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Andreessen Horowitz just raised $650,000,000 for our second fund. Through the process, people asked us three questions consistently and I will answer them here.
Why raise $650M?
Isn’t smaller better? As a matter of core philosophy, we invest in companies not stages. We want to be in business with the best entrepreneurs going after the biggest markets and we do not care whether they need seed money, venture money or growth money. We believe in great entrepreneurs and the products and companies they build. We do not focus on special return profiles for various stages of investment.
As result, our fund is stage agnostic. As in fund 1, we are excited about investing $50,000 in exciting new seed deals and we are excited about investing $50,000,000 in companies like Skype. While $650M would be a large venture fund, it is a moderately sized seed, venture, and growth fund.
Why raise $650M? I heard you guys could raise at least $1.5B?
Interestingly, we get the opposite question as well. Why so small? We do not want the fund size to dictate our investment pace. We have seen other firms raise so much money that they lower their quality bar in order to “put the money to work.” We would strongly prefer to run out of money sooner and be forced to raise a third fund than to have that problem.
Why only one fund? Why not separate growth and venture funds?
First, from a returns perspective, we do not want to attempt to predetermine where the good investments will be. In our experience, the quality of companies in each investment stage varies wildly over time. It’s possible that the right strategy for this fund will be to invest $550M in venture, $50M in seed, and $50M in growth. It may also be the case that $400M in growth, $150M in venture, and $100M in seed is the right mix. One thing is certain; we won’t know until we see the companies.
Second, one of the founding principles of the firm is to have general partners who are skilled in helping companies at all three stages of development. As former entrepreneurs, we believe this is ideal. When you are raising seed money, you need an investor who can help you grow. When you are the founding CEO of a growth company, you want an investor who understands the value of a founder running the company and who can help you develop into a skilled CEO. As a general partner who has founded, grown, taken public, and run companies at scale, do I belong in the seed fund, the venture fund, or the growth fund? With one fund, I don’t have to choose and neither do our entrepreneurs.
Finally, we believe in being totally aligned with our investors. In venture capital, general partners are paid a percentage of the return on investments. This percentage is called carry. Firms that break their funds into separate vehicles for growth and venture typically separate the carry incentives as well. For example, if their growth fund loses 50% and their venture fund gains 50%, the general partners will be paid carry for a 50% gain on the growth fund, and will not be paid anything or pay back anything on the venture fund. So, if you are an investor in both funds, even though you might lose money on your investment, you will still have to pay the general partners for making you money. That structure does not seem fair to us, so we elected to have one fund. If our investors don’t make money, we don’t make money.
Gee, that was fast. Have you even invested fund 1 yet?
We raised $300M for Andreessen Horowitz Fund I 16 months ago. Typically, firms invest venture capital funds in between 2 and 3 years. Why did we invest fund I so quickly? Two core reasons:
- Prior to raising fund I, Marc and I were angel investors for three years. Many of those angel investments turned out to be outstanding venture-stage startups. As importantly, the entrepreneurs who ran them wanted us to invest in their venture rounds. As a result, we made investments in great companies like RockMelt, Nicira, and Apptio rapidly after raising the fund. And we are incredibly glad that we did.
- We invested $50M in Skype. Companies that can become primary, important, long lasting consumer franchises generally do not come up for sale. When they have already reached over 100M users, are generating hundreds of millions of dollars in annual revenue and are deeply profitable, an opportunity to buy them is even more unusual. So when we learned that Skype would be available, we jumped at the opportunity to be a part of one of the world’s most important companies.
Having raised fund II, we are now prepared to be a major investor in the very best companies. If you believe that you are building one of those, we can’t wait to meet you. And that’s regardless of stage.