As Silicon Valley events go, it was an irresistible draw: Marc Andreessen, Web wunderkind turned venture capitalist, interviewing Michael Ovitz, former superagent and co-founder of the Creative Artists Agency.
The conversation between the pair of icons, staged last month in a packed conference room in the offices of Andreessen Horowitz—Silicon Valley's newest, hottest venture capital firm—turned out to be a lovefest. Ovitz, the most powerful man in Hollywood before his career imploded in the mid-1990s after a disastrous stint at Disney (DIS), called his friendship with Andreessen "one of the single most important relationships in my life." Andreessen, co-founder of Netscape, the Web browser company whose 1995 initial public offering kicked off the Internet era, said he modeled his VC firm on CAA. "A lot of what we're trying to do with Andreessen Horowitz is based on what Michael was doing at CAA and his theories about how to build a high-quality service firm," Andreessen said.
The pantheon of elite venture capitalists, as seen from Silicon Valley, is as indelible as the faces on Mount Rushmore. There's John Doerr, who invested in Intuit (INTU) and Amazon.com (AMZN); Mike Moritz, backer of Google (GOOG) and Yahoo! (YHOO); and Vinod Khosla, the Sun Microsystems co-founder who helped propel Silicon Valley's cleantech wave, among others. Every so often an upstart tries to carve his own visage into the granite. At 39, Marc Andreessen, who first made the cover of Time magazine almost 15 years ago, thinks now is his moment to grab a chisel. With his longtime business partner, Ben Horowitz, 44, Andreessen raised $300 million last year amid the miasma of the recession and made big, loud bets on such companies as Foursquare, which lets people broadcast their arrival at shops, bars, and restaurants, and Skype, the Internet calling service. Skype, which could go public as early as next year, received $50 million from the pair, who were part of the syndicate of investors who spun it out of eBay (EBAY).
While many other VC firms are still reeling from a decade of weak returns and an influx of competing capital from Russia and China, Andreessen Horowitz is doubling down. On Nov. 3 the firm announced that it has raised a second $650 million fund. (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.) The firm also claims a new, Ovitz-inspired approach to venture capital. Andreessen wants to create a full-service VC firm that helps with all the needs of startups, from recruiting to public relations, just as CAA catered to every aspect of career development—and every personal demand—of film stars and directors.
Andreessen isn't simply trying to reinvent the Silicon Valley VC. He's also reinventing himself—morphing from visionary entrepreneur and small-time investor into a top-tier venture capitalist, an Ovitz-like power broker at the nexus of tech's largest companies, best deals, and most promising entrepreneurs. "We worked personally with a lot of great VCs. There is no magic in what they do. They just work incredibly hard at supporting entrepreneurs and their companies," Andreessen says, explaining his decision to enter the high-stakes VC game. "We have a hard time backing off a challenge."
Despite its novel approach and gobs of cash, Andreessen Horowitz's primary appeal to the Valley's geek-entrepreneurs may be Andreessen and Horowitz themselves. (Befitting its nerd cred, Andreessen Horowitz has a nickname and Web address, A16Z.com, that's a sort of winking word puzzle for left-brainers. If you can figure it out quickly, you qualify.)
Andreessen is the tireless, trash-talking grand marshal of Silicon Valley's change parade, who once kept a New York Times "deathwatch" on his blog and instructed Old Media moguls at a 2008 Sun Valley conference to sell all their nondigital properties immediately. He sits on the boards of eBay, Facebook, Hewlett-Packard (HPQ), Skype, and Stanford Hospital—and has been at or near the center of just about every major Silicon Valley hiring, firing, coupling, and corporate divorce in recent memory. That includes the resignation of HP Chief Executive Mark Hurd earlier this year for shenanigans involving an expense account and a female contractor. (Andreessen was on the board committee that picked Hurd's successor, Léo Apotheker.)
Horowitz, Andreessen's equally astute and alopecic partner, is also an entrepreneurial superhero in the tech startup community. He was a vice-president at Netscape, then chief executive of Andreessen's before-its-time cloud computing startup Loudcloud, which was founded in 1999 to host the websites and e-commerce stores of other dot-coms. He helped rescue the firm during the bust by repackaging it as a software company, changing its name to Opsware, and selling it to HP for $1.6 billion.
While Andreessen has curtailed his own blogging, Horowitz's posts have become required reading for Valley entrepreneurs and often reflect both partners' views. For example, when Andreessen wanted to publicize his take on the Hurd scandal but was restricted by his board role from talking publicly, Horowitz published an item that slammed critics who thought the HP board had overreacted when it ousted the CEO. He called Hurd's accuser a "former soft-core porn movie actress" (she had starred in some saucy R-rated movies) and strongly implied Hurd and the woman had a sexual relationship (which both had publicly denied).
Horowitz says the blog post was his idea, though he ran a draft by Andreessen. "You can't expect people to understand your story and your point of view if you never say it," he says. "You can't just put the facts out there."
Following that principle, the partners deploy their own power and influence to publicize their second fund and frame Andreessen Horowitz as an elite venture capital firm. An interview list of friendly heavy hitters is given to a reporter, favors are called in, and suddenly the Valley's best and brightest can't heap enough praise on Andreessen Horowitz's early track record. Bill Campbell, the behind-the-scenes executive coach to Steve Jobs and Eric Schmidt, says the new venture capitalists have an enviable camaraderie with young entrepreneurs and have "climbed up the Sand Hill food chain amazingly quickly." Facebook Chief Operating Officer Sheryl Sandberg talks about how Andreessen is a mentor to Mark Zuckerberg and, given his time at Netscape, has valuable experience facing down a larger, stronger rival. John Donahoe, eBay's CEO, calls while driving to his daughter's water polo game and praises Andreessen as a great listener who "brings a genuine curiosity about how to help a big company move quickly and innovate." Normally press-shy investment banker Frank Quattrone responds to a request via e-mail, using all capital letters: "NO VC PRIVATE EQUITY INVESTOR HAS SUCH A COMPREHENSIVE VIEW OF THE INDUSTRY FROM AN INSIDER'S PERSPECTIVE."
The business of Andreessen Horowitz is investing in companies that are building the digital future. But its offices, in a two-year-old Sand Hill Road office park owned by John Arrillaga, Andreessen's billionaire father-in-law, are in some ways a throwback to the analog past. They reflect Andreessen's belief that venture capital can learn from old-school service organizations such as talent and advertising agencies.
Greeting visitors as they walk in the door is a library, with Andreessen's personal collection of technology books mixed with ominous orange-hued photographs of mushroom cloud explosions from atomic tests. Other walls in the office, decorated from the private collection of Andreessen and his wife, Laura, a lecturer in business strategy at Stanford, are adorned by midcentury paintings from such artists as Robert Rauschenberg and Jasper Johns. In his own spacious office, a liquor cabinet is stocked with A.H. Hirsch and Black Maple Hill vintage bourbon. On his desk, Andreessen displays the Victrola used by a character on the TV show Mad Men, which he bought at auction for $1,000.
"Marc is a guy who believes the past is prologue," says Ovitz, who is on the advisory board of Andreessen Horowitz and also invests in it. "You are dealing with a guy who created the future with Netscape who is basically looking backward for cues on how people behaved, their thought process and creative patterns."
Andreessen and Horowitz know how their connection to their controversial adviser might look. Ovitz was famous for racking up enemies as easily as 15 percent commissions. "You need to separate what he did for his clients from what his detractors think and why they think it," says Andreessen. "What he did for and with his clients is legendary. That's the part we're focused on."
As the partners point out, CAA under Ovitz controlled most of the major writers, directors, and actors in Hollywood. Andreessen contends this type of dominance would be impossible to achieve in Silicon Valley. Anyway, he doesn't really want all the deals—just the best ones. "When it comes right down to it, there are 15 tech companies a year you actually want to back," he says. "Our fundamental goal is to be a major investor in as many of those 15 as we possibly can, and we are set up to do that."
The crux of Andreessen's and Horowitz's idea is to organize the firm as a unified high-service organization that provides help to fledgling startups in the areas critical to their survival while offering access to a wide network of people that reaches into other large companies throughout the high-tech community.
Other firms, they say, operate more like a collection of independent agents bound by a loose partnership. They can have a dozen venture capitalists—known as general partners—who act as lone gunslingers, finding deals, winning approval of peers for investments, and then catering to and advising those startups on their own. Startups that work with those firms primarily have access only to the advice and personal networks of their individual partner.
Andreessen Horowitz's three general partners—the third is former Opsware vice-president and dealmaker John O'Farrell—collaborate on finding deals, then decide who is best suited to be the startup's main liaison. They also have a 15-person (and growing) operations staff, unusually large for a VC firm with only three general partners.
Most of these other employees at Andreessen Horowitz are called "partners"—another cue taken from Ovitz's CAA. They mainly focus on helping the firm's portfolio companies, much as the multiple departments of CAA would swarm over an actress to get her next movie deal—and also schedule her singing coaches, line up endorsements, and make sure she's huge in Japan. Andreessen Horowitz's chief operating officer, a former Opsware senior vice-president named Scott Kupor, aids startups with the logistics of raising money and runs the firm day to day. Teams are devoted to recruiting, public relations, and business development. Other firms have tried aspects of this holistic approach, such as adding a single in-house recruiter. Andreessen Horowitz has six, and they're mapping the Valley's talent pool—building a database of all the top designers, coders, and executives in the community. The firm then uses the data to help fill positions at its startups. It'll even line up talent for friendly large companies, notching favors to be repaid at a later date.
Andreessen and Horowitz say the firm's high staff-to-VC ratio frees them personally to focus on making investments and using the force of their reputations to close a deal or persuade an executive candidate to join a startup. Egon Durban, who led the Skype deal as managing director of the private equity fund Silver Lake Partners, calls this kind of persuasion the essence of what Andreessen does best. "He is a great closer because of who he is," he says. "People really respect him and respect his endorsement. That is pretty powerful when you are in a competitive process, such as trying to recruit an executive."
It's not clear yet what advantage this system gives the firm when trying to find those 15 elusive winning startups each year. So far, Andreessen and Horowitz appear to be relying on more traditional means: intuition and star power. In the summer of 2009, the pair met with Osman Rashid, the Pakistani founder of Kno, a startup in Santa Clara, Calif., that plans to manufacture a dual-screen tablet for digital textbooks. Some other top venture capital firms, allergic to building actual hardware and fearful of Apple (AAPL) and the impending iPad, passed on the deal.
Rashid, who also founded the textbook rental company Chegg, describes his meeting with Andreessen and Horowitz in romantic terms. "I felt something I haven't had with any other investor before," he says. "It was very fluid. It was right to the point." Over the next few months Andreessen Horowitz invested more than $30 million in Kno, about 10 percent of its first fund, and took a majority stake. It's the firm's second-largest bet after Skype. "Special product, special market, special entrepreneur, special economics," Andreessen says with his usual rapid-fire delivery.
The tablet, with the shape and thickness of a physical textbook, will go on sale later this year. Everyone in the Valley will be watching to see whether Andreessen Horowitz picked a winner—or suffered its first flop.
Since he first burst into the public consciousness in the mid-1990s, proselytizing for the browser and a new medium called the World Wide Web, Andreessen has always been at the forefront of those who believe in technology's promise to reshape and improve our economy and lives. Now that 2 billion people around the world have broadband—and 5 billion own mobile phones—reality is finally catching up to him. "This is Marc's time," says Quincy Smith of Code Advisors, an advisory firm. "All the things he has been thinking about for the past 15 years are possible."
The danger for any visionary is being too far ahead of the curve to see how people live now. And Andreessen has sometimes misjudged the pace and direction of technological change. For example, although AOL (AOL) bought Netscape for $4 billion in the heat of the dot-com boom, it fell far short of the Microsoft-toppling revolution Andreessen predicted back then. In fact, Microsoft (MSFT) crushed its rival.
In 2004, Andreessen started Ning, an ambitious company that allowed anyone to create and customize a social network. The business was meant to outmaneuver Facebook in the same way the open Web had upended early Internet dial-up services such as AOL. Andreessen rarely brings up Ning these days, though he seeded the company out of his own pocket and ultimately persuaded investors to bet $120 million on it. While he is still chairman of the board and recently installed a former Netscape colleague as its CEO, it is difficult to see his move to the Facebook board in mid-2008 as anything other than a switch to the winning team in the middle of the game. Andreessen disputes that view and believes the Palo Alto (Calif.) company, which now charges people to administer specialized social networks, has turned the corner.
Andreessen's new venture capital firm also has its share of skeptics, particularly other VCs who speak only off the record, fearful of the partners' influence. They say it's too early to judge whether the firm's approach will produce bounteous financial returns, the only standard that matters in the industry. They also wonder if Andreessen Horowitz is willing to go a bit further than others in tolerating potential conflicts of interest between the companies the general partners are involved in and the startups in which they invest.
Andreessen Horowitz's $20 million investment in Foursquare in June, valuing the startup at about $100 million, illustrates how Andreessen Horowitz plunges in where other firms fear to tread. Foursquare solicited bids from major VC firms along Sand Hill Road, but because of their investments in competing companies, such top-tier firms as Kleiner Perkins, Benchmark Capital, and Greylock Partners took themselves out of the running. Although Andreessen sits on the board of Facebook, Foursquare's primary competitor, and receives stock as compensation, Andreessen Horowitz was one of two firms that aggressively pursued Foursquare.
Andreessen Horowitz won the deal over rival Khosla Ventures in surprising fashion. During the process, Horowitz told a tech blog that the firm was pulling out, because the startup was vacillating about whether to raise money or sell out to a larger company. (Yahoo had shown interest.) Partners at Khosla Ventures thought they had the deal. Then Foursquare announced the winner of its VC bake-off: Andreessen Horowitz. The investment occasioned bitter whispers up and down Sand Hill Road that Horowitz's blog statement had been a duplicitous head fake and that Andreessen's Facebook directorship gave the firm a tactical edge all along because Foursquare wanted to get close to the massive social network.
Dennis Crowley, the co-founder of Foursquare, says he didn't mind Horowitz's public rebuke and concedes he was equivocating about raising the money. He also insists Andreessen's position on Facebook's board did not influence his decision, although he says it does demonstrate the venture capital firm's expertise. "The fact that they have a deep understanding of social [networks] I think is represented by Zuckerberg's trust in Andreessen," he says. Horowitz, not Andreessen, sits on Foursquare's board of directors. "There is a wall between the relationship I have with Ben and what Ben discusses with Marc," Crowley says.
Andreessen says that Facebook and Foursquare are fundamentally different companies with different goals and that Facebook's new check-in feature is a small part of its overall business. He acknowledges that his involvements on the boards of Facebook, eBay, and HP may create potential problems. He says he avoids them by keeping certain information confidential and recusing himself from sensitive portions of board meetings that involve areas where his startups compete. The models for these extracurricular activities are Kleiner Perkins' Doerr and Jim Breyer of Accel Partners, who sit on the boards of Google and Wal-Mart (), respectively. That gives them unique insight into everything from the state of the global economy to technology trends. "As entrepreneurs, we always found it to be very valuable to have your VC connected into the broader industry so that if needed, he can plug you into any company that matters," Horowitz says.
Board seats—which are the primary way VCs exert their influence on startups—could compromise Andreessen Horowitz in another way. The wisdom on Sand Hill Road is that top investors can productively sit on at most 8 to 12 boards at any given time. Andreessen already sits on eight, Horowitz on five. Both will be asked to join more when they begin spending that next $650 million on the hottest startups, which will want to make their active involvement a condition of any investment.
Although he toys with the possibility he could effectively sit on up to 15 boards, Andreessen says this "is the central challenge for us and for other VCs. You are constrained far more by time than money." (E-mails from Andreessen to his CEOs come at all hours; Rashid of Kno looks at his in-box and tallies messages from Andreessen, on three different nights, at 2:17 a.m., 2:31 a.m., and 1:31 a.m.) Andreessen says the firm plans to add as many as three general partners over the next few years to lighten the load. The question is whether startups will want to do business with Andreessen Horowitz if they are getting a partner on their board whose name is not on the nameplate.
Ovitz says he talks to Andreessen often about the challenges of time management. "Most of the conversations are probably irrelevant because I have never met a human being with such a fertile mind, photographic memory, and retention ability," he says. Ovitz, though, has other insights that may be more helpful. At the end of his public conversation with Andreessen, the ex-mogul said he regretted scorched-earth tactics such as poaching every last movie-director client from the rival William Morris Agency. "We were too competitive," he said. "If I had to do it again, I'd ratchet back."
Andreessen is quick to point out that Silicon Valley is not Hollywood, and tech companies, including VC firms, find it easier to collaborate on one deal and then compete for the next. He says Andreessen Horowitz is sportsmanlike. Then again, when his firm was launched last year, he said it would focus on small deals and the founders wouldn't take board seats. Things haven't worked out that way. Asked what changed, Andreessen gives a long-winded answer. Pause. Grin. "We just can't help ourselves," he says.