advantages, even if it introduces short-term financial strain or market skepticism.
• Maintain Competitive Focus and Adaptability: CEO George Kurtz continuously set new adversaries—first Cylance, then Carbon Black, then SentinelOne, and eventually Microsoft. This drive to always push boundaries and compete at higher levels infused a sense of urgency and focus across the organization.‍
• Harness Organizational Loyalty and Culture: Tony Xu’s ability to attract and retain top talent—some staying since the early days—was crucial to scaling DoorDash. His mission-driven approach inspired a level of dedication and persistence from his team that survived industry ups and downs. His team from 2018 - Chris Payne, Keith, Prabir could have all left the company during difficult times. Yet they stayed during the most difficult period when the company couldn’t raise any money for almost 1000 days. It is important to hire and inspire a loyal team that can stick with you during your downs. ‍
• Learn Fast and Fill Gaps with Expertise: Vlad Tenev, a technologist at heart, recognized the need for strong business leadership and hired top-tier talent, such as CFO Jason Warnick and GC Dan Gallagher. This complemented his strengths and helped Robinhood navigate challenging periods, including public scrutiny during the "GameStop Saga."‍
• Mission-Driven Leadership Resilience: Tony’s childhood experiences instilled resilience and fearlessness, shaping how he navigated fierce competition. His personal connection to the company’s mission inspired not only his employees but also external stakeholders like investors and partners.‍
• Anticipate and Counteract Market Misunderstandings: Roblox faced skepticism about its niche appeal (children’s gaming) and uncertain scalability, but founder David Baszucki remained unwavering in his vision. By focusing on the platform’s dual network effects and creator-driven innovation, they built a business that eventually commanded immense respect and scale.‍
• AI and Technology Trends: AI is driving a fundamental shift in how users interact with software and systems. David highlighted examples like reimagined interfaces:‍
  • Potential for AI to be “Sugar” vs. “Frosting”:‍
    • Frosting refers to superficial features added to existing systems (e.g., chatbot functionality on CRM platforms like Salesforce).‍
    • Sugar refers to core ingredients baked into the system, creating entirely new forms of engagement (e.g., natural language interfaces to replace forms or button-based workflows).‍
  • Winning Formula:‍
    • Companies building AI-native systems are positioned to succeed because incumbents struggle to retrofit core AI capabilities effectively into their established architectures.

Key investments criteria for AI companies

• Reimagined UI/UX in AI Applications: Traditional software relies on forms, menus, and button-based interactions, often requiring users to adapt their workflow to fit the system. AI-driven applications, however, can present:‍
  • Conversational interfaces: Users interact through natural language dialogues (e.g., chatbots, voice commands).‍
  • Dynamic personalization: The interface evolves based on user behavior, preferences, and context, reducing friction.‍
  • Real-time adaptability: AI interfaces can adapt instantly, providing relevant suggestions, predictions, or decisions without user input.
  • Example: Cursor’s interface is uniquely tailored for coding workflows, making it much more effective and user-friendly compared to alternatives like GitHub Copilot.Developers consistently highlighted the seamlessness of its design and functionality as a reason for their satisfaction.
  • Cursor’s performance against Copilot was seen as strong, especially in use cases where UI/UX and user experience matter most.
  • By forking open tools like VS Code, Cursor has also created technical differentiation and appeal among power users.

• Proprietary data creates unique advantages for AI models, as they learn and adapt based on datasets competitors can’t access.
  • Example: An enterprise search product like Glean gains an edge by aggregating organizational knowledge in one place. Over time, its search functionality improves because it is fine-tuned on unique company-specific datasets.
  • Audio companies like ElevenLabs gathering synthetic voice feedback can tailor better outputs than competitors with generic data.

Outlook for Growth-Stage Fundraising:

• SaaS (Software as a Service)
  • Challenges: Fundraising for SaaS companies is expected to remain difficult unless they exhibit exceptional growth. Companies growing at 20-30% annually will face significant challenges attracting investment.
  • Growth Threshold: Only companies demonstrating 100%+ growth rates or clear paths to accelerating growth will attract investor interest.
  • Focus for Founders: SaaS founders need to focus on their "next act" to drive growth acceleration, as growth is the primary metric investors will prioritize over profitability.
• Consumer
  • Contrarian Bets: Rahul mentioned making a few contrarian investments in consumer companies. These are harder bets in the current market climate but were driven by the belief in exceptional founders.
  • Value Creation with AI: Many consumer companies will derive operational efficiencies and margin improvements (200-400 basis points) through AI integration, even if AI isn't core to their product offering.
  • Survival Dynamics: The market is polarizing into "haves and have-nots," where only standout consumer businesses will thrive in raising funds.
• AI
  • Strong Outlook: AI remains a hot sector, with significant investor interest continuing into the next year.
  • Differentiation: Companies need to demonstrate exceptional traction, growth, and retention to secure funding, as competition is intense.
  • Market Saturation: While some AI companies that were highly valued in 2023 are cooling off, others with clear differentiation and potential for massive scalability will continue to raise at premium valuations.
  • Move fast to capitalize on opportunities, as the competitive landscape, especially from hyperscalers, is evolving quickly.
  • Focus on retention and growth over unit economics at this stage of the cycle
• General Outlook
  • AI Leading the Pack: While AI dominates investor interest, both SaaS and consumer categories face significant challenges in securing growth-stage funding, with AI currently positioned as the most attractive segment.‍
  • Polarization: The market is increasingly divided, with a few standout companies across all sectors capturing most of the investment dollars.