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Andreessen Horowitz Case

By Francisco Coln Valds March 2017

1. Was venture capital an attractive industry to enter in 2009? What


entrepreneurial opportunity did Andreessen and Horowitz see?
Not that attractive, with a very recent financial crisis and very high valuations in the tech
sector. In 2009, they entered Skype for example, they saw an opportunity in creating a
better sourcing, with a deeper understanding. The value proposition of their VC was the
networks they created internally and externally and how the use that networks to add
more value to their portfolio companies.

2. To succeed as a VC, you have to do three things really well: source, pick,
and win" (Andreessen Horowitz case, p. 8). What does a traditional VC firm do
to source, pick and win? How does a16z approach these key success factors
differently than other VC firms?
Traditional VC firms do either of two things: Being outside lurking for average looking
companies as well following the stars and two, leverage on their strong brand and just sit
and see the parade. For Picking, they mainly go for companies with not so many
weaknesses even though they may not have many strengths. a16z, instead focus on the
strengths and just keep an eye in weaknesses. And for winning, traditional VCs, throw
money and a lot of empty promises but a16z instead, gest picked by the entrepreneurs
by all the real things it has to offer: the operational advisory and their big networks.

3. If you were a first-time founder of a tech startup seeking Series A


investors, would you find a16z's value proposition attractive?
Yes, since a16z can really help me with building a solid network, as it is my first venture,
they can connect me with the best people to join my company as well the can provide a
more in depth insight of the technical part of the venture

4. Is a16z's big investment in its operating team likely to yield a positive


return? Should other top- tier VC firms copy this approach?
Yes, their team is cheaper, and it aligns better the strategy with the incentives. It
would be very hard for other top tier firms to adopt this approach, since their staff will
have to endure a heavy hair cut on their paychecks and a total shift of culture ion the
way the work and operate.

5. Evaluate the following a16z organizational policies and practices:


a. criteria for hiring General Partners; Founder or CEO, it aligns with a16z strategy,
allowing GP to coach better another CEO
b. compensation approach for GPs; It aligns the GPs with the LPs objectives,
reduce political stress among those parties.
c.co-founders' governance rights.
It changes form a partnership with the GPs to a more hierarchical structure, avoiding the
lord of the flies effect whenever a hard decision comes by or interest gets in conflict
How important will each be to the firm's success?
Those 3 dimensions are key to the success of the firm, by aligning the profile with the
incentives and structure, you ensure the continuity and congruency in the execution of
the strategy.
6. Should a16z seek to double its assets under management over the next
two years? If you support rapid expansion, would you diversify into other
sectors (e.g., life sciences, clean tech) and/or geographies (e.g., China, New
York)?
Yes, double its size, the hierarchical structure allows them to grow the team without
threating the culture and strategy, but instead going to another geography, going to
different sectors like big data, robotics etc. Staying in that geography to not grow to
thing its networks, which is one of their main strengths, before expanding to new
geographies they must first enhance their network in such geographies.

7. To understand the potential financial impact of doubling assets under


management, estimate a16z's "steady-state" annual revenue and its costs
before GP compensation using the following simplifying assumptions:
a. al6z raises a new $1.5 billion fund every 3.33 years (a typical frequency for
a VC firm); fund life averages 10 years. So, in steady state, al6z would have
$4.5 billion in total committed capital 1.7x its current scaleand would
invest $450 million per year.
b. Across its entire portfolio, exit proceeds average 2.5-3.0x capital invested,
consistent with successful VC funds' performance.
c. Management fees equal 2.5% of committed capital and carry equals 25%
of capital gains. Ignore thresholds that boost the carry to 30%, and the fact
that management fees on parallel funds are paid on invested rather than
committed capital.
d. To calculate costs, estimate average annual cash compensation per non-GP
employee. Then increase that figure to reflect additional expenses for benefits,
rent, travel, professional services, etc. Finally, estimate the number of non-GP
employees al6z would require to support a 1.7x increase in scale to $4.5 billion
in committed capital. Note that a16z currently has 74 non-GP employees, 43 of
whom are operating team professionals. As you consider Question #6 above,
note that four of the top VC firms listed in Exhibit 9 (Bessemer, Kleiner
Perkins, NEA, and Sequoia) invest across info tech, life sciences, and clean
tech. The other five firms focus solely or very heavily on info tech. Also, with
respect to Exhibit 6, note that the investment tally for a given year includes
many follow-on rounds for startups in which al6z made an earlier investment.
For 2013, for example, of 49 rounds not classified as "Seed," 22 were follow-on
rounds and 27 were first-time investments for a16z. Further note that al6z
does not provide all of the capital in a given round: it typically co-invests with
other venture capital firms. In analyzing Exhibit 6, assume that al6z's share of
total round proceeds averages 50%. This is just a guess as al6z does not
disclose its actual share of funding rounds.

2.5% management fee on committed capita= 4.5bnx2.5%=$112.5 million in managing


fee/yr
$450m*3x=$1,350 exit proceeds per yearx25% carried interest= $337.5 millions
Total revenues per year in SS=$450millions

Cost
Average annual cash compensation per non-GP employee=$130,000
Non GP employees needed= 100
Cost/yr of non GP employees= $1,300,000