a16z Growth Fund's Investment Philosophy: Why Waymo, ElevenLabs, and Kalshi Were Chosen
"There are fewer than five companies in the public market showing over 30% growth this year," said Alex Immerman, GP at a16z Growth Fund, on the podcast 'Sorcery'.
For growth investors, the era of looking for high-growth companies now requires looking at the private market. OpenAI and Anthropic alone added more revenue in the last year than half of the public cloud companies excluding the Mag 7.
Although a16z is a massive fund that collects 18% of US VC dollars, its individual investment decisions are based on extremely specific criteria. This article summarizes the investment theses for Waymo, ElevenLabs, and Kalshi as discussed by Immerman, as well as the growth investment philosophy in the AI era.
1. "The most undervalued company in America" — Flock Safety
1-1. AI cameras that solve 2,800 cases every day
The starting point of the discussion was an unexpected name. Immerman asserts, "The most undervalued company in America right now is Flock Safety."
Flock Safety is a crime investigation support platform that utilizes AI cameras. It gained attention for being used to identify the perpetrators of the Brown University and MIT incidents in December 2024, but according to Immerman, that is just "a typical day for Flock." The company contributes to solving over 2,800 cases every day, which is equivalent to about 15% of reported crimes in the US.
As an example of the positive impact AI has on society, it is one of the investments Immerman is most proud of.
2. Private Market vs. Public Market — The "Great Disconnect" in Growth
2-1. No growth companies left in the public market
A report released by a16z partners called the private market the "new high-growth public market." There are numbers behind this. Among public internet, software, and fintech companies, fewer than five are achieving over 30% growth this year. On the other hand, the a16z portfolio maintains an average growth rate of over 100%.
As a result of companies not rushing to go public and instead pursuing larger roadmaps while remaining private, the fruits of growth are concentrated in the private market. Immerman states clearly, "As a growth investor, the place to be right now is the private market."
2-2. A new perspective on gross margins
Many AI companies have gross margins of around 0-50%, which is significantly lower than the level of traditional SaaS companies (around 70%). While some view this as a problem, Immerman's view is different.
His basic stance is, "Margins are always important. However, if the reason they are low is due to LLM costs, it is acceptable." He says the more essential question is, "Does the company's value depend on someone else's model, or is it building up differentiation through its own workflows, integrations, and data?"
He also touched on the fact that engagement metrics are emerging as "today's key metrics." For high-growth companies with many annual contracts, there are often cases where contract renewals have not yet arrived. Engagement cohorts that measure whether the product is actually being used are valued as leading indicators of future retention rates. The legal AI company Harvey was cited as a good example, where "engagement cohorts are repeatedly improving, and it is becoming the lifeblood of law firms."
3. Waymo — The investment thesis for a $126 billion valuation in autonomous driving
3-1. Participating in every round since Series A
Waymo raised $16 billion in its Series D, reaching a valuation of $126 billion. a16z has participated in all four rounds since Series A.
In San Francisco, it has captured a 25% market share with only a small number of vehicles, surpassing Lyft and growing into a strong competitor to Uber. These are figures from a state where access to highways and airports is limited. Immerman states, "The current growth of Waymo is simply being held back by vehicle count constraints. If the number of vehicles increases, the market share will be even higher." It plans to scale to over 20 new cities this year.
3-2. The True Scale of the Ridesharing Market
The current ridesharing market is worth approximately $125 billion and is growing at a low double-digit rate. However, Immerman analyzes this as "just the tip of the iceberg, similar to looking at the taxi market in the early days of Uber." Even total ride-hailing covers less than 1% of vehicle miles traveled in the U.S.
If prices drop, Waymo could become the cheapest option when choosing between a personal car, a human-driven taxi, or Waymo. If that happens, Immerman believes the ridesharing market will "grow at least tenfold."
3-3. Comparison with Tesla FSD
Tesla is developing FSD (Full Self-Driving), which takes a camera-only approach. Waymo uses a full-stack configuration that includes LiDAR, which is considered superior in performance under adverse weather conditions. While there are reports that FSD 14.1 has "improved disengagements by an order of magnitude," and the trend of improvement is acknowledged, Immerman's view is that Waymo is clearly in the lead in terms of both safety and track record at this point.
4. ElevenLabs: Voice AI is a Platform, Not a Feature
4-1. $500 Million Funding and Expansion of Enterprise Customers
ElevenLabs announced a new $500 million round. a16z led or co-led the Series A, B, and C rounds, and is listed as a major participant this time as well.
The company's strength lies in both consumer and enterprise sectors. The consumer business continues to grow organically, and on the enterprise side, large companies like Meta, Salesforce, and Deutsche Telekom are building agents on its platform.
4-2. "Voice is a Platform, Not a Feature"
In response to criticism that voice AI is "just a feature," Immerman clearly disagrees. The investment thesis for the company is that "voice is a platform and could become the primary means for humans to interact with computers in the future."
The company's use cases range widely, including sales, customer support, job interviews, healthcare, and financial services. Immerman highly values the stance of CEO Maddy, who has responded to criticism that the model's competitive advantage would crumble by "moving faster and building more defenses."
5. Kalshi: The Prediction Market Leader Born from a Regulatory-First Approach
5-1. Investing in the Number Two to Overtake the Number One
At the time a16z invested in Kalshi, the company was second in reported trading volume. "We pride ourselves on investing in market leaders. So, investing in the number two required a strong hypothesis," Immerman recalls.
The core of that hypothesis is a "regulatory-first approach." Kalshi spent four years fighting regulators to become the first prediction market to be regulated by the CFTC. As a result, it became possible to build relationships with mature partners such as Robinhood, Coinbase, CNN, and CNBC.
5-2. Is the Prediction Market Gambling?
Regarding the criticism that it is "close to sports betting," Immerman clarifies it this way: Grain futures were once called gambling. Stock and options trading were the same. Speculation creates liquidity, and liquidity enables hedging. He also stated that, unlike sportsbooks, the design difference is important: Kalshi does not have a structure where the company profits when users lose, but rather charges a transaction brokerage fee regardless of the outcome.
It has now risen to number one in all metrics: number of users, revenue, and trading volume.
6. a16z's Investment Evaluation Criteria: Growth, Retention, and End-State Margins
6-1. Admitting to being a 'growth snob'
Immerman states frankly, 'We are growth snobs.' At the early growth stage, annual growth of several hundred percent is expected. A 60% growth rate makes the probability of continued investment across multiple rounds low.
The three pillars of evaluation are growth rate, retention, and end-state margin. High gross retention makes it easier to secure revenue for the following year, while high net dollar retention means expansion revenue accumulates automatically. Regarding margins, they prioritize an 'annual improvement trajectory' over current levels, looking at the path to long-term free cash flow.
6-2. Whether the company has a 'second act'
A common question asked is, 'Is there a second act?' Even if a 3x return is expected from the core business alone, if the market size ceiling is low, they cannot continue to invest. Elise AI was cited as an example that started with its first product, a leasing assistant, and has since succeeded in becoming a platform, now recording 60% and 40% attachment rates for additional products.
Summary: A consistent philosophy of 'investing in market leaders'
The reason a16z attracts 18% of US VC dollars is not just because of a list of flashy names. What Immerman consistently spoke about was the principle of 'investing in market leaders.'
Citing a line from the movie 'Glengarry Glen Ross'—'First prize is a Cadillac, second prize is a set of steak knives, third prize is you're fired'—he explained the reality that companies in leadership positions accumulate the majority of market capitalization. He noted that this structure holds true not only for network-effect businesses but for software in general.
Now that AI is growing rapidly, honing the eye to distinguish the 'next leader' within the private market has become the core job of growth investors.
