Made Men: Why Venture Capitalists Sponsor Other VCs

The big news out this week in the venture capital market is the launch of Andreessen Horowitz, a new $300 million venture capital fund co-founded by Marc Andreeseen, a tech visionary who founded Netscape Communications, the startup that triggered the Internet tsunami.

Raising $300 million for a first time fund is an incredible achievement in today’s depressed capital-starved economy. How did Andreessen and his long-time business partner and co-investor Ben Horowitz pull it off? Well, tops on the list is the stellar reputation and track record of this pair. Andreessen has been at the forefront of the three major technology trends of the last 20 years: The Web, cloud computing and social networking.

After Andreessen launched Netscape, he and Horowitz founded tech service provider Opsware, which Hewlett-Packard bought in 2007 for $1.6 billion. Andreessen also co-founded Ning, a social networking company that is growing fast and generating revenue. “Marc understands technology on a deeper level than 99% of the public,” says Todd Chaffee, partner with Institutional Venture Partners.

But one other big reason that the two were able to attract so much money, a key detail that I broke in my story for BusinessWeek, was the duo gained the support of three of Silicon Valley’s most established and successful venture capital firms: Kleiner Perkins Caufield & Byers, Accel Partners and Greylock Partners.

The lead partners of these three firms (Kleiner’s John Doerr, Accel’s Jim Breyer and Greylock’s Aneel Bushri) sponsored Andreessen Horowitz, say several sources. Being sponsored is sort of like being a made man in the mob. You are tapped on the shoulder and invited into an elite club.

Concretely, this means that these sponsors made personal introductions to several of their limited partner investors to help Andreessen raise money. No doubt, that sponsorship gave the investors more comfort to invest their dwindling capital with a group of first-time VCs. “Those are great anchor tenants that will give them more credibility,” says Roger Lee, partner with Battery Ventures.

In fact, there’s a long tradition of sponsorship in the venture business. Thomas J. Davis, the co-founder of Davis & Rock, one of the pioneering firms of the venture capital industry, helped Kleiner, Perkins raise money by introducing them to a few investors.

Similarly, the Mayfield Fund helped Don Valentine launch Sequoia Capital in the early 1970s. Gib Myers, one of the first partners of Mayfield, said that the firm set up Valentine with some free office space on Sand Hill Road in a building owned by Wally Davis, the co-founder of Mayfield Fund. “We helped Don get his start,” Myers told me during an interview for my book. “He and Tommy and Wally were really good friends.” Valentine repaid the favor by inviting Mayfield to invest in a little company called Atari.

Back in the early days of venture capital, sponsorship reflected the collegial milieu of what was then a cottage industry. These days, the practice is driven more by practical considerations. Venture firms occasionally help a newcomer this way to forge ties that could prove valuable later on. The new firms, for example, could give the established firms a window into a different area or the ability to get preferred access to co-invest on new deals. “You’d like to get plugged into that network,” says Robert Ackerman, co-founder of Allegis Capital, which was sponsored by AVI Capital when it got started.

More recently, in 2007, Greylock sponsored life sciences investor Third Rock Ventures, investing some of its own money and introducing the founding team to several investors.

I was not able to find out if Kleiner, Accel or Greylock invested in Andreessen Horowitz. But I would not be surprised if they did. And why not? Increasingly, big firms are looking for ways to continue investing in early stage deals without all the time and energy it requires. In March, Sequoia Capital announced a small investment in the angel fund of Y Combinator. Investing in venture funds that focus on early stage deals could give the big guys a way efficiently scale their early stage investments.

- Spencer Ante also publishes the Creative Capital blog. Click here to see more.

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