When I call Andrew Anagnost at his office in downtown San Francisco at the end of a long work day, I apologize for being unable to speak with him in person, having traveled through the Bay Area mere days before.
“It’s a good thing we aren’t talking in person,” he says, laughing. “I’m wearing my sweaty gym clothes!’ (Thank God for telecommunications software.)
The truth is Anagnost, CEO of software maker Autodesk, has little reason to perspire. His company, which makes tools for architects, product designers, and filmmakers, is making more money than ever before—more than $2 billion in fiscal 2018—and is more valuable than it ever has been, worth nearly $30 billion.
Anagnost has held Autodesk’s top job a mere 16 months, but he’s already excited about the changes underway at the company—a path he plans to articulate to his customers this morning at his Autodesk University conference in Las Vegas. Here’s what he had to say to Fortune, lightly edited and condensed for clarity.
Fortune: You took the top job at Autodesk last spring, but you were a 20-year company veteran. What did you find that you didn’t expect?
Anagnost: I’ve been at the company a long time, but I’m actually part of a subculture at the company—the product design and engineering team. It’s very different. The space that team competes in is highly competitive. Our competitors were as big or bigger than Autodesk. So I was not necessarily of the mainstream culture of the company.
I’m not sure I learned anything when I ascended to the top job that I didn’t already know, but what I came to appreciate was how much work there was to do to become the company we wanted to be. All of these technologies are allowing us to bring together the design and make processes closer together. And that’s going to change our company.
The cloud is changing every software company. You have instantaneous connectivity to your customer—what you do right, and what you do wrong. You have to build a whole new set of nervous systems, musculature, connective tissue to respond to and thrive in that world. That still requires a lot of work to get there.
We made several consequential decisions at one point that we weren’t going to make any products that weren’t cloud products. There’s still a legacy [infrastructure] that needs to be undone. We’ve actually changed our business model and our technological underpinnings at the same time. It’s really hard to do successfully.
A lot of people have heard of Autodesk but may not know what it does. How do you describe it today?
Today, Autodesk makes software for people who make things—bridges, buildings, products, roads, movies, games. You name it, Autodesk has a piece of software for how somebody designs and makes it: civil engineers, mechanical engineers, film artists, structural engineers. These people use our software to design and make the world around you.
Classically we were most involved in their design process—what it looks like, what functionality it has. But more and more, because the world is becoming more automated and we can deliver supercomputing power to anyone, we’re actually able to get deeper into the process of how they build the building, or manufacture the product. We’ve moved deeper. Now we’re a “design and make” software company.
Which areas of the business are you trying to emphasize? Deemphasize?
We’re focused on driving greatest penetration in construction. It’s one of these classic opportunities where the technology—the cloud, mobility—is ready. The customers are ready; construction companies say, “I need to digitize to stay competitive.” And the products are ready. So we’re doubling down in a big way. We want to bring manufacturing methods to construction. We see the construction market starting to move in the same direction as airplanes and cars moved years ago. You’re gonna make a building the same way you make an airplane.
Every building project is a one-off, but they’ll now not only be prefabricated but use more industrial processes to do things. This isn’t optional. The amount of projects that need to be done in the next 20, 30 years is going up but the capacity to do them—humans, materials—is not there. We have to move to a higher efficiency, lower waste way of doing these things. It’s the most wasteful industry today.
Autodesk serves the smallest projects to the largest, but our biggest emphasis is for the biggest projects—vertical construction buildings. But technological innovation will all move down the supply chain to smaller projects.
Coming up behind construction, where the technology and customer isn’t quite ready yet, is manufacturing. It’s going through change with the rise of 3D printing and microfactories? That’s going to require a whole new approach to designing things for different types of manufacturing methods. So we’re working on completely new design tools made for small design runs and highly customizable products. Most 3D modeling tools were built up to support certain types of manufacturing methods; the current paradigm is 3D parametric feature-based modeling. With new tools, you can unlock new optionality.
Our AEC business—architecture, engineering, and construction—is about 40% to 50% of our overall business. Another 30% to 40% is manufacturing. And the rest is media and entertainment.
Tell me about your business model transition from licensed software sales to subscriptions.
One could argue that doing both at the same time may have caused us unnecessary pain. But we made a decision and knew it was going to take time. We knew we had to change or this whole transformation wouldn’t work. If we really wanted to move into the future, everything had to move into the future. Otherwise we’d be some chimeric monster that didn’t do anything well.
Thankfully, it takes a long time for products to be adopted in our industry. Even Adobe changed its business model, then started building cloud products afterward. There wasn’t a lot of cloud in Creative Cloud, and it’s a long way away from looking like Office 365.
Your stock has been on a tear since mid-2016.
People finally believed that we could do it.
They didn’t before?
I’m not sure they did. Our business was 90% indirect. Investors were highly skeptical that we could get through the transition to the other side. Now they’re not.
Let’s go back to Adobe for a second. I can’t help but think of that company, which was also founded in 1982 and also a Silicon Valley company that’s made the cloud transition. But Adobe is worth five times as much as Autodesk.
It’s a timing thing. We’re on our way to be a design-and-make company. Adobe is already a create-and-market company. When they bought Omniture, it was the beginning of their marketing cloud. And now they’ve bought Marketo, which adds to it. The creative business and the marketing business, which takes the creative business and puts it out there. As we grow our businesses, you will see our creative suite become as valuable. Adobe has both sides of the business up and running right now.
Autodesk generated $2 billion in revenue last year, impressive for many companies but small in the world of Silicon Valley software companies. What’s holding you back, or is that the wrong way to think about your addressable market?
Construction’s gonna be our next billion-dollar business, there’s no doubt about it. It’s huge and moving quickly. Manufacturing, we’ll probably be able to double it in size in the next five years. Lots of money is being spent. In construction, there’s probably a billion and a half of investment going into that market, and it’s already generated over half a billion dollars in revenue across all these small companies. The opportunity is real.
The businesses you serve span the globe. Are there any macro trends affecting it?
Our whole business is doing well across all geographies right now. It’s kind of unusual. The largest market for construction tech is still the U.S. The next largest will be Europe because it has some fairly advanced general contractors. We’re seeing a fairly robust global market right now.
Let’s talk about artificial intelligence, which is seeping into every facet of the tech industry. How is it working its way into Autodesk?
We talk about it fundamentally as automation. The big thing for us is to bring “design” and “make” closer together.
Let’s look at the building process. Building a building is a very serial process. An architect comes up with a design, they’ll make a design—say it’s spiral—and dare a contractor to build it: “Figure out how the concrete structure is.” We’re automating the conversation between the architect and the general contractor, using machine learning insights to figure out what it will take to make that building. Get them early in the process, you decrease the risk that you can’t build it within budget, and increase optionality. The computer sits behind the scenes, picking and choosing information, facilitating option analysis—how they might solve a particular problem. It doesn’t work this way now, but it’s what we’re working on.
For instance, we do a lot of crunching to figure out if a building is going to stand, or if an architect can maximize the light exposure of a building. What if we’re able to provide architects with options like that?
We recently did a project with General Motors and redesigned a seat bracket as one 3D-printed part. It doesn’t look like anything a human would come up with, but it instantly matched the design requirements. We have a pretty broad space here to play.
Are you concerned about some of the negative aspects of A.I. that have been reported?
We’re automation optimists. When we look at our built world, all we see is a capacity problem—there’s not enough people or time for all the things that need to be built. The middle class is still rising in the world. We can’t build everything that needs to be built without destroying the planet. We see automation as a way to build all these things, better, and with a lot less negative impact on the world. We believe more people will be employed building things because more money will go to building things. Human creativity is valuable. Automation will take away repetitive tasks.
You’re based in San Francisco. A lot of Bay Area tech companies have taken a hit this year for overstepping ethical boundaries or otherwise doing harm to their customers or society. How do you feel about this recent narrative? Do we need regulation?
I don’t believe in unfettered technological proliferation without some kind of rational oversight. One serious problem is we do not have national privacy legislation right now. We need it. We need to define and level the playing field for what is acceptable for how we use people’s data and how we ask for permission to use it. Our ad-based business models right now, we’ve distorted some of the benefits of these technologies. Europe got it partly right with GDPR. And we have California. But it’s every company’s nightmare to have every state set a different version. We need real national legislation. Not some toothless thing; something real.
On a lighter note, you’ve had an interesting path to the CEO job. You dropped out of high school but now have a mechanical engineering degree from Cal State Northridge and then a Masters and Ph.D in Aerospace Engineering from Stanford. What made you return to formal education and, if I may, engage in the self-flagellation of a lengthy doctoral program?
When I got into trouble as a young man and dropped out of things, I always had a passion for doing certain things. I wanted to be part of the space program and just fell off the rails. When I got back on the rails, though, and started working hard again, I started having fun learning. Can I be good at this? Can I make an impact? The Ph.D thing—you want to catch up and gobble up knowledge and make an impact. I was very excited by parallel computing then. And I honestly felt an obligation to my parents and family that the grief I gave as a young man, their suffering was not for naught.
You’re also a self-proclaimed “space geek.”
I started my career at Lockheed and went to work at NASA Ames. It was my childhood dream; I was very fortunate. But I realized it’s really hard to get things done in large bureaucracies. I saw a lot of people who worked on projects that never actually got done. That was a sad realization for me—spending my whole career working on something that might not happen. And that launched my career into software.
And now you launch cloud software for a living, on a regular basis.
We launch a lot of stuff.