Technology Investors Worth Following

Despite the Buffett-ism that investing in technology is a fool's errand, many people have consistently shown themselves able to navigate the sector comfortably -- and make a killing doing so.

In this week's episode of Industry Focus: Tech, Sean O'Reilly and Dylan Lewis talk about Marc Andreessen and Peter Thiel, two wildly successful, tech-oriented venture capitalists and entrepreneurs. Find out how they've done so well investing in such a notoriously volatile sector, how looking at the moves that VCs like them make can give you hints about a company's prospects, what they can teach us about where technology is heading, and more.

A full transcript follows the video.

This podcast was recorded on April 21, 2016. 

Sean O'Reilly: Dylan and I discuss our tech leader crushes, on this technology edition of Industry Focus. Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Thursday, April 21, 2016, and joining me in studio is the snappily dressed Mr. Dylan Lewis. Dylan, it's a Thursday! And we're here! Talking tech!

Dylan Lewis: Yeah, it's a little odd. I thought you actually said the date wrong at first. We've done some times where we've pre-taped and you've caught yourself, and been like, "Ah, no, let me start over and say Friday's date." But no, we have flipped it up. We wanted to allow Tyler Crowe to hang out with a friend in town, so we agreed to switch the Thursday energy show and the Friday show. Just this once.

O'Reilly: Tyler, if you're listening, you have a lot of moxie.

Lewis: Yeah.

O'Reilly: Anyway. We're shaking it up a little today, but I'm actually really excited. I don't have much in the way of notes, and I don't think you do, either.

Lewis: No.

O'Reilly: I just have some bullet points. We're going to talk about two tech leaders that we follow closely, to see what they're up to, to see what we can learn from them, and more importantly, to glean what they think about the future of investing in technology. Dylan, since you're better-dressed than me today, you have those snappy shoes on ...

Lewis: Yeah, we had a meeting with one of our distribution partners for Fool.com, so I had to dress a little bit nicer than I usually do for the office.

O'Reilly: You have the honors to start us off.

Lewis: Oh, thank you.

O'Reilly: Who are you talking about?

Lewis: I'll be talking about Marc Andreessen. As you've prefaced here, these are people we admire as investors, they're people that are incredibly innovative in the tech space, and they're really fun to follow. They generally tend to be ahead of the investing curve on some of the major trends. That's why we're going to profile them today.

O'Reilly: Awesome! So, who is Mark Andreessen, and why is he awesome?

Lewis: So, quick bullet-point resume for him: He co-authored Mosaic, which was one of the early Internet browsers, and basically got ported over into Netscape, which I'm sure most early Internet users are pretty familiar with. Netscape, of course, went on the be bought by AOL. 

O'Reilly: And destroyed by Microsoft (MSFT -1.84%) and Internet Explorer. [laughs]

Lewis: Yes, the infamous browser wars.

O'Reilly: It wasn't even a war. It was, "We're going to block your browser on all of our operating systems. Have a nice day!" Or, "We're going to heavily promote our own browser," I would be more accurate by saying.

Lewis: Makes it tough to compete. And then, he later went on to launch the venture capital firm Andreessen Horowitz with his friend Ben Horowitz in 2009. They went from having about $300 million in capitalization to around $4 billion AUM in six years.

O'Reilly: Is that by any chance mostly due to capital appreciation?

Lewis: I'm sure there's some capital appreciation. I think it's also people voting with their dollars and realizing that they are doing one heck of a job, and they want to get money with them. He and his firm has been an early investor in Facebook (META 1.54%), Twitter, Pinterest, Oculus, Lyft, Airbnb, and Skype, just to name a few. He currently sits on the board of Facebook, eBay, HP Enterprise, and a couple other smaller names.

O'Reilly: Oh my gosh, I just realized, this was the guy that got the big payday when Microsoft bought Skype.

Lewis: Yep.

O'Reilly: That just clicked for me.

Lewis: He's had a couple big pay days.

O'Reilly: You're listing all these things ... what's Airbnb valued at -- $20 billion, $30 billion?

Lewis: An insane amount of money, yeah. I think, one of the things I wanted to do with him was profile something investors can learn from what he's done in the past, his track record, and an example of signals to pick up on in the marketplace. Andreessen Horowitz was an early investor in Groupon (GRPN -0.61%). A few months before their IPO, the firm participated in this odd funding round they'd had. And they contributed, I think, $40 million, to just under $1 billion for total funding in that rounding. They had an initial investment with a basis around like $7.84 a share.

O'Reilly: This was back, if my memory serves, Groupon was, like, the fastest-growing company ever?

Lewis: Absolutely, they were exploding. And it was one of those cases where the popularity they were experiencing was outpacing the business development, and the core fundamentals of how they would make money and how will it make sense and how will it be palatable to mainstream investors.

O'Reilly: I distinctly remember reading an article in Forbes or something when they were operating in a warehouse in Chicago or something, and it was like, of their size, Groupon was the fastest-growing, in terms of revenues, businesses on record. It was just blistering growth. He obviously saw that. [laughs]

Lewis: Yes, and he got in, as many venture capitalists do. But, shortly after the sale, they wound up selling their shares.

O'Reilly: Right after the IPO.

Lewis: Well, immediately after the lock-up period on those private equity shares expired, and they were able to sell. So, a couple months after the IPO, they were able to liquidate their shares. And shortly after the sale, it was reported, Mr. Andreessen was among several Groupon advisors who had urged the firm not to go through with IPO as planned, basically believing that they should pull the IPO, there would be a lot of intense scrutiny on the business, it's not a business that people are very used to seeing yet, and the metrics aren't ones that people are familiar with, so they'd face a lot of the skepticism that a lot of Internet companies do post-dot-com boom and bust.

O'Reilly: That's interesting. If I'm reading what you just said correctly, they wanted Groupon to be able to show more cash flow?

Lewis: Wall Street financials.

O'Reilly: Yeah, that's what they wanted. And Andreessen just thought Groupon wasn't there.

Lewis: Yeah, which is actually kind of counter in a lot of ways. Typically, you think about these VCs cashing out as soon as they can because they just want to get their money out, they want to exit. But this was the situation where he felt like the business should not have gone public yet. It's kind of odd, a little flip.

O'Reilly: Yeah, it's like, you don't want your money yet?

Lewis: Yeah. Maybe he saw more potential there that they weren't realizing, or was worried that an unfavorable market reaction would hurt his ability to exit. So that's why he was pushing them against that. But, obviously, as an investor, when you see something like that happen -- so they'd been public for about five or six months when Andreessen Horowitz cashed out -- you have to pump the brakes a little bit and look at, what does that signal? This is someone who knows the tech space very well, someone who knows software companies incredibly well. And, to no surprise, Groupon is down about 60% since they cashed out.

O'Reilly: Unfortunately for Groupon and its shareholders, history has proven him right.

Lewis: Absolutely. And I know some people might say, "Well yeah, he sold some of his personal Facebook shares in late 2015." He has a lot of personal Facebook shares in his portfolio. And yes, that's true. But I think there are some differences here. The stock had appreciated 175% on the public markets when he made that sale. So wherever he bought in as a VC, he's doing even better than that. He didn't totally liquidate his position; I think he sold about half of it. And some of the stock that he owned in that deal was actually tied to the Oculus acquisition. That was part of the financing for that deal. So not all of his Facebook shares were intentional shares, so to speak. And lastly, he still sits on the Facebook board.

O'Reilly: Yeah, he's not leaving.

Lewis: Yeah. So I think this Groupon example is a really great example of signals that VCs can send to the market. As an everyday investor, we don't have access to these early round funding meetings and what's going on behind closed doors. But when you see these kinds of things happening, you have to question what's going on with some of these businesses.

O'Reilly: Right. Let me ask you a question. If you found out he was selling all of his shares in Facebook, how nervous would you be about Facebook?

Lewis: I'd be a little nervous.

O'Reilly: You would be.

Lewis: Yeah. I mean, I totally understand him wanting to sell some of them, and enjoy some of that --

O'Reilly: Yeah, I imagine it was becoming an increasingly large percentage of his portfolio, so it was like, OK, diversification, a little bit.

Lewis: Yeah. And for him, he takes a lot of small bets. 

O'Reilly: As he should.

Lewis: Him liquidating half his position in Facebook allows him to take very small positions in a whole bunch of VC placements that can then balloon up in growth. So it makes sense for his investing style. But there's a reason he still has a stake in them. And then, with this focus on Andreessen, I think one of the things I wanted to pivot to is what he's looking at now.

O'Reilly: Which I'm super interested in.

Lewis: He is very well known for this idea of software is eating the world. That's actually the credo of Andreessen Horowitz.

O'Reilly: In a good way or bad way?

Lewis: He thinks it's a good way.

O'Reilly: [laughs]

Lewis: I think, if you're a legacy manufacturer or something, you might hate it. It's Andreessen Horowitz's credo, it's the tag line on their site, and it shows in his investments. If you want a full sense of his thinking, he actually wrote an essay with that as the title, "Software Is Eating the World." It's available on The Wall Street Journal. I think it published in 2011. I'm not going to rehash the whole thing here, but I think one little snippet here gives you a good sense of how he feels and how he invests. It is: "My own theory is that we're in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swaths of the economy." He goes on to say, "Over the next 10 years, I expect many more industries to be disrupted by software with new world-beating Silicon Valley companies doing the disruption in more cases than not."

O'Reilly: Wow!

Lewis: He goes on to itemize several different industries that are ripe for disruption, and not the ones you always think of. Healthcare is one of them, manufacturing is one, the financial services industry, which we see a little bit here at the Fool.

O'Reilly: Are they going to replace us with software? Is that what you're telling me? [laughs]

Lewis: I hope not! [laughs] Do I still have a job? So, this is kind of his ideology. He's very much a software, work smart, platform play kind of investor. And I thought it would be interesting to profile a couple of the most recent Investments that Andreessen Horowitz has made. They make a lot of small bets and you can't read too much into any single one, but I think, again, this track record will illustrate what he's interested in. January 2016, the firm led an $8.1 million A round in Everlaw, which is a legal technology company. Basically, it is this cloud service that law firms can use. It's for document storage, search, and accessibility, making the discovery phase of the legal process much easier, much less onerous.

O'Reilly: That's not a lot of money, by the way. You're talking about making lots of small bets. Not to begrudge $8 million, but yeah.

Lewis: Yeah. In the grand scheme of what they have under management, right. More recently, in March, the firm led a round for Branch.co, which is a digital financial services firm. Basically, they are taking mobile tech and bringing it to sub-Saharan Africa and helping people that would not have access to credit ratings or creditworthiness, be able to take out loans. So, instead of saying, "All right, this is your credit history, and this is what you qualify for," they're using other data points to build up someone's credit history and creditworthiness. This is a firm that is helping people who probably otherwise would go unbanked, have access to credit and loans, to be able to facilitate some of that stuff. And most recently, Andreessen Horowitz led a round for SkySafe, which is a start-up that is developing drone disabling systems.

O'Reilly: That sounds like a great idea right now! [laughs]

Lewis: The idea here is, if drones go rogue, or if people are being nefarious with drones --

O'Reilly: Or, you could sell it to FedEx or UPS and they could use it on the [Amazon.com] drones that are totally coming.

Lewis: [laughs] Yeah. The thought here is, if drones are where people don't want them to be, they are going to be using some sort of radio wave technology to override the drone's remote and take control of the aircraft and usher it out into the area it should be.

O'Reilly: Get it out to sea! [laughs]

Lewis: So, what you see with all these types of investments is, they're software plays, they're scalable, and they're working smarter. A lot of people are very big on drones, and rightfully so. It's something that's poised to explode in a lot of ways. But he is not interested in the hardware side of drones.

O'Reilly: Right, he's interested in the software, because anyone can make the hardware.

Lewis: Right. I think Andreessen Horowitz has invested in Jawbone, the wearable manufacturer. But even that as a hardware play is still kind of a platform play, because you have the health tracking and the nudges on the tracking side. So you're not saying a lot of hardware stuff here, it's all stuff that's software.

O'Reilly: Cool. Well, before we dive in to talking about Peter Thiel, I wanted to point any listeners out there that are hungry for more Foolish content to focus.fool.com, where all Industry Focus listeners have access to a special discount on the Motley Fool Stock Advisor newsletter. The discount works out to $129 for a full two-year subscription. Once again, the website is focus.fool.com.

So Dylan, thanks for sharing about Marc Andreessen. When you were talking, I couldn't help but notice the scores of similarities between Marc and the gentleman who I want to talk about, Peter Thiel. Not only does Peter Thiel have a net worth of $1.5 billion, but he's also a U.S.-ranked chess grand master.

Lewis: Wow!

O'Reilly: Do not play him in chess.

Lewis: Sharp guy.

O'Reilly: And not only that, but it's really weird -- listeners, I highly recommend you get his book Zero to One, which I'll discuss in a second. But also, just go to YouTube and type in Peter Thiel. There's lots of great videos about him talking about business and start-ups and all this, and there's also [laughs] this really funny video of him walking around New York with Garry Kasparov, the chess grand master from the '90s? Ringing any bells? Anyway, he's walking around New York talking about politics and technology with Garry Kasparov, visiting chess clubs.

Lewis: That's pretty cool.

O'Reilly: It's really cool.

Lewis: Are they doing it as ringers? Or as "We're these guys who are very good at chess?"

O'Reilly: Yes. I highly recommend you check it out. It has a weird title, something like "Into the Night With Garry Kasparov and Peter Thiel," and they're just going around talking about life and stuff, but they're visiting all these chess clubs in New York. Anyway. Peter Thiel was born in West Germany in 1967. He found his way to the United States, I think they moved here when he was 1. He attended Stanford University studying philosophy, and he received his J.D. from Stanford Law in 1992. He has a philosophy degree, he's a lawyer, he's a chess grand master.

Lewis: And I'm guessing you're going to get to his tech credentials at some point?

O'Reilly: It gets even better from there. Because, obviously, if I just described this individual, you'd be like, "Wow, this is a really sharp guy, a lawyer and all this stuff." He is a co-founder of PayPal (PYPL -1.83%), he's one of --

Lewis: The PayPal Mafia?

O'Reilly: Yeah. In fact, I found this great photo I meant to show you before we went on air, all of them playing poker and there's Scotch and stuff, and he's in the middle of the photo of the PayPal Mafia. I'll show it to you later. Knew Elon Musk from the PayPal days. In fact, I read this story one time, where after they got the payday from selling PayPal, Musk bought this race car and Thiel was driving with him and Musk wrecked it.

Lewis: And he was like, "You know what? I'll build a better one." [laughs]

O'Reilly: Yeah, "I'll build a better race car," and he did. Since selling PayPal, which probably netted him a couple million dollars, he's had an extraordinarily successful career. Started investing in tech companies, the most prominent of which was Facebook.

Lewis: Early investor, right?

O'Reilly: He was the first outside investor in Facebook. This was actually detailed in the movie The Social Network.

Lewis: Someone depicted him in the movie?

O'Reilly: Yeah. I don't think it was with his blessing or anything. In fact, if you watch The Social Network, the guy that plays him looks nothing like him.

Lewis: He's just a generic VC guy?

O'Reilly: Generic rich guy writing a check. [laughs] Anyway, in addition to that, currently the chairman and founder of Palantir, which is currently private, and I want to hold off on talking about them, because it bears discussing in great deal later. He's been an investor through his Founders Fund and a bunch of other companies, including Yelp, Big Think, Quora, LinkedIn. He won TechCrunch Venture Capitalist of the Year in 2013. He's currently one of 10 part-time partners in venture capital seed accelerator Y Combinator. He's in on everything.

His philosophy, how he views businesses and everything, is put together in a book. I cannot recommend this book enough. The reason I wanted to talk about Peter Thiel today was, I came to investing when I was 15, reading books about Warren Buffett. I remember specifically wandering into my local library in a suburb of Cleveland, I saw this book, How to Pick Stocks Like Warren Buffett, and it has this old guy on the cover, and it's like, what the heck is going on? First thing I learned was stay away from tech at all costs.

Lewis: Very different ideology from what Peter Thiel is interested in.

O'Reilly: Right. He said, stay away from it at all costs, it's unpredictable. As you age, though, you start to notice that's not quite right. And I couldn't put into words why I got that inkling, I didn't really buy any tech shares. But the value of what technology does, and how you can invest in it successfully. is perfectly enunciated by Peter Thiel in this book, Zero to One.

Lewis: What are some of the main points?

O'Reilly: Right. The book is actually a compilation of what he taught in a Stanford entrepreneur class.

Lewis: Really?

O'Reilly: Yeah, this was a class he was teaching.

Lewis: As an adjunct professor? Entrepreneur in residence or something like that?

O'Reilly: Yeah. Basically, the book Zero to One is about how a business like Coca-Cola, Buffett invested in them and made $10 billion in it in the late '80s, it does not push our civilization and society forward. Makes lots of money, gobs of cash flow, does not push things forward. A business like Microsoft, which has made billions of humans on this planet more productive with word processing and Excel alone, helps our species and civilization move forward. And Zero to One is where that comes from, nothing to something.

He looks for businesses that do that and, in so doing, create monopolies. He's all about monopolies, and he thinks competition is dumb. So any business that he invests in, and he cites Google as a prime example of this, is going to build a monopoly around being so disruptive and so good at what they do, that they're not an evil monopoly where the government protects them and it's this evil thing or whatever. They have a monopoly by being so good that nobody else can possibly compete with them. A primary example is Google.

Lewis: So, businesses with extremely strong competitive moats.

O'Reilly: Yeah. And, really quick, before we wrap up, I wanted to highlight one more combination there. He is all about software as well. The Palantir company I cited --

Lewis: Is that what he's currently interested in right now?

O'Reilly: Yes. He's invested in that open AI thing that Elon Musk is into, about making sure that AI doesn't kill all of us like in The Terminator. Palantir is basically the merging of humans and AI. Basically, they look for defense threats against IT infrastructure in the United States. The United States Department of Defense is a major customer. Basically, they created software that identifies potential threats, and it whittles down all potential threats to ... I'm making this up, but a couple hundred potential threats, then a human analyst at Palantir's headquarters whittles it down from there. Because, it's that last 1% of potential threats that a human needs to get a feel for.

Lewis: So it's kind of like guided analytics?

O'Reilly: Yeah. He thinks the future is very software-based, and it's not going to be about humans being replaced by software, but how we're going to work with it and become more effective working with it.

Lewis: And again, obviously, the defense industry is something that has always made use of technology, but it's not where maybe technology's best and brightest have focused. And this is just another example of that mind-set changing quite a bit.

O'Reilly: Right. And he's already made a billion dollars out of this thing. Cool. Dylan, any final thoughts before we head out?

Lewis: Yeah, one thing I really like about Andreessen Horowitz is, their site, a16z.com, has a lot of information and resources available for the Average Joe. They do regular podcasts, they'll feature talks that Marc or Ben, the namesakes, do. So just, in addition to following them in the news or seeing how their firm operates with companies they've seeded, and how they handle it once they've gone public, that's an interesting resource in another great place to check.

O'Reilly: Yeah, I know what I'm doing after this. Thanks.

Lewis: And also, our writer Sam Mattera interviewed Peter Thiel last year. So we have a couple articles that came from that. If listeners are interested in getting any of those articles, we can get a bunch of links together.

O'Reilly: Yeah. And on that note, if you want those articles or just want to give us a shout out, feel free to hit us up at [email protected]. Once again, that is i[email protected]. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!