David George, General Partner and head of growth at Andreessen Horowitz (A16Z), joins Bloomberg's Odd Lots hosts Joe Weisenthal and Tracy Alloway to discuss the massive shift in how and when companies access capital markets.

The conversation covers why the best tech companies are staying private longer, with highly valued private companies now representing $5 trillion in market cap. George explains how A16Z's growth fund invests in later-stage companies that have found product-market fit, including major positions in SpaceX, OpenAI, Databricks, and Stripe.

Key topics include the rise of SPVs and secondary markets, why legacy software companies are getting crushed by AI, the emergence of outcome-based pricing models, and how private companies manage employee liquidity through tender offers rather than traditional IPOs.

The $5 Trillion Private Market Revolution

Private tech companies now represent $5 trillion in market cap, almost 25% of the S&P 500 and 40% if you exclude the Magnificent 7, representing a 10x growth in 10 years.

The top 10 largest private companies represent 40% of that $5 trillion, demonstrating the massive power law dynamics in private markets.

Recent IPOs generated 55% of their market cap creation while private, compared to just 12% a decade ago when 88% of value creation happened post-IPO.

Only three companies in A16Z's public market universe are growing over 30%, making private markets the primary destination for hypergrowth investing.

Why Companies Stay Private Longer

Private capital markets have become deeper and more liquid, reducing the need for companies to go public until they require massive amounts of capital.

Going public costs 10-20 million dollars annually, which is meaningful for smaller companies that would have IPO'd at $100 million revenue 15 years ago.

Public markets favor large-cap companies, making it difficult for smaller companies to get attention from investment banks, research analysts, and institutional investors.

Founders want to avoid public market volatility after witnessing the 2021 tech run-up and 2022-23 crash, where some employees saw stock grants drop 70%.

Private Market Liquidity and Employee Management

Public company employees receive quarterly RSU deposits that are immediately liquid and tax-netted, creating a 'waterfall' of stock grants over time.

Private companies now run regular tender offers where employees can sell 25% of vested stock annually, with SpaceX famously running successful twice-yearly programs.

"Most of the time, there's not like a stigma" around selling in tender offers because employees typically can only sell a small proportion of total holdings - David.

The strongest signal of founder confidence is when they refuse to sell any shares, with one CEO telling A16Z: "I'm not selling a share. Like, why would I sell a single share?"

The SPV Problem and Cap Table Control

Founders "really don't like" SPVs because they want to know exactly who is on their cap table, with some investors misrepresenting where capital actually comes from.

Anduril has "famously gone to war with some of the SPV hucksters" trying to assemble capital through obfuscated methods around the company.

SPVs are inherently riskier than diversified funds because they represent single-company bets that "could be devastating if you put a large amount of capital into it."

A16Z invests directly from funds rather than SPVs, making it "a point of pride with founders to say, hey, you know exactly what you're getting."

AI Companies Speedrunning Growth

AI companies "have the potential to be some of the best businesses ever created" and are "speedrunning the process of company growth" at unprecedented rates.

Models are improving at an "eye-popping rate" and "can basically double their ability to complete long-form tasks over six to seven months."

"If you were to just arrest model development today, I think we would have the chance to build 10 to 20 years of really interesting applications on top of it" - David.

A16Z is "probably the largest investor in the AI industry" and invests in "two-thirds of the aggregate AI revenue" in private markets.

Unlike the fiber buildout characterized by "dark fiber," there are "no dark GPUs" - every GPU or TPU put online "immediately gets used."

The Death of Legacy Software

Legacy software companies face an existential crisis as "all the new budget basically in any buyer organization is going toward AI initiatives right now."

While gross dollar retention remains high, "net dollar retention of these companies has steadily declined" since 2021 as growth shifts to AI.

Legacy vendors risk becoming "systems of record" while new AI-powered products "take action on top of those," capturing the value layer.

The shift to "outcome-based pricing" from seat-based subscriptions will "massively favor newcomers" because "it's so hard to react if you're one of the incumbents."

Customer support shows early signals of outcome-based pricing due to "verifiable tasks that those companies have to complete."