Sunday, September 8, 2013

Sunday Night Scotch: Andreesen Wrong About Nearly Everything, But That's His Business Model and He Will Win Anyway

...You fell victim to one of the classic blunders! The most famous of which is "never get involved in a land war in Asia," but only slightly less well-known is this: "Never go in against a Sicilian when DEATH is on the line!" [He laughs hysterically, but suddenly freezes mid-laugh and dies]

- Vizzini from "The Princess Bride"

I thought it would be useful to reprise last Sunday's blog with a counterpoint. I think I may have mistakenly created the impression that I had some sort of bias against VMware CEO Pat Gelsinger when I opined last week on his outburst regarding the relative merits of ARM vs. x86. That was certainly not my intent, but the problem is that Mr. Gelsinger got into an argument with the wrong guy: he decided to take on a venture capitalist. There are a number of problems with this, and so I thought I would waste a few words to try and explain the relative difference between the ways the two men frame their opinions.

Let's begin with a simplistic explanation of portfolio theory. Specifically venture portfolios. It is often overlooked precisely how Mr. Andreesen makes his money. No one should be surprised by this, but a typical VC is managing some pretty immense risks. On the flip side, he or she has some outsize payouts should one of the immense risks actually pan out. On the face of it, the math starts to look astonishing: A 10-20% win ratio will generate some bubbly returns even after the exorbitant fees are taken out.

So when you parse the publicly held opinion of a VC, you need to keep in mind that they are making crazy bets all day with huge sums of money. Moderately crazy bets wont do, because they can't generate the returns needed to justify the fees. They also make lots of these crazy bets to manage the risk. Most importantly, they don't need to make sense relative to one another. For example you may be wondering how we could end up in a server-less world but at the same time, processors that can't run VMs will flourish. Don't do that. It doesn't make sense.

The point is that Mark Andreesen lives in a world of extreme outcomes. All of his opinions need to sound crazy and unhinged. That was the beauty of putting him on the VMworld panel discussion. Even more interestingly, we will never remember him for the 80% of his portfolio that goes mediocre. Being wrong is the most likely outcome. Like we do for professional sports athletes, we will remember him and lionize him for the big wins.

Back to the discussion panel, the CEO of VMware lives in a diametrically opposed world. VMware is a very unique company, but they are still governed by the need to produce stable performance for their customers and employees. They actually have to be right most of the time, or else things will go badly for everyone. To my previous point, Pat Gelsinger and Mark Andreesen should disagree about a lot of things. If not, one of them is going to be a failure.

That said, one or two of the prognostications will eventually pan out, much to everyone's surprise, and will result in a radically changed world. You can't blame a VC for trying to disrupt the status quo. On the other hand, you can be quite alarmed when a CEO lacks the imagination to consider the factors that may lead to his firm's demise. (That was the point of my post.) We know from experience that disruption is inevitable, and stability is fleeting at best. Makes you want to align with the disruptors, doesn't it?

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