What does a16z stand for?
There are 16 letters between the a and the z in Andreessen Horowitz
What are a16z’s key differentiators from other VC’s in the Valley?
The 9 GPs were Founders or prior CEOs. Operational experience is a core qualification for being a Founder
On the street you’re known as being Founder Friendly, how did you get that reputation?
We always treat our Founders with respect and pride ourselves on building up entrepreneurs – they are the ones that have the hardest job. If we don’t believe the person can be the long term CEO the company needs, we probably won’t invest.
What are the key ingredients for a successful venture-funded startup?
1) MARKET SIZE- the key for knowing when to seek a VC for investment is understanding the market potential of your company. There are plenty of companies that can be successful without venture funding. Companies that have infinite market potential are the companies we can back and make a return on. At BEST, we are going to be ‘right’ 5/10 times, the difference between what makes us successful as a VC firm is what amount of $$ ends up in the 10-20x bucket to make up for all of our failures – otherwise known as our batting average. We aren’t measured by how many times we ‘hit’ but by how many ‘sluggers’ (outliers) make up the rest of the failed attempts.
2) TEAM – Once you get past market size at the early stage there’s not much to evaluate – assuming the market exists and it’s BIG, we ask ourselves, “Can this team actually build this product”- “Why should we invest in this team rather than the other 5-6 teams that will enter into the market with the same idea? What is it about the founders background that convinces us it’s the right team to go into the market”– Andreessen calls this notion FOUNDER MARKET FIT – Is there something organic about how they got to this company?- Was there an organic problem that the Founder felt so compelled to build a company around it and is it an extension of their life’s work?
3) “PRODUCT” – It’s highly likely the product you have today is going to be different than the product tomorrow – Does this team have the depth necessary build this product today and the right product in the future? – Is the team malleable enough to create the right product in the FUTURE. Is there a way for you to bet/prove that there is actual market need?
What is Andreessen’s sweet spot in the business cycle? Where do you like to be?
Andreessen’s portfolio is made up of 80% Seed or A-Round and 20% C or D Round. If you think about the nature of VC, getting in at the earliest and lowest valuation has the highest reward potential, but you are also taking on the most amount of risk. Out of 125 employees, 80 are on the operations team, helping companies after they invest. Andreessen takes comfort in the operational team they have in place to back and ensure the future success of earlier companies. IF the risk reward of being early and wrong is too great, we will pass and pay more in the next round. HOWEVER, if there’s enough information to make the decision we prefer to do it then.
“What are the most common mistakes from entrepreneurs?”
During a pitch? Entrepreneurs often say what they think we want to hear. We want to know the depth of your understanding of the industry. SO much of the evaluation is based on your ability to showcase how BIG the MARKET is. If I have a suggestion, I don’t want to hear ‘oh that’s a good idea, I didn’t think about that?’ I want you to have 100% conviction in your knowledge of the market and I don’t want to be able change your mind, this makes me question the depth of your understanding. WE DON’T want to hear that there are a lot of acquisitions to be had in this business. We want to THINK that the market will sustain a standalone success. Acquisitionsaren’t a “de-risker” for us, we don’t WIN by choosing companies that will be acquired, we WIN by choosing companies that will be the best on their own. Andreessen will solve for risk by portfolio management, not by choosing companies that are most likely to be acquired.
Other mistakes –
People hire Executives later than they should, bootstrapping is great, but hire a VP of Sales and a Finance partner when you get through product building so that you know the conversion funnel and can measure your go-to-market strategy.
How sector agnostic is Andreessen?
Well -”Software is eating the world” Half of our companies are consumer facing/ half are enterprise facing. We never redline an industry, “when you start redlining you are reducing your opportunity set.”
Where do your introductions for your most likely startups come from?
REFERRALS- We’d rather entrepreneurs exhibit their ‘sticktoitness’ and find a way to network with one of our 125 employees than try to cold call.
How many companies have a sole founder?
Out of the 90 companies that we sit on the board of, fewer than 15 started with a single founder. We love to see organic relationships.
What should entrepreneurs look for from VCs?
You are basically getting married to this person for the next 10-13 years. “Let’s face it, we all the know the success rate of marriages these days.” Make sure you like who you are getting married to……. IT’S A RELATIONSHIP BUSINESS
Entrepreneurs needs to ask themselves, “will this VC help me with follow-on funding if and WHEN I need it.”
What do you view as Seed stage and what do you view as Series A?
The names and the letters probably don’t mean anything anymore – there’s been grade inflation in every step. My advice to entrepreneurs is that whatever you call it, you have to think about it from a company maturity standpoint. Seed level means no product, but you’re going to get to a point where you have a product in the market. Series A mean you have demonstrated a need in the market and gained traction. (There are exceptions to all the rules here!)
Do you see changes in the way companies are getting funding?
Two years ago it was a great market for all companies and then in January, it became a terrible market for any company. Investors wanted Municipal Bonds instead of Venture Capital.
Basically, it’s a good market for good companies. That being said, there may be great companies, but the market for them isn’t there right now- it’s likely that they’re going to be funded at lower valuations than 12 months ago. The biggest changes have happened in the growth-end of the market, valuations are 25-50% less than what you would’ve gotten 12 months ago. The HARDESTrounds are the aspirational rounds to the real revenue rounds. When companies are getting $5-10m in revenues – investors now have the data to compare the private company to quantitative metrics in the public markets, and the public market is down, which reflects the private comps.
What are the 3 most important questions that entrepreneurs should ask VCs before accepting capital?
Ask other CEOs in their portfolio – they have the first hand experience
Are the interests aligned? – Can the VC add value to your company
Is the GP excited about this? They should feel the same conviction as you do for your business
What’s the low hanging fruit in terms of market opportunities for you guys right now?
Changes in Core Enterprise Stack – We’re at the beginning of a fundamental shift, there is $4 trillion in software and only $2b in the cloud – barely scratching the surface. The cloud is eating software