A decade after gatecrashing Silicon Valley’s most exclusive party, Ben Horowitz is sounding vindicated.
The venture capital firm he set up with Netscape co-founder Marc Andreessen has long drawn detractors — not least over what rivals claimed was a willingness to bid up the valuations of the most promising early-stage tech start-ups to uneconomic levels.
After the stock market debut of ride-hailing company Lyft at the end of last week, Mr Horowitz was ready with a response: “It doesn’t look that way in retrospect, now does it.” The IPO turned his firm’s investment, estimated at around $100m, into a holding worth more than $1bn, even after a 12 per cent share price drop on Monday. “It’s not easy to make $900m,” he added.
Andreessen Horowitz has never been too concerned about antagonising others in the clubby world of venture capital. Breaking into a narrow sphere where personal networking is key and returns are disproportionately concentrated in a small number of the most successful firms was never going to be easy.
“People are always going to bark at us because we’re always beating them,” Mr Horowitz said. “When you get beaten by the same people over and over again, you talk smack. But that’s OK, that’s just the name of the game.”
The firm has had big “exits” from its investments before, notably last year’s sale of code sharing site GitHub to Microsoft, bringing it about $1bn worth of Microsoft stock (like all VCs, it also has had its share of disappointments, among them one-time internet stars such as coupon marketing site Groupon, gaming company Zynga and Foursquare, the location-sharing app, that never lived up to the hopes).
But in the round of big tech initial public offerings that is expected to follow Lyft, Andreessen Horowitz stands to come out as one of the main winners. It was an early investor in several, leading the second, or “B” rounds, of financing for business messaging service Slack, social media site Pinterest, and PagerDuty, a business software company in which it holds a stake worth up to $250m, based on the indicated IPO pricing. It also led the B round for accommodation-booking site Airbnb, which has also been eyeing a stock market listing, though not before next year.
The IPOs are the culmination of a campaign by Andreessen Horowitz to break into the A-list of VC firms. As a recently appointed partner at another top Silicon Valley investment firm explained, the only sure route to superior returns in VC is to be first in line when the entrepreneurs with the best new business ideas are looking to raise money. That gives established firms with the strongest brands and personal networks a big edge.
Andreessen Horowitz has been aggressive in its marketing — something previously unheard in the VC world — and cast itself as the champion of the entrepreneur. That came easily to the abrasive Mr Andreessen, who co-founded Netscape and whose first experience in business was an all-out fight with Microsoft at the height of its power. The quieter Mr Horowitz also worked at Netscape and the two went on to found one of the first cloud computing companies before selling it to Hewlett-Packard.
According to Mr Horowitz, the firm was built on what its founders had learnt themselves as customers of the VC industry. For instance, it hired its own recruiters, marketing experts and others to support the founders it backed, replacing the informal networks of personal contacts other firms relied on. His own book The Hard Things About Hard Things on the challenges of starting a business based on his experience is often cited by tech founders as an inspiration. “We really moved the model into the future, and we’re the best at it,” he said.
If that kind of self assurance has antagonised rivals, critics also accuse the firm of making unrealistic promises to win over entrepreneurs. Mr Andreessen, for instance, once said the firm was happy to hold on to stock in its private companies for 15 years or more — much longer than most VC firms are set up to do.
“In general, venture capitalists are pushing for an earlier IPO than the founders of the company,” said Jay Ritter, an IPO expert at the University of Florida.
Mr Horowitz denied that Andreessen Horowitz had made exaggerated claims. “The promise wasn’t that we’d hold the stock,” he said. “The promise was, ‘We’re going to help you run your company and we’re going to give you a network that makes you powerful enough to do so’.”
He also argued that the latest generation of tech companies have been staying private longer as “a direct result of a set of regulations that were put in place between 1997-2004”, which made it less attractive to be public.
For the investors who backed the handful of big winners from the latest cycle of tech start-ups, the delayed IPOs could now bring big returns.
“From a purely selfish standpoint it’s great when they take a long time because they build so much value in the private markets, and that’s great for us,” said Mr Horowitz. But he called it a “tragedy” for the markets as a whole.
“The public market investor doesn’t get access to a lot of the growth, and that just creates wealth inequality, it’s terrible,” he said. In trying to protect small investors from too much risk, he added, regulators “basically gave all that growth opportunity to people who are already wealthy. We have to, as a country, do something to fix that.”
While Andreessen Horowitz’s first fund — a $300m investment vehicle raised in 2009 — is reputed to have performed strongly, it is too early to judge the much larger funds that followed. After raising more than $7bn, it faces the hard job of maintaining a high return on the much larger sums invested. Meanwhile, money has poured into Silicon Valley and competition has escalated sharply — not least with the arrival of SoftBank’s $100bn Vision Fund.
In search of opportunities, the firm has created separate funds to invest in cryptocurrencies and blockchain start-ups, and in technologies that are transforming healthcare. And in its core consumer and business markets, it is betting that artificial intelligence will open a big new investment cycle.
The firm’s website still bears the slogan “Software is Eating the World”, a reference to an influential article Mr Andreessen wrote in 2011 in The Wall Street Journal. In it, he argued that software companies were “poised to take over large swaths of the economy”. The firm he and Mr Horowitz founded is now counting on AI to bring another decade of profitable disruption.
