The Andreessen-Horowitz (A16Z) story is little short of amazing. In the traditionally slow moving world of venture capital they have gone from standing start to raising $4bn across three funds in 5 years – Summit Partners, an older highly successful later stage VC took 15 years to achieve the same feat. In addition to raising money A16Z have done an awesome job of building their brand and investing in great companies. Their high value add model is one of the inspirations for Forward Partners so when I saw that former Summit Partners VC Peter Sims had written an analysis of how they are disrupting Silicon Valley I clicked straight through.
I will shortly get to the reasons Peter gives for their success. But in case you still need convincing that they are onto something here’s a quote from his piece which underlines the success they are enjoying:
In a very short time, A.H. has become one of the hottest Silicon Valley venture capital firms with investments in Facebook, Twitter, Pinterest, Airbnb, Box, Foursquare, and Skype, a deal that earned A.H. investors a 4x return on the firm’s $50 million investment in 2009.
Picking the bones out of Peter’s piece I think A16Zs success comes down to three strategies and their positioning as entrepreneur friendly. These are the strategies:
- Content marketing – post the blogging revolution an increasing number of VCs have marketed themselves through content (including me), but A16Z have taken VC content marketing to a new level. If you take even a passing interest in the startup ecosystem you will have noticed that high quality content from the firm is everywhere. I’m going to give three examples, firstly, it seems that everybody has read The Hard Thing About Hard Things, Ben Horowitz’s excellent book about being an entrepreneur, secondly, Marc Andreessen’s ownership of futurism generally, most clearly seen in his oft-repeated prediction that “Software will eat the world”, and finally Andreessen’s prolific tweet storms (he has averaged 50-200 Tweets per day this year).
- They work their network with technology – all good VCs have good networks and introduce their portfolio companies to potential customers, investors and employees, but A16Z have taken networking to a new level. They have built a CRM software which tracks the people which can help their portfolio companies and who at A16Z knows them and they employ people to work the system on behalf of their portfolio companies. Peter tells the story of when he was at a GE hosted conference talking to the CEO of A16Z backed Mixpanel when two A16Z employees came up to make sure he was meeting the people from GE that he wanted to meet.
- They work incredibly hard to support their portfolio – this is as much a philosophy as a strategy – there are more people at A16Z whose job it is to help the portfolio than are making investments. This very unlike traditional VC funds where the job of the Principals and Associates is to help the Partners get deals done and everybody kowtows to the investment hierarchy. The end result is that A16Z backed companies have an advantage in the marketplace which is a huge draw for entrepreneurs.
The ‘entrepreneur friendly’ positioning is the icing on the cake. Just about every VC these days positions themselves as entrepreneur friendly, but Andreessen carries it off better than most. That’s in part because Andreessen and Horowitz are both former entrepreneurs, but more importantly it’s because they show it in what they do every day. That starts with a big non-cash investment in helping their portfolio succeed (point 3 in the strategy list above) but extends to their philosophy on supporting founders and the way they deal with entrepreneurs day to day (e.g. A16Z employees are fined if they are late to meetings with entrepreneurs – Ben Horowitz describes how that works in the The Hard Thing About Hard Things).
These three strategies are hard for the incumbents to copy effectively. It’s nigh on impossible for a senior VC partner to go from doing little content marketing to being as effective as Andreessen and Horowitz, building an effective CRM software requires partners’ to open up their networks in ways they have traditionally resisted, and building a big team to support the portfolio requires a radical transformation of VC economics supported by the VCs themselves and the LPs who invest in their funds. It’s this hard to copy factor which makes A16Z disruptive.