The Andreessen Horowitz Effect

In the three short years since Marc Andreessen and Ben Horowitz set up shop as venture capitalists on Sand Hill Road, they’ve already established Andreessen Horowitz as one of the top VC firms in Silicon Valley, right up there with Accel, Benchmark, Greylock, Kleiner, and Sequoia. Some would argue that it is the top firm. They’ve raised $2.7 billion across three funds and they somehow seem to get into every deal that matters. The Andreessen Horowitz portfolio includes such marquee names as Skype, Instagram, Twitter, Foursquare, Pinterest, Airbnb, Fab, Groupon, and Zynga.

If you look back at some of the higher-profile deals where Andreessen Horowitz was the lead investor, many observers thought the valuations frothy at the time.  The list includes Airbnb (which raised a whopping $112 million in a Series B last year that valued the company at more than $1 billion), Foursquare’s most recent $50 million round (at a $600 million valuation), Fab’s $40 million Series B (at a $200 million valuation), and Pinterest’s $27 million Series B from last October (also at a reported $200 million valuation). Andreessen Horowitz also participated in more recent $100 million rounds for both Fab and Pinterest. And let’s not forget the $100 million financing for Github last July (at a reported $750 million valuation) where Andreessen Horowitz took the entire round, blowing away the terms offered by other firms.

Other VCs point to these deals as examples where Andreessen Horowitz overpaid. Horowitz counters that they were in fact good deals. In some cases, like with Fab’s and Pinterest’s Series B rounds, Andreessen Horowitz wasn’t even the highest bidder. Eventually, claims Horowitz, “every VC who says that we overpaid wishes to the bottom of their heart they had made the same investments.”

When Foursquare raised its $50 million round, for instance, the naysayers warned that Facebook would crush it. That didn’t happen. Pinterest took off like a rocket and in May (just six months after the round led by Andressen Horowitz) it raised that new $100 million round at an even loftier $1.5 billion valuation (led by Japanese e-commerce giant Rakuten, with Andreessen Horowitz participating once again). And Fab raised another $105 million of its own in July at a valuation more than three times what it went for last December.

And it is not just later-stage deals. Of the 180 investments Andreessen Horowitz has made over the past three years, about 120 of them have been in seed-stage deals. These tend to be for small amounts and are pursued for the market intelligence they provide as much as for the option to invest again down the line in the winners. Yet private company valuations for early stage tech companies are also hitting new highs. Case in point: Ark, a social search startup, recently raised $4.2 million for a seed round. Seed rounds, which used to be typically less than $1 million, are the new A rounds. Guess who helped lead that one? Yup, Andreessen Horowitz.

But the Andreessen Horowitz Effect goes well beyond boosting valuations. It is really shorthand for how the entire VC world is being turned upside down. Andreessen Horowitz just happens to be at the center of that change. Capital is plentiful for tech startups, with the rise of super angels and networks such as AngelList on the seed end, and new growth capital from investors like Yuri Milner’s DST and Elevation Partners on the multi-billion-dollar pre-IPO end.

Venture capitalists have to provide a lot more than simply capital these days. They need to provide access to customers, talent, and know-how to help build businesses. Andreessen Horowitz is tapping into these needs by positioning itself as extremely founder-friendly. Every partner is himself a founder and an operator. “They tried to start a venture firm they wanted as founders,” noted Jeff Jordan, the former OpenTable CEO who is now a partner at Andreessen Horowitz, at the most recent TechCrunch Disrupt conference last May.

A big part of that is how the firm is structured to support entrepreneurs. Many of the tenets are borrowed from Michael Ovitz and how he built the Hollywood talent agency CAA. Instead of assigning one partner to each company, all the partners are available to each one. And the fund reinvests its higher-than-average management fees (which are separate from the “carry” and rumored to be as much as 3 percent) into providing company-building services for finding talent, marketing, business development and even sales and market research. All of these efforts are geared towards creating the most useful network entrepreneurs can tap into. Of the 56 people who work at the firm, only six are investing partners. The rest support the portfolio companies in these functional areas. The whole idea, writes Horowitz in a blog post, is to take founder CEOs and help them more quickly become professional CEOs.

One of the risks of providing too much hand-holding for young companies is that they will put off learning how to do the hard stuff for later. And by then it might be too late. But there is no doubt that Andreessen Horowitz gains an information advantage by being hands-on with its portfolio companies at an operating level. Cross-industry disciplines such as recruiting talent also gives them unique insights. “We do get a lot of knowledge from those functions,” explains Horowitz. “We know where the best engineers and executives want to go in ways other firms don’t because we are in those meetings.”

Asked about Andreessen Horowitz and its full-service strategy onstage at the last TechCrunch Disrupt (where the firm’s impact on the VC industry was a recurring theme), Sequoia partner Roelof Botha quipped: “One thing we believe at Sequoia is that it is important to teach companies how to fish instead of just giving them a fish. Ultimately what matters most is the relationship between the partner who is on the board and the entrepreneur.”

Sequoia, Kleiner, and other big VC firms offer similar company-building services, but generally not in such an organized way as Andreessen Horowitz. The best VCs will parachute in when they are needed. Redfin CEO Glenn Kelman tells a great story about how Sequoia Partner Pierre Lamond used to camp out in his office at his prior company, Plumtree, during troubled times and literally took the helm as “virtual CEO.”

When capital is arguably the least valuable thing VCs bring to the table, entrepreneurs are increasingly judging them by their ability to help build companies. Andreessen Horowitz is designed from the ground up to service entrepreneurs in much the same way that a Hollywood talent agent services movie stars. And that is exactly how it is marketing itself to entrepreneurs.  It doesn’t hurt that Marc Andreessen is looked upon as the “founder of the World Wide Web,” as one rival puts it, and other founders want to be just like him. They all want to be the next Marc Andreessen, and maybe they believe that taking his money will help them get there.

 

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