Venture capital firm Andreessen Horowitz launched in 2009, and its been having a great run at a time when other VC firms are failing.
It announced a new $650 million fund in November and has investments in all five of the consumer Internet companies expected to do big IPOs in the next two years: Facebook, Twitter, Groupon, Zynga, and Skype.
We spoke with John O’ Farrell, who joined the firm as its third general partner last June about the firm and the current state of VC in the Valley. He told us:
- He doesn’t think there’s a dot-com style tech bubble right now — the companies getting big valuations have real customers, revenue, and growth potential, unlike a lot of companies that emerged from 1998 through 2000.
- Twitter is already having a huge cultural effect around the world, and is a natural global business, so the money will inevitably follow.
- The craziest entrepreneurial pitch he ever heard turned into eBay.
Here’s the full interview:
Business Insider: A lot of VC firms are having a hard time right now. How does Andreessen-Horowitz buck this trend? What’s the secret?
John O’ Farrell: We have all been entrepreneurs and operators ourselves. We’ve tried to build a firm that’s very friendly to the entrepreneur and can provide an enormous amount of value, starting with general partners who are operators, and supplementing that with a firm that has a lot of depth in functional areas like engineering, talent acquisition, executive talent acquisition, business development, marketing and PR, sales development, and so on.
Also, we’re a multi-stage firm that is capable of and does invest as little as $50,000 in seed-stage companies or as much as $50 or $100 million in late-stage companies. And a lot of venture-type deals in between those two extremes. The world has changed significantly in terms of companies being cheap to start, but staying private much longer to tackle a global market. Being able to work with companies at every stage of their development gives us the ability to be a very effective investor.
BI: Do you think that there is another bubble building in the tech sector right now?
JO: We don’t believe there’s a bubble. We’re now in a stage where there’s two billion people on the Internet worldwide. A lot of them are on broadband. A lot are on smartphones. That’s only going to accelerate as we see the proliferation of platforms like Android drive down the cost of smartphones in emerging markets like Brazil or Russia or China.
If you look at the companies that are attracting multi-billion dollar valuations today at the growth stage, these are companies with significant revenue and employees, assets, partnerships, and global businesses. This is not Pets.com.
BI: What do you look for in early stage and what do you look for in more mature companies?
JO: At the seed stage, I would say we’re betting on the team. We like strong technical founders. It’s not a dogmatic rule, but we have a strong preference for technical founders. Because the history of tech is so often that your first idea is not your best idea. It’s a question of the quality of the team to move from that initial idea to an idea that really takes off.
We’re not expecting to generate substantial returns from our seed investing. With a $650 million fund, if you’re putting $100,000 to work in a seed deal, no matter how spectacular it is, it’s unlikely to have a big impact on the funds returned. The reason we’re doing seed investment is primarily for relationships with the best entrepreneurs.
At the venture stage, there has to be some established business. Is this capable of being a multi-billion dollar market? Is it a global market versus a national or regional market? Is there a selling model in place that makes sense?
Late stage, these are typically companies with significant revenue. It might be in the tens of millions, it might be in the hundreds of millions. Or even billions. But they still have a lot of runway ahead of them. Having been in companies like that ourselves, as leaders, we know those companies have different needs from the startup companies. Typically they’re still building out the executive team. Hiring a really great VP of sales, for example, can build out the global sales force. They may be hiring a world-class CFO who can be getting them ready for IPO or is putting in place controls and processes given the amount of growth they’re experiencing. They’re probably looking at global expansion and figuring out how to do that. They’re probably getting a lot of interest from bigger companies who may want to acquire or kill them, and how to deal with that. They may be dealing with acquisitions themselves and how to manage and integrate successfully.
BI: Let’s talk about one of the companies you recently invested in: Twitter obviously has users. How do you turn the corner and monetise those users?
JO: Any global franchise like Twitter will find great ways to monetise. I travel widely and it is quite remarkable how ingrained Twitter has become over the last several years. It’s a language-independent medium. It’s becoming the world’s messaging backbone.
Once you get the kind of penetration that Twitter has achieved, there are many ways to monetise it. Advertisers are going to find a way to leverage that platform. There are already great trends with Twitter in terms of customer care, whether it’s airlines or retail, there are much more real-time ways to deal with customers.
We’ve had a long relationship with them, going back to Mark Andreessen was an angel investor in Twitter. We know the individuals well including the current management team. We feel very good about them being able to build a good business economically just as it’s already valuable socially, culturally, and politically.
BI: Are there any particular areas in tech, especially consumer tech, that you think are overhyped right now?
JO: We typically don’t invest in themes or trends. It’s a matter of the right team with the right trend. Given the success of Groupon, we’re seeing a ton of interest in local deals. Having said that, the local space, enabling brick and mortar merchants to come online, is an enormous opportunity still. We don’t think that’s tapped out in any way.
Everything seems to have a social or gaming aspect to it these days. You see people saying, “I’m offering a social game with the intent of offering my users specifically relevant daily deals.” When you hear a lot of buzzwords it makes your antennae go up a little bit in terms of potential hype.
BI: Are there underappreciated areas where there’s a lot of opportunity that people aren’t capitalising on yet?
JO: Enterprise IT is still underappreciated. It kind of fell out of vogue in the aftermath of the dot-com bubble. Inevitably, the consumer and Internet companies tend to attract the attention because they are consumer phenomena and everyone knows them. Enterprise IT is harder. It’s a longer slog, it’s a more demanding, concentrated buyer set. And a very sophisticated set of buyers with some very specific and complex technical requirements. But the payoffs there are very significant over time as well.
BI: You are focusing on Silicon Valley companies. What is special to you about this region, or is it just where your background and connections are?
JO: We have the best insight into the companies and people who are close to us. And Silicon Valley is the place where most of those companies and people are.
It has the large companies that become the initial home for many of the great entrepreneurs. You have the sources of capital, you have the startup ecosystem. You have the angels. The culture that’s been around for 40 years has really created this environment that attracts the best entrepreneurs from all over the world. So it’s natural for our focus to be here.
We do invest outside Silicon Valley. One of our biggest investments is in Skype, based in Luxembourg and developed in Estonia. We have over $50 million in Skype and are very excited about that company among all the other companies in our portfolio. We invest on the East Coast from time to time and other parts of the world.
But we don’t believe it makes sense to open a Shanghai or Beijing office or India or a European office. We think those would be big distractions for us. We deliver the best value to our entrepreneurs by being really strong in the Valley and helping them go to the rest of the world from there.
BI: Of all the entrepreneurs that you’ve met, who had the craziest idea that actually succeeded?
JO: This was prior to Andreessen-Horowitz in the mid-90s. I was running the internet business for US West, one of the big Bell companies at the time based in Denver. We were big investors in broadband, we were building big broadband networks around the world. And we were also doing some investing in internet companies that could really leverage the power of broadband.
We had this guy who I thought was a great guy, super smart, but I thought his idea didn’t make any sense and he had very little experience at the time. And his proposal was for a marketplace focused on the Bay Area initially that would enable people to buy and sell stuff that they had lying around at home. He called it Electronic Bay Area. We passed on that one.
He was Pierre Omidyar, and the company turned into eBay. Great credit to our friends at Benchmark for doing that one. You never know. We hope we get better over time at identifying the traits of a successful entrepreneur, but you’re never gonna get them all.