It had been rumoured for a little while, but now it’s official: Andreessen Horowitz, the new but already top tier venture firm started by Silicon Valley demigods Marc Andreessen and Ben Horowitz, raised a new huge fund worth $650 million. (Here’s Giga Om)
That brings their total AUM (assets under management) to almost a billion dollars. Wow!
Here’s what this means for the venture capital industry, the funding environment, and startups:
- VC is alive and well — for the top firms. Conventional wisdom is that the traditional VC model is dying, or at least that the VC industry is going to shrink dramatically, as VC firms raised huge funds during the bubble days and now can’t return capital to their investors. Superangels are eating VCs alive at the early stages, and at the late stages IPOs are very rare. All of this is probably still true, but for the very top firms, investors are still more than willing to pony up tons of cash — maybe even more so, as letting the weaker VCs die frees up more cash for the top firms. In the case of Andreessen Horowitz, all of the new fund comes from their previous investors, and they raised it in three weeks. Yowza! For the industry as a whole, this could mean that while weaker VCs will shrink or die, the top VCs might actually, contrary to conventional wisdom, grow even bigger. (Kleiner Perkins, another top VC firm, is rumoured to be raising $1 billion.)
- The seed stage market is overcrowded. Marc Andreessen, who is very good at timing markets (he forecast the financial crisis well, and arguably the dotcom bust, selling Netscape to AOL near the top), has said that Andreessen Horowitz is taking a step back in the seed funding market, where they were very active (Andreessen was a very active angel investor before raising his first fund) because super angels are driving valuations up. There’s lots of discussion about whether there’s a “bubble” in seed funding, and Marc Andreessen’s money is talking. It’s probably worth listening.
- Look for more mega deals. This new fund raises Andreessen Horowitz’s maximum investment amount from $50 million to $100 million. That’s a big chunk of cash for one company. (Maybe their first $100 million out of this new fund will be for Twitter, which is rumoured to be raising a $200 million megaround and where Andreessen is already an angel investor?) Andreessen Horowitz is stage agnostic and has said that what matters for them is investing in the greatest startups, regardless of stage. They put $50 million in Skype at a $2.5 billion valuation, and they’re already getting ready for a big IPO. VC firms like to “put a lot of money to work” because a comparatively modest return on a big amount of cash can still make their whole fund. A typical early stage investment needs to return at least 50X for it to be significant for a fund, but a mere 2X return on their Skype investment would return $100 million — a great outcome for a $300 million fund. As seed stage valuations get expensive, it makes sense for them to look for ways to put big chunks of all that cash to work, and that means more mega deals ahead.
And finally, congratulations to Marc and Ben! We’re pretty sure if any $1 billion VC firm can perform well, this one can.