Since Marc and I founded Andreessen Horowitz three years ago, we have raised $2.7 billion. That statement begs a few questions. The two most obvious are:

• Why did such a new venture capital firm raise so much money?
• How did such a new venture capital firm raise so much money?

To get to the answers, it’s useful to go back to the original motivation for starting Andreessen Horowitz.

After raising our first round of funding for Loudcloud in 1999, we went to visit our new venture capital firm and meet their full team. As founding CEO, I remember being quite excited to meet our financial backers and talk about how we could partner to build a great company. That excitement took a sharp downhill turn when one of the top partners said to me, in front of my co-founders, “When are you going to get a real CEO?”

I was completely stunned—the comment knocked the wind out of me. Our largest investor had basically called me a fake CEO in front of my team. I said, “What do you mean?”—hoping he would revise his statement and enable me to save face. Instead he pressed on: “Someone who has designed a large organization, someone who knows great senior executives and brings prebuilt customer relationships, someone who knows what they are doing.”

I could hardly breathe. It was bad enough that he undermined my standing as CEO, but to make matters worse, I knew that at some level he was right. I didn’t have those skills.  I had never done those things. And I did not know those people. I was the founding CEO, not a professional CEO. I could almost hear the clock ticking in the background as my time running the company quickly ran out.

Could I learn the job and build my network fast enough or would I lose the company? That question tortured me for months.

In the years that followed, I remained CEO, for better or worse. I worked incredibly hard to close the gap between what the partner had described and where I was at the start. Thanks to a lot of effort and help from friends and mentors, especially Bill Campbell, the company survived and ultimately became quite successful and valuable.

However, not a day went by when I didn’t think about that interaction. I always wondered how long I had to grow up and how I could find help to build my skills and make the necessary connections along the way.

Marc and I discussed this often. We wondered aloud why as founders we had to prove to our investors beyond a shadow of a doubt that we could run the company, rather than our investors assuming that we would run the company we’d created. This conversation ultimately became the inspiration for Andreessen Horowitz.

Marc and I share a simple belief that became the basis for our new venture capital firm: in general, founding CEOs perform better than professional CEOs over the long term, and a venture capital firm that enables founding CEOs to succeed would help build the best companies and yield superior investment returns.

As we set out to design a venture capital firm that would enable founders to run their own companies, we began by asking: In what ways are professional CEOs superior to founder CEOs?

Professional CEOs bring two core advantages to the table:

• Superior skill set – Being CEO requires vast know-how that is very difficult to gain without extensive experience actually being CEO. Founders with no CEO experience naturally make many critical mistakes during their “on the job training” period. Excellent professional CEOs already have those skills.
• Superior network – Great professional CEOs know lots of outstanding executives and employees. They also know key reporters and analysts, important potential customers and top industry players. Founders tend not to have enough industry experience to know all these people and need to build their networks almost from scratch.

Next, we asked: How might a venture capital firm help close those gaps?

Addressing the skill set issue proved to be difficult because sadly the only way to learn how to be a CEO is to be a CEO. Sure, we might try to teach some skills, but I know from experience that learning to be a CEO through classroom training would be like learning to be an NFL quarterback through classroom training. Even if Peyton Manning and Tom Brady were your instructors, with no experience, you’d get killed the moment you took the field.

We decided that while we would not be able to give a founder CEO all the skills she needed, we would be able to provide the kind of mentorship that would accelerate the learning process. As a result, our first requirement for General Partners is to be an effective mentor for a founder striving to be a CEO. This is why so many of our General Partners are former founders or CEOs or both, and they are all highly focused on helping founders become outstanding CEOs.

Of course, not all founders want to be CEO—there are companies for which the right thing is to bring in a professional CEO. For those companies, we focus on helping the founders identify the right CEO, and then helping the CEO successfully integrate into the company and partner with the founders to retain their unique strengths.

Next, we went after the network.

Existing venture capitalists with whom we had worked with had important industry relationships, but we found them to be lacking in the following ways:

• Siloed – As an entrepreneur, you can often count on the General Partner on your board to introduce you to customers or executives, but you can’t count on the venture capital firm itself. Each General Partner has his own distinct network, and it’s not really feasible or practical to access the other partners’ networks because those partners prioritize their own companies and in practice you will never see them—they are not available to help you. So, there is no firm-wide network you can plug into.
• Hard to access – As CEO it’s always a bit weird to say to your VC, “Please introduce me to some potential customers.” First, it seems like an inconvenience—VCs are clearly busy people with many other things to do. Second, there isn’t any easy process to execute that introduction. Where will this introduction take place? Will the VC set up the meeting? Will you have to fly out to see the prospect? Will the VC come with you? Will the prospect be qualified well enough to do that? If not, then should you even ask? To make matters worse, the need to meet customers is not a one-time event. How do you ask your VC the second, third and tenth times? And at what point does your VC start to judge you as incapable of reaching customers (or partners, distributors, suppliers, investors or acquirers) on your own?
• Incomplete – Finally, VC networks tend to be incomplete. A certain General Partner might know a certain type of customer like telecom carriers, but not others like pharmaceutical companies or government agencies. They may know customers, but not have deep relationships with key reporters. They may know key reporters, but not know executives you would want to hire. They might know executives, but not engineers. As founding CEO, one tends to be busy. If you spend time trying to tap a network and come up empty, you probably won’t bother trying again.

To address these issues, we designed Andreessen Horowitz’s network to be firm-wide, dead simple to access and comprehensive—supported by operating partners who work full-time to develop and manage each branch of the network.

This approach has already lead to some stunning results:

• In 2011, we hosted over 600 portfolio presentations to corporate customers and partners at our office in Menlo Park. These presentations resulted in more than 3,000 introductions between portfolio companies and prospective Fortune 500/Global 2000 senior executives.
• We’ve built relationships with over 4,000 engineers, designers and product managers, and we’ve made more than 1,300 introductions to our portfolio companies, resulting in 130 hires within the portfolio.
• We added over 550 executives to our network in 2011 and made more than 300 executive introductions to our portfolio companies.
• We’ve had nearly 400 interactions with media on behalf of our portfolio companies.

Through these practices, we’ve been able to help founders develop critical CEO skills and wield networks as broad and powerful as the best professional CEOs. And that is why we have become a popular firm among founders.

Our reputation with founders has then enabled us to invest in great entrepreneurs building the great new technology companies. Interestingly, the demand from entrepreneurs has come in all stages and sizes. From seed stage entrepreneurs like JR Rivers at Cumulus Networks to entrepreneurs with fast growing enterprises like Brian Chesky at Airbnb, great founders everywhere want to be the best CEO that they can be and work with us to help them do that.

And that’s both how and why we raised $2.7 billion. We are uniquely positioned to help the greatest technology entrepreneurs in the world build the best technology companies in the world, and that’s just what we’re going to do.

Many years ago, I encountered a particularly tricky management situation. Two excellent organizations in the company, Customer Support and Sales Engineering, went to war with each other. The Sales Engineers escalated a series of blistering complaints arguing that the Customer Support team did not respond with urgency, refused to fix issues in the product, and generally inhibited sales and customer satisfaction. Meanwhile, the Customer Support group claimed that the sales engineers submitted bugs without qualification, did not listen to valid suggested fixes, and were alarmists who assigned every issue the top priority. Beyond the actual complaints, the teams genuinely did not like each other. To make matters worse, these groups had to work together constantly in order for the company to function. Both teams boasted superb personnel and outstanding managers, so there was nobody to fire or demote. I could not figure out what to do.

During this time, I miraculously happened to watch the motion picture classic Freaky Friday starring the underrated Barbara Harris and the incomparable Jodie Foster—note: there is also a high quality remake starring Jamie Lee Curtis and the troubled, but talented Lindsey Lohan. In the film, mother and daughter grow completely frustrated with each other’s lack of understanding and wish that they could switch places and they do:

Through the course of the movie, by being inside each other’s bodies, both characters develop an excellent understanding of the challenges that the other faces. As a result, the two women become great friends when they switch back. After watching both the original and the remake, I knew that I had found the answer: I would employ a Freaky Friday management technique.

The very next day I informed the head of Sales Engineering and the head of Customer Support that they would be switching jobs. I explained that, like Jodie Foster and Barbara Harris, they would keep their minds, but get new bodies. Permanently. Their initial reactions were not unlike the remake:

However, after just one week walking in the other’s moccasins, both executives quickly diagnosed the core issues causing the conflict. They then swiftly acted to implement a simple set of processes that cleared up the combat and got the teams working harmoniously. From that day to the day we sold the company, the sales engineering and support organizations worked better together than any other major groups in the company—all thanks to Freaky Friday, perhaps the most insightful management training film ever made.

Thanks to Ward Cunningham, the metaphor technical debt is now a well-understood concept. While you may be able to borrow time by writing quick and dirty code, you will eventually have to pay it back—with interest. Often this trade-off makes sense, but you will run into serious trouble if you fail to keep the trade-off in the front of your mind. There also exists a less well-understood parallel concept, which I will call management debt.

Like technical debt, management debt is incurred when you make an expedient, short-term management decision with an expensive, long-term consequence. Also like technical debt, the trade-off sometimes makes sense, but often does not. More importantly, if you incur the management debt without accounting for it, then you will eventually go management bankrupt.

Like technical debt, management debt comes in too many different forms to elaborate entirely, but a few salient examples will help explain the concept. For this post, I choose 3 of the more popular types among startups:

1. Putting two in the box
2. Over compensating a key employee, because she gets another job offer
3. No performance management or employee feedback process

Putting two in the box

What do you do when you have two outstanding employees who logically both fit in the exact same place on the organizational chart? Perhaps you have a world-class architect who is running engineering, but she does not have the experience to scale the organization to the next level. You also have an outstanding operational person who is not great technically. You want to keep both in the company, but you only have one position. So, you get the bright idea to put “two in the box” and take on a little management debt. The short-term benefits are clear: a) you keep both employees, b) you don’t have to develop either because they will theoretically help each other develop, c) you instantly close the skill set gap. Unfortunately, you will pay for those benefits with interest and at a very high interest rate.

For starters, by doing this you will make every engineer’s job more difficult. If an engineer needs a decision made, which boss should she go to? If that boss decides, will the other boss be able to override it? If it’s a complex decision that requires a meeting, does she have to schedule both heads of engineering for the meeting? Who sets the direction for the organization? Will the direction actually get set if doing so requires a series of meetings?

In addition, you have removed all accountability. If schedules slip, who is accountable? If engineering throughput becomes uncompetitive, who is responsible? If the operational head is responsible for the schedule slip and the technical head is responsible for throughput, what happens if the operational head thrashes the engineers to make the schedule and kills throughput? How would you know that she did that? The really expensive part about both of these things is that they tend to get worse over time. In the very short-term you might mitigate these effects with extra meetings or by attempting to carve up the job in a clear way. However, as things get busy the mitigation will fade and the organization will degenerate. Eventually, you’ll either make a lump sum payment by making the hard decision and putting one in the box or your engineering organization will suck forever.

Over compensating a key employee because she gets another job offer

An excellent engineer decides to leave the company because she gets a better offer. For various reasons, you were undercompensating her, but the offer from the other company pays more than any engineer in your company and the engineer in question is not your best engineer. Still, she is working on a critical project and you cannot afford to lose her. So you match the offer. You save the project, but you pile on the debt.

Here’s how the payment will come due. You probably think that your counteroffer was confidential because you’d sworn her to secrecy. Let me explain why it was not. She has friends in the company. When she got the offer from the other company, she consulted with her friends. One of her best friends advised her to take the offer. When she decided to stay, she had to explain to him why she disregarded his advice or lose personal credibility. So she told him and swore him to secrecy. He agreed to honor the secret, but was incensed that she had to threaten to quit in order to get a proper raise. Furthermore, he was furious that you overcompensated her. So, he told the story, but kept her name confidential to preserve the secret. And now everyone in engineering knows that the best way to get a raise is to generate an offer from another company then threaten to quit. It’s going to take awhile to pay off that debt.

No performance management or employee feedback process

Your company is now 25 people and you know that you should formalize the performance management process, but you don’t want to pay the price. You worry that doing so will make it feel like a “big company”. More so, you do not want your employees to be offended by the feedback, because you can’t afford to lose anyone right now. And people are happy, so why rock the boat? Why not take on a little management debt?

The first noticeable payments will be due when somebody performs below expectations:

CEO: “He was good when we hired him, what happened?”

Manager: “He’s not doing the things that we need him to do.”

CEO: “Did we clearly tell him that?”
Manager: “Maybe not clearly . . .”

However, the larger payment will be a silent tax. Companies execute well when everybody is on the same page and everybody is constantly improving. In a vacuum of feedback, there is almost no chance that your company will perform optimally across either dimension. Directions with no corrections will seem fuzzy and obtuse. People rarely improve weakness that they are unaware of. The ultimate price you will pay for not giving feedback: systematically crappy company performance.

In the end

Every really good, really experienced CEO that I know shares one important characteristic: they tend to opt for the hard answer to organizational issues. If faced with giving everyone the same bonus to make things easy or sharply rewarding performance and ruffling many feathers, they’ll ruffle the feathers. If given the choice of cutting a popular project today, because it’s not in the long-term plans or you’re keeping it around for morale purposes and to appear consistent, they’ll cut it today. Why? Because they’ve paid the price of management debt and they would rather not do that again.

Special thanks to my friend Joanne Bradford who came up with the idea for this post and coined the term “management debt”.

Early in my tenure as product manager for the web servers at Netscape, we faced a terrible crisis. We just got our hands on Microsoft’s new web server, Internet Information Server (IIS), and benchmarked against our product. Microsoft’s IIS had every feature that we had, was five times faster and we knew that they were going to give it away for free. This might not sound so bad, but we had just gone public three months earlier with a story to Wall Street that said, “Don’t worry about Microsoft giving away the browser because we will make money selling servers.” Oh snap.

I immediately went to work trying to move the playing field and pivot the server product line to something that we could sell for money. The late, great Mike Homer and I worked furiously on a set of partnerships and acquisitions that would broaden the product line and surround the web server with enough functionality that we would be able survive the attack.

As I excitedly reviewed the plan with my engineering counterpart, Bill Turpin, he looked at me as though I was a little kid who had much to learn. Bill was a long-time veteran of battling Microsoft from his time at Borland and understood what I was trying to do, but remained unconvinced. He said: “Ben, those silver bullets that you and Mike are looking for are fine and good, but our web server is five times slower. There is no silver bullet that’s going to fix that. No, we are going to have to use a lot of lead bullets.” Oh snap.

As a result of Bill’s words, we focused our engineering team on fixing the performance issues while working the other things in the background. We eventually beat Microsoft’s performance and grew the server line to become a $400M business and we would never have done it without those lead bullets.

I carried that lesson with me for many years. Six years later, when I was CEO of Opsware, our toughest competitor Bladelogic started to consistently beat us in large deals. We were a public company and the losses were all too visible. To make matters worse, we needed to win those deals in order to beat the Wall Street projections, so the company felt tremendous pressure. Many of the smartest people in my company came to me with ideas for avoiding the battle:

• “Let’s build a light-weight version of the product and go down market.”
• “Let’s acquire a company with a simpler architecture.”
• “Let’s focus on service providers.”

The issue with their ideas was that we weren’t facing a market problem. The customers were buying; they just weren’t buying our product. This was not a time to pivot. So I said the same thing to every one of them: “There are no silver bullets for this, only lead bullets.” They did not want to hear that, but it made things clear: we had to build a better product. There was no other way out. No window, no hole, no escape hatch, no backdoor. We had to go through the front door and deal with the big, ugly guy blocking it. Lead bullets.

After nine months of hard work on an extremely rugged product cycle, we regained our product lead and eventually built a company that was worth $1.6B. Without the lead bullets, I suspect we would have ended at about 1/10^th that value.

There may be nothing scarier in business than facing an existential threat. So scary that many in the organization will do anything to avoid it. They will look for any alternative, any way out, any excuse not to live or die in a single battle. I see this often in start up pitches. The conversations go something like this:

Entrepreneur: “We have the best product in the market by far. All the customers love it and prefer it to competitor X.”
Me: “Why does competitor X have five times your revenue?”
Entrepreneur: “We are using partners and OEMs, because we can’t build a direct channel like competitor X.”
Me: “Why not? If you have the better product, why not knuckle up and go to war?”
Entrepreneur: “Ummm.”
Me: “Stop looking for the silver bullet.”

There comes a time in every company’s life where it must fight for its life. If you find yourself running when you should be fighting, you need to ask yourself: “If our company isn’t good enough to win, then do we need to exist at all?”

A year ago I wrote about a very special entrepreneur, Christian Gheorghe, who escaped Communist Romania, migrated to America, and—after starting here with $27 as a limo driver and construction worker—eventually became a computer scientist and an entrepreneur. I indicated that just as he broke from an oppressive, totalitarian regime, he planned to free his customers from the oppression of enterprise software. Today Christian announces his new company Tidemark and I finally get to tell you how he will redefine and reinvent enterprise performance management and, more broadly, data analytics.

As we enter the age of the cloud/mobile platform, Tidemark provides a compelling example of why future applications will be far superior to the current generation. By properly using the bursting capabilities of the cloud, Tidemark benchmarks out at 1,000 times the performance of current solutions, which sometimes take 6 or 7 days to consolidate financials across a business. By using the iPad as the primary user interface target, Tidemark is highly accessible to business people and not just data analysts.

Both of these advances turn out to be critically important. If it takes a week to consolidate financial statements, then any scenario planning will be stale by a minimum of one week. In today’s real-time business environment, that’s ridiculous and certainly uncompetitive. Anybody who has been in business for any length of time knows that the data represents a portion, but not all of the business. In the same way that a map is not the terrain, the spreadsheet is not the business. As a result, having data analysts analyze data and the managers of the business attempt to make decisions on that basis is far from optimal. By making the data and its analysis directly available to the people with the knowledge, Tidemark transforms decision quality.

Beyond these platform advantages, Tidemark changes the nature of data analytics by ditching the two fundamental and problematic questions on which the existing industry is based:

• What data do I have?
• What reports do I want?

The trouble with these questions is that a) it is highly unlikely that you’ve gathered all of the relevant data in the right schema and format prior to needing it, b) businesses are not best represented in reports and c) the reports generally say very little that’s interesting about the future. As a result, companies that analyze their businesses with off-the-shelf products tend to do a far worse job than companies like Google who use data to achieve massive competitive advantage through teams of brilliant engineers.

Christian replaced these two ancient questions with far better ones:

• How does our business work?
• How do we want to measure it, understand it, and predict what will happen next?

Tidemark’s software begins by literally capturing a blueprint of the customer’s business. If you think of a business as a series of processes executed by a variety of people designed to create specific, measurable outcomes then you get the basic idea of how Tidemark defines a blueprint and aligns itself to the business. It’s a great alignment, because when you think about it, processes cover the import aspects of a business—product development process, sales process, financial planning process, etc. Tidemark enables companies to capture their process architecture and the related key performance indicators in software. Once Tidemark understands how a business works and how the company wants to measure and understand it, it can help the company forecast future results, scenario plan, and continuously improve.

For those of us who have been around this kind of software for years, Tidemark’s breakthroughs are breathtaking. It’s a product that delivers on a 30-year vision in the same way that the iPhone finally fulfilled the dream of the Newton.

Christian is the shining example of why an open and benevolent immigration policy for oppressed peoples is the right one. Before he is done, he will make thousands of U.S. businesses more competitive, employ many Americans, and lead the way for other companies to follow and improve their approach to software. And all we had to do was give him a chance.