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Original article

a16z Growth's David George on His Frameworks for Late-Stage Investing

Key takeaway

• For entrepreneurs: Focus on creating a unique product and distribution strategy, as these are the primary drivers of long-term success and investor interest in growth-stage companies.
• For investors: Look beyond traditional business model analysis and consider the "right side of the fan" - the potential for outsized growth and market expansion that may not be immediately apparent.

Summary

David George, head of a16z Growth fund, discusses his approach to growth-stage investing, emphasizing the importance of unique products, market potential, and long-term market structure. He highlights the advantages of being connected to a venture fund, the power law dynamics in tech markets, and the need to focus on inputs rather than outputs when making investment decisions.

Insights

• Investment Framework Components:
  • Uniqueness of product → The uniqueness of a product is a critical factor in assessing growth-stage investments, often more important than traditional business model analysis.
  • Market differentiation
  • Business model (considered "table stakes")
  • Management team dynamics
• Key Investment Principles:
  • Most successful investments have highly unique products
  • Alpha comes from product and market uniqueness, not standard business model analysis
  • Focus on "right side of the fan" - potential extraordinary outcomes → Growth investors should pay adequate attention to the "right side of the fan" - the potential for outsized success and market expansion.
  • Understand how market trends can dramatically expand initial TAM
• Market Structure Observations:
  • Most technology markets follow a power law distribution → Most technology markets follow a power law distribution, with market leaders capturing the majority of value.
  • First-place companies capture 80-90% of market value
  • Scale and increasing returns are typical in tech industries
• Other
  • The best businesses have both unique products and unique distribution strategies.
  • Business model innovation can lead to significant competitive advantages and organic growth.
  • Understanding the long-term market structure is crucial for identifying potential market leaders.
  • Growth-stage investing benefits greatly from the insights and portfolio of an associated venture fund.

Implications

• Investors need to look beyond traditional metrics and consider the potential for market expansion and long-term dominance.
• Investors should be prepared to make bets on companies that may not appear to be market leaders initially but have the potential to disrupt incumbents.
• Investors should:
  • Look beyond traditional market sizing
  • Understand emerging market transformations
  • Recognize how product innovation can redefine market boundaries
  • Develop deep product and market understanding
• Entrepreneurs should prioritize developing truly unique products and distribution strategies to attract growth-stage investors.
• Entrepreneurs should:
  • Invest heavily in creating truly differentiated products
  • Think expansively about market potential
  • Build scalable, innovative business models
• Growth-stage firms should focus on identifying and backing potential market leaders rather than spreading investments across multiple players.