Andreessen Horowitz Part II

Summary Notes


In the latest episode of Acquired, hosts Ben Gilbert and David Rosenthal explore the meteoric rise of venture capital firm Andreessen Horowitz (a16z). The firm, co-founded by technology veterans Ben Horowitz and Marc Andreessen, has transformed the venture landscape since its inception in 2009, challenging industry norms with its unique strategy. The firm's approach included employing former founders as GPs, providing extensive support services to startups, and aggressively investing in high-growth companies at premium valuations. Despite criticisms of overpaying, a16z's investments in companies like Coinbase, Airbnb, and Okta have yielded substantial returns, solidifying its status as a top-tier VC firm. The episode delves into a16z's counter-positioning against traditional VCs, its significant role in shaping the startup ecosystem, and the firm's potential future as a multi-faceted platform for innovation.

Summary Notes

Introduction to Acquired Season Nine, Episode Two

  • Ben Gilbert introduces himself as the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
  • David Rosenthal introduces himself as an angel investor based in San Francisco.
  • The hosts welcome listeners to part two of their series on Andreessen Horowitz.
  • The story picks up from Mark and Ben's 2008 instant messenger conversation about starting a venture capital firm.

"Welcome to season nine, episode two of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." "And I'm David Rosenthal, and I am an angel investor based in San Francisco."

The quote introduces the hosts and the focus of the episode, which is the continuation of the Andreessen Horowitz story.

Andreessen Horowitz's Foundation and Growth

  • The firm was founded in 2009, following a conversation from 2008.
  • Andreessen Horowitz became a significant force in the venture capital landscape quickly.
  • The firm is known for high valuations, massive fund sizes, and criticism for both.
  • It also became an investment firm and a media company, advocating that former operators make better VCs than career investors.
  • The founding of the firm coincided with a good time in technology, two years after the iPhone's release.

"Well, today, listeners, we will cover the next eleven years from the firm's founding to today. This is the story of the VC firm that basically changed everything in the whole landscape."

The quote summarizes the rapid rise and impact of Andreessen Horowitz in the venture capital world, setting the stage for the episode's deep dive.

The Acquired Community and Special Content

  • Ben Gilbert highlights the Acquired Slack community and the limited partner program.
  • The hosts discuss a recent episode with Kyle Samani of Multicoin Capital, focusing on managing a crypto fund.
  • The community and content offer in-depth discussions and insights into the tech and investment world.

"Join at acquired FM, Slack and the limited partner program. This is our members only community where we drop special for subscribers content."

The quote explains the additional resources available to listeners who want to engage more deeply with the Acquired community and content.

Pilot's Role in Startup Accounting

  • Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
  • The firm has grown significantly and is backed by notable investors like Sequoia, Index, Stripe, and Jeff Bezos.
  • Pilot's services allow startups to focus on their core product and customers by outsourcing financial operations.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote describes Pilot's services and its status as a leader in accounting for startups, emphasizing its value to the startup ecosystem.

Investment Disclaimer and New Investment Vehicle

  • The hosts clarify that the show is not investment advice and is for informational and entertainment purposes only.
  • David Rosenthal announces his new investment vehicle, Kindergarten Ventures, an angel fund co-founded with Nat Manning.

"And one other disclaimer, disclosure. I do have a new Investing vehicle that I am super excited about. It is called Kindergarten Ventures and it is a angel fund that I've started with my budy Nat Manning."

The quote serves as a disclaimer regarding investment advice and announces David Rosenthal's new venture, Kindergarten Ventures.

Andreessen Horowitz's Counter Positioning Strategy

  • Andy Ratcliffe advises Mark and Ben on the need for a strategy to break into the VC industry.
  • Benchmark's counter positioning against Kleiner Perkins becomes a model for Andreessen Horowitz.
  • The firm positions itself as the anti-benchmark, supporting technical founders and building a platform using management fee resources.
  • Andreessen Horowitz's approach includes investing at any stage and offering a range of services to portfolio companies.

"So here they are. And obviously, we've talked about the last time, the big thesis that they have that there is no bubble."

The quote reflects the contrarian mindset of Andreessen Horowitz's founders as they set out to establish their firm in the venture capital industry.

Venture Capital Industry Dynamics

  • Venture capital firms traditionally valued opacity and limited PR.
  • Andreessen Horowitz (a16z) challenged this norm by being vocal and optimistic about the future.
  • They aimed to accelerate the future they envisioned by loudly supporting the companies they invested in.
  • This approach was a stark contrast to the traditional, reserved venture capital marketing strategies.

"Andreessen Horowitz well, the interesting thing about why no venture firms were doing it about themselves was the commonly accepted wisdom is that opacity plays to our advantage."

The quote explains a16z's deviation from the industry norm of opacity, suggesting that they saw transparency as a strategic advantage.

Management Fees and Investment Strategies

  • Venture capital firms typically do not publicize their management fees or the size of their investments.
  • a16z's strategy involved being open about their investments and the future they believe in, which could attract entrepreneurs seeking a supportive VC.
  • Traditional VC firms were more discreet, potentially to avoid scrutiny over management fees and equity stakes.

"Yeah, well, two things. One, I think the version of hiding the war financing of investment bankers that vcs were doing here was they're hiding the management fees."

The quote highlights the secretive nature of traditional VC firms regarding their management fees, likening it to historical practices of investment banks.

Branding and Marketing Strategy

  • a16z named their firm after the founders, which was initially criticized but was part of a larger branding strategy.
  • The name "Andreessen Horowitz" leveraged Marc Andreessen's existing brand recognition.
  • They planned to transition to "a16z" to reflect a broader, inclusive brand beyond the founders.
  • The firm's early marketing efforts included high-profile media appearances and strategic use of public relations.

"So the story of how they get connected is. Market tells this. On an a16z podcast episode, she says that one of the companies that Mark and Ben had been angels in wanted to work with outcast, but Facebook blocked it and said it was a conflict and wouldn't let outcast work with them."

The quote explains the origin of a16z's connection with Margaret Wenmachers, an influential PR strategist in Silicon Valley, who later joined a16z to help with their branding and marketing.

Investment in Skype and Media Presence

  • a16z made a significant $50 million investment in Skype, which was controversial at the time but yielded a substantial return.
  • The firm's media strategy included placing Marc Andreessen on prominent shows like Charlie Rose, where he could discuss innovation and hint at the VC firm's creation.
  • a16z's media appearances were calculated to build hype and establish their presence in the venture capital industry.

"So February of 2009, Mark goes on Charlie Rose."

The quote refers to Marc Andreessen's appearance on the Charlie Rose show, which was part of a16z's strategy to gain media exposure and establish credibility in the VC space.

Early Investments and Fundraising

  • a16z quickly deployed their initial $300 million fund, leading to the need for a second fund.
  • They raised a $650 million second fund in 2010, which was unprecedented at the time and allowed them to expand their team and investments.
  • The firm made a series of investments in various companies, including both successful bets like Okta and Slack, and less successful ones like Jawbone and

"So they go out summer 2010 and they raise a second fund."

The quote marks the rapid fundraising of a16z's second fund, showcasing their aggressive growth strategy and confidence in their investment approach.

Notable Misses and Successes

  • a16z missed the opportunity to invest in Uber, which became one of the biggest misses in their history.
  • Despite this, they had significant successes with investments in companies like Airbnb, Pinterest, and Stripe.
  • The firm's strategy of making bold bets and quickly deploying capital led to a mix of high-profile wins and losses.

"Oh, this is brutal. Andreessen Horowitz is in line, specifically Jeff Jordan. Man, could you imagine what a monster year it already was for Jeff Pinterest. Airbnb all in this same year, he's in line. Handshake on a deal to lead Uber's series B."

This quote reflects on a16z's missed opportunity to invest in Uber's series B, which would have added to their already impressive portfolio of investments for that year.

The Berkshire Episode and Venture Capital Deals

  • The anecdote about Warren Buffett's purchase of Berkshire Hathaway is used as a metaphor for a venture capital deal involving Travis Kalanick and Andreessen Horowitz.
  • A deal's valuation was significantly reduced from the initially proposed $305-310 million to $220 million post-money.
  • Travis was initially willing to accept the reduced valuation because he wanted Andreessen Horowitz as the lead investor.
  • The deal deteriorated further when the term sheet included a new option pool refresh, diluting existing shareholders, which led Travis to reject the deal.
  • Menlo Ventures stepped in to do the deal at over a $300 million post-money valuation, ironically following the playbook often associated with Andreessen Horowitz.
  • Andreessen Horowitz is known for paying premium prices for deals, which sometimes works out favorably in the future.

"They put a huge new option pool refresh in there, which, of course, would dilute existing shareholders and particularly the entrepreneurs, even more." This quote highlights the issue that caused Travis to reject the deal, as it would have led to further dilution of his and other existing shareholders' stakes.

Venture Capital Investments and Market Dynamics

  • Andreessen Horowitz's investment strategy involves paying higher prices for stakes in companies, with the belief that these companies' future valuations will justify the premium.
  • The firm's approach has influenced the broader venture capital market, with other firms adopting similar strategies.
  • Andreessen Horowitz's investments in Lyft and Uber are discussed, emphasizing the significant market caps of these companies at the time of their IPOs.
  • The discussion also covers the early days of ride-sharing and how Lyft pioneered peer-to-peer ride-sharing, with subsequent investment by Andreessen Horowitz.
  • The idea that software is eating the world is attributed to Marc Andreessen, who published an op-ed on the topic in 2011, arguing against the notion of a tech bubble and predicting the disruption of various industries by software companies.

"Today's stock market actually hates technology, as shown by the all-time low price to earnings ratios for major public technology companies." This quote from Marc Andreessen's op-ed reflects the undervaluation of technology companies in the stock market at the time, contrasting with their future growth and profitability.

The Evolution of Andreessen Horowitz

  • Andreessen Horowitz has raised multiple funds over the years, with significant amounts of venture money under management.
  • The firm's investment in GitHub is highlighted as a masterful public relations move, branding it as a Series A despite it being more akin to a late-stage investment.
  • The firm's strategy includes investing large amounts in later-stage deals, which have lower downside risk but still offer high upside potential.
  • The firm's hiring of Chris Dixon and the investment in Coinbase are discussed, showcasing Andreessen Horowitz's foresight in the crypto market.
  • The discussion touches on the firm's broader impact on the venture capital industry, including changes in marketing, public relations, and the provision of value-added services to portfolio companies.

"We're elephant hunting, going after big game." This quote from Mark Andreessen encapsulates the firm's strategy of seeking out large, high-impact investment opportunities, reflecting their ambitious approach to venture capital.

The Venture Capital Ecosystem and Entrepreneurship

  • The venture capital ecosystem has evolved, with firms like Andreessen Horowitz leading changes in marketing, service provision, and investment strategies.
  • Entrepreneurs have benefited from these changes, receiving more capital, facing less dilution, and gaining access to valuable resources and support from their venture capital partners.
  • The discussion acknowledges the potential for margin compression in the venture capital industry as firms invest in building teams and providing services to remain competitive.
  • The conversation touches on the potential for Andreessen Horowitz to expand its influence beyond the Bay Area and into global markets.

"Every successive generation of technology companies should be an order of magnitude bigger because of Moore's law, because the cost of compute declines." This quote illustrates the belief that technological advancements will continue to drive the growth and scale of new companies, with venture capital firms like Andreessen Horowitz poised to capitalize on these trends.

Creation of Separate Fund for Crypto Investments

  • Firms create separate funds for crypto to avoid regulatory complications associated with token investing.
  • Token investing in a core fund could necessitate registration and loss of venture capital exemption.
  • Andreessen Horowitz (a16z) chose to create a crypto fund to maintain the ability to buy tokens instead of equity.

"I think part of the reason why they created a separate fund for crypto versus doing it out of the main fund was because of the same things that trigger needing with secondaries, needing to be an RIA."

The quote explains the strategic decision by a16z to form a separate crypto fund to avoid regulatory issues and maintain their venture capital exemption.

Operational Challenges in Crypto Investing

  • Staying abreast of regulatory requirements in the U.S. and internationally requires significant overhead.
  • a16z has invested in understanding the necessary infrastructure for crypto investing with LP (Limited Partner) dollars.

"And the operations of things, of staying abreast of the things you can do in the US versus international, takes overhead, and they've invested in that overhead and they've figured out what the necessary infrastructure is from a regulatory perspective to do crypto investing with LP dollars."

This quote emphasizes the operational investments a16z has made to navigate the regulatory landscape of crypto investing, ensuring compliance and effective fund management.

The Bear Case for Andreessen Horowitz

  • a16z's strategies have aligned with the economic landscape, but their performance in a down market is untested.
  • Critics argue a16z lacks price discipline, which could be detrimental during economic downturns.
  • The firm's expansion into new areas may overextend their capabilities, risking their current success.

"We have been on an unprecedented, unbelievable bull run in tech that started the same year that Andreessen Horowitz was founded."

The quote raises the concern that a16z's success has coincided with a tech bull market, and their strategies have not been tested in a bear market.

Branding and Marketing Strategies

  • The choice of branding strategies, such as calling their approach "HP 20," may not resonate with current business leaders.
  • As a16z grows, internal politics could become a challenge, historically affecting venture firms.

"For a firm and people that are so good on branding and marketing and whatnot, calling this strategy HP 20, you might want to rethink that one."

The quote critiques a16z's branding choice, suggesting that the association with HP may not have the intended positive connotation.

The Impact of Hedge Funds and Financial Investors

  • Hedge funds entering late-stage financing offer pure capital without additional services.
  • Entrepreneurs with established relationships may prefer capital-only investments over bundled services.
  • a16z's model of offering a broad set of services at higher valuations may face competition from pure capital providers.

"Tiger Global and what's going on in hedge funds coming into late stage financing and now even early stage financing, those folks are beating the drum of, we're a financial investor and we're going to give you the cheapest available capital."

This quote discusses the trend of hedge funds providing capital to entrepreneurs, potentially challenging a16z's value-added investment approach.

Underwriting Models and Market Predictions

  • Andreessen Horowitz's underwriting model differs from other VCs, betting on larger future markets.
  • The firm's success so far may be due to correct predictions about market growth, but a capital crunch could test their model.

"Andreessen Horowitz had a different underwriting model on the future than the rest of the VCs did."

The quote explains that a16z's investment approach was based on different assumptions about future market sizes, which has paid off during the bull market.

Venture Capital Industry Dynamics

  • The venture capital industry benefits from increased attention and competition.
  • The rivalry between venture firms is advantageous for various stakeholders, including entrepreneurs and investors.

"This is all just great for everybody. It's just freaking fantastic for everybody."

This quote highlights the positive effects of competition and media attention on the venture capital industry, suggesting that all parties involved benefit from the dynamics.

Power and Counter-Positioning

  • a16z's initial source of power was counter-positioning, doing things that incumbents could not.
  • Their brand has become a lasting source of power, differentiating them in a commodity industry like venture capital.

"The first one was clearly counter positioning...they literally did things that other people could not do because their business models did not allow for it."

The quote describes a16z's strategy of counter-positioning, which involved adopting practices that were not feasible for established venture firms, contributing to their success.

The Playbook for Changing Venture Capital

  • a16z introduced several innovations to the venture capital industry, including hiring former founders as GPs, large teams of experts, and aggressive pricing.
  • The firm's approach has redefined the requirements for venture capital firms.

"Their playbook was to change the requirements of the job to be done for everyone else in the industry."

The quote summarizes how a16z's novel practices have influenced the venture capital industry, setting new standards for firms to compete effectively.

Investment Decision Making and Red Teams

  • a16z allows individual GPs to make investment decisions without consensus.
  • The firm employs "red teams" to challenge investment decisions, ensuring thorough due diligence.

"Any GP can pull the trigger on any deal on their own...they assemble a red team to basically be there."

This quote explains a16z's unique approach to investment decision-making, which combines individual autonomy with a structured challenge process to balance risk and opportunity.

The Role of Passion and Persistence in Innovation

  • a16z's Marc Andreessen believes in the importance of passion and persistence over pivoting and failing fast for breakthrough innovations.
  • True believers who persistently pursue their vision contribute significantly to societal progress.

"The big innovations throughout history are made by true believers who just kept trying."

The quote reflects Andreessen's perspective on innovation, emphasizing the value of dedication and long-term commitment to achieving significant breakthroughs.

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