Andreessen Horowitz

Group: Hong Wei, Yuqin Chen, Zhakazhanov Bakhytzhan

To: All the employees and management personnel
From: Mr. ABC
CC: Mr. XYZ, Department head
Date: 16th February 2020
Subject: Critical factors of Andreessen Horowitz’s success

Venture capital was not such an attractive industry in 2009 for the following reasons.
To begin with, venture capital delivered poor returns. Only the top VC firms generated
consistently high returns. Three percent of VC firms generate 95% of the industry’s
returns. Additionally, due to the decreased cost, the need for venture capital is not so
strong as it used to be. Besides, venture capitals had to face the challenge from
competing sources of seed and early-stage funding such as angel groups, incubators,
and crowdfunding.

However, Andreessen and Horowitz saw the entrepreneurial opportunity of investing

in late-stage, high-profile consumer Internet companies, in addition to the planned seed
investments.

For traditional VCs, they have to source the very best deals—high-potential ventures
whose founders will allow them to invest. Next, they have to pick the right opportunities
from that pool. Lastly, they have to do everything they can to win—to accelerate the
development of the start-ups they’ve picked.

For a16z, in the sourcing part, they do a monthly report looking at deals done by
Sequoia, Accel, Greylock, Benchmark, and other peers for sourcing in order to double
check with their own decisions and find out the reasons behind others’ decisions. And
they look for strength rather than lack of weakness. With respect to picking and winning,
they track inputs instead of the results due to the long feedback cycle. In addition, they
used a network model to help the company win with specialists in marketing, recruiting
and business development.

If I am a first-time founder of a tech startup seeking Series A investors, I would find

a16z’s value proposition attractive. They are founder-friendly. The major reason is that
they had a strong network around the trade press, big companies and key talent pools,
which is valuable to technical founders by seeking for talents and developing the market.
As a first-time founder, I would also like the team of functional specialists to provide a
more in-depth insight of both the technical and business part of the venture. I can
improve the company without being removed from the board and learn something new.

A16z’s big investment in its operating team is likely to yield a positive return. The
operating team can help several portfolio companies at a same time. In addition, with
the help of the operating team, the returns of investing in these companies are more
likely to be increased, which would result in a positive return for a16z.

However, other top-tier VC should not copy this approach. Since their teams have
already established, it would be expensive. An established VC would have to ask its
partners to take a big pay cut to fund something similar. It’s easier to disrupt an industry
through an organizational innovation when you launch de novo.

a16z has its unique organizational policies and practices that contribute to their success.
First, the refined criteria for hiring General Partners generates more satisfied working
atmosphere and efficient operating system. All the candidates are required to have been
a founder or a CEO or both and are effective at coaching technical founders as well as
value the culture of teamwork. Compared with many other VC firms that hired GPs
with prior investing experience, all of a16z’s GPs had experience as tech company
founders or CEOs, which are beneficial to company since it can be assisted by other
investment professionals in tech companies and receive plenty of experience. What’s
more, general partners who earned cash compensation creates an alignment of interests
between LPs and GPs. It’s fair that GPs receive high returns when LPs get a lot of
returns as well. That helps in cultivating productive work atmosphere and maintaining
a good relationship between partners. Besides, the cofounders retain sole control over
hiring and firing decisions, reducing political fighting. Also, co-founders don’t create a
promotion path to general partner for junior investment team professionals, decreasing
disputes about who would pursue opportunities and the proportion of getting credits if
wins.

For the future, a16z has its great resources and good reputation generated from network
and marketing to grow itself and further diversify into other sectors and geographies.
However, it’s hard to grow a firm’s assets under management by increasing the amount
invested per portfolio company without the expansion in the general partners. Therefore,
I would suggest that a16z can include more general partners to increase the assets but
not as many as the number of GPs that will deter the culture of teamwork. Also, a16z
is able to potentially diversify into other sectors or geographies within a feasible plan.
That prevents a16z from suffering fluctuations from a single industry and allows it to
diversify the risk and offset poor investment by another good fund performance in
different fields.

Assuming that management fees as 2.5% of committed capital and carry equals 25% of
capital gains and having $4.5 billion in total committed capital in steady state, we can
calculate in the following way:
4.5 bln * 2.5%=$112.5 million in managing fee per year

Across the entire portfolio, exit proceeds average 2.5-3.0x capital invested, which is
consistent with successful VC funds’ performance. Therefore, taking higher end of 3x
of capital invested, taking into account given $450 million investment per year, we get:
$450mln * 3x=$1,350 exit proceeds per year
$1,350 * 25% carried interest= $337.5 million
Ultimately, total revenues per year in steady state = $450 million

Turning into costs, after calculation of estimated average annual cash compensation per
non-GP employee equals $130,000. Currently, a16z has 74 non-GP employees and
estimated number of non-GP employees’ company would need to support a 1.7x
increase in scale to $4.5 billion in committed capital is 100.
Thus, the total cost per year of non-GP employees is $1.3 million.

Class notes:

Positive:

 Successful founders ; tech celebrities

 Angel investors

Negative:

 No LP relationships

 New structure untested

 2009 need to raise funding

 Top tier very persistent

Strategy

 Operating team

 Focus on technical founders

 Not replacing CEO

 No track to be promoted to partner

 No silos

 Partners have entrepreneur experience