Silicon Valley’s newest major VC firm Andreessen-Horowitz closed a $1.5 billion third fund this morning, bringing its total under management to $2.7 billion.
The firm has only been around for three years.
Founding partner Ben Horowitz blogged about the raise this morning, and credited the firm’s preference for keeping founding CEOs as a big reason why entrepreneurs — and in turn, investors — want to work with Andreessen-Horowitz.
But being a CEO is very hard, and nobody can be fully prepared for it. We caught up with him on the phone to ask why, and what he and the firm’s other partners can do to help.
Here’s what we found out:
- You can never train to be a CEO because business is dynamic, which means you have a lot less time to make decisions than you think.
- People decisions are the hardest — like how do you tell one exec that he’s suddenly going to be reporting to another exec you just brought in, or how do you evaluate an exec’s performance in an area where they have more experience and knowledge than you do?
- Leadership is more important than management skills. Entrepreneurs have to be able to convince groups of people to follow them down a very uncertain path, and to articulate a vision that’s clear and compelling enough to draw and retain top talent.
- For enterprise startups, it’s important how many employees are actually USING the products. It’s not just about seats or revenue — enterprise startups like Box (an Andreessen-Horowitz investment) and Jive will only be able to expand into adjacent markets if employees are actively using the products.
- His Super Bowl pick. (Scroll to the end…)
Here’s a lightly edited transcript of our conversation:
Business Insider: What’s hardest about being a CEO?
Ben Horowitz: Instinctive stuff. That’s the hardest part, it’s a very dynamic thing. You could go to class to go to be an NFL quarterback, you could have Peyton Manning or Tom Brady teach you lessons. But when you walk onto the field you’ll still be completely unprepared no matter how much schooling you’ve had because it’s dynamic and the time you have to make decisions much much shorter than you think.
BI: Can you give me some examples of the kinds of really hard decisions that startup CEOs have to make?
BH: Say you’ve got to hire an executive who’s running a function you’ve never worked in, or run, or had any undersatnding of, like finance. What’s the criteria for that, how do you do that, what’s that job about, once you bring them on how do you manage them? If they know more about it than you do by a lot, how do you manage them? How do you set their performance standard?
When they come to you and say “gee, I think my territory should be broader,” how do you handle that conversation without creating a politically charged situation? These are really complicated things.
Organizational design tends to be very company- and product-specific, so how do you do those things while keeping the various personalities involved happy and motivated?
How do you make your company a good place to work in general? that’s a really really really large and complex set of skills. A lot of it is on the job training, combined with excellent mentorship.
I was an executive running a pretty substantial group before becoming CEO and I had no idea what it was like. When something goes wrong, people say “it’s all your fault.”
Your reaction is “It’s not my fault.”
But what do you mean? I was the founder, I hired everybody in the company, I was managing it.
BI: So what kind of advice and help can you give? Do you go in and tell companies when they’re screwing up? Or do they usually approach you with specific problems?
BH: It tends to be subtle. It’s typically not me or one of our guys making an assessment and telling them they’re screwing up. It’s much more often them having a situation they don’t know how to do.
Like “one of my cofounders isn’t doing a good job and the engineers and everybody else is resenting them, what do I do?”
We give them a lot of advice, say “here are the things you’ll want to consider,” not “here’s what you’re going to do.”
Another one — “I’ve got a new executive I’m bringing in, and I think an existing exec ought to report to him. This is how I plan to tell that exec he should report to the new guy. Will this work?”
So I try to explain “here’s how he’s going to hear it, here’s how he’ll think about it, here are the things you should decide before you even go into the conversation.” It really helps them be much more successful and fluid in their work.
Stage 2, sometimes there are little things that happen. We might tell a CEO “it’s fine if you stop doing payroll, you’re big enough to hire somebody so you can stop doing that now.” It seems like a little nothing thing, but it can really change the momentum of the company, to see where their mind is going.
There are other things, like if there’s clear trouble ahead we might be able to identify it.
Really common things, like almost no CEO has a good process for hiring executives, as most of our CEOs haven’t done it before. We really try to take them through what the elements of a good process look like, certain principles are really good to understand. It’s very rare somebody hires an incompetent exec. It’s very common that execs don’t make it. Why is that? It has to do with fit to the organisation. So how do you determine fit? How do you determine what are the necessary strengths for this position, what are the weaknesses you can live with, how do you socialize those weakneses with the staff?
That’s kind of motion we like to have. It’s much more of a mentorship relationship than a boss-employee relationship.
BI: What do you look for most in an investment? Founders? Technology? Market fit? Demonstrated customers?
BH: Our criteria have to be both stage- and sector- specific.
It depends on when we’re coming in. Coming into AirBNB, had to look at a lot more than the founder, they had a valuation where other things matter quite a bit like the characterisitcs of the business.
Some kinds of companies more difficult to run than other kinds. Lytro was a more complicated company to run in a lot of ways than other more consumer Internet things, because it has a big hardware component, there’s hardware and softawre, so you need a different kind of entrepreneur to build that than some other kinds of businesses.
Things that are pretty common, we look for large potential markets, and a breakthrough idea — not incremental progress, not “oh this is Facebook married to whatever.” …It needs to be inspirational enough to get the best engineers to join the company.
In an entrepreneur, we look a lot more for leadership qualities than management skills. is this a person you’d be excited to work for, is this a person you’d follow down very complicated and questionable path because they’re so compelling, is this a person you can trust? Is this person massively competent in what they do, but also very competent in the field, and able to articulate a vision extremely well? Do they have the kind of ambition that’s not totally self-centered but much more company oriented?
BI: Are you guys drawing back on late-stage investments, or are you still playing the field seed to late?
BH: We have done growth deals, but they haven’t been as late in their development lately. I’d argue that Pinterest was a growth deal. It had a small number of people, but as a service was well on its way. It was early relative to when a lot of people undrestood what it was.
We’re definitely still in the market for growth investments, but for things very close to kind of being able to go public, pricing has gone up in that region of market, so we’re more price sensitive.
BI: You guys invest in a lot of enterprise startups. There seem to be a lot of companies in more or less the same space — cloud-based collaboration, like Box, Jive, Moxie, Yammer, Salesforce with Chatter. Do you think there will be a rollup there? Or is there room for a bunch of independent companies?
BH: It’s really TBD. It’s not clear yet how big that category is. Even in companies you’ve mentioned, engagement varies a lot. They’re all in the same revenue ballpark, but how much customers are actualy using the products varies tremendously among them. Our general thinking is that the ones used the most will have biggest opportunities to expand into adjacent markets….But it’s very early days.
BI: You’re a football fan — who’s your pick for Super Bowl?
BH: The Giants.
Full disclosure: Horowitz is an Oakland Raiders fan, and most Raiders fans have a particular loathing for the New England Patriots — the Giants’ opponent this weekend — because of this controversial 2002 playoff game.