Andreessen offers harsh critique of VC industry

Marc Andreessen could have invested in Facebook early on, but he didn’t try hard enough.

That was one of a number of revelations he made last week in a wide ranging discussion with PE Week about his transition from serial entrepreneur to venture capitalist. Andreessen and his longtime investing partner, Ben Horowitz, have officially closed on $300 million for their firm, Andreessen Horowitz.

The Netscape co-founder says he and Horowitz are “going pro” after backing 39 seed-stage companies as angels since 2004. But while they have backed a number of popular startups—most notably Twitter—Facebook isn’t in their portfolio.

Asked if he would have invested as an angel in Facebook, the 6-foot-5 Andreessen smiled, blushed and said: “Uhhh. Damn, she asked the question. … Let’s put it this way, I’ve known them from the beginning. I probably could have if I had tried hard, but I didn’t.”

The non-investment in Facebook is particularly painful because it is what Andreessen calls a “franchise company,” a technology startup that reaches annual revenue of $100 million. In fact, Facebook will do about $500 million in revenue this year says Andreessen, who sits on the company’s board.

Citing research by Stanford University Lecturer Andy Rachleff, Andreessen says about 15 franchise companies get launched in the tech industry every year—and it’s those companies that his firm hopes to back.

“Those companies in total represent a very large percentage of the returns to venture capital,” he said. “[Rachleff’s] data show that they were 97% of all public returns, which is a good proxy for all returns.”

To be able to invest in a franchise company at any stage, Andreessen and Horowitz have given themselves the flexibility to invest as little as $50,000 or as much as $50 million in a single round.

“Our view is when you find one of those franchises … you want to invest as much as you can both in time and effort across as many rounds as you can,” he said.

Practically speaking, Andreessen and Horowitz expect to make 60 to 80 seed investments and about 10 to 15 later stage deals over the next 10 years.

But they won’t invest in just any franchise company. “Let me give you the ‘not list’ first,” Andreessen said. “Not cleantech, not energy, not biotech, not life sciences not nanotech, not rocket ships, not electric cars and not space elevators.”

What they will back is “basically anything computer-related,” including consumer Internet, software as a service, cloud computing, networking, storage, servers, databases and consumer electronics enabled by commodity hardware.

As for where they will invest, the duo plans to stay close to home. “Most of the investments will be in the U.S. and most of those will be in Silicon Valley,” he said. “We think the Valley continues to be the best place to make these kinds of investments in general, with some exceptions.”

While he’s optimistic about his own firm’s future, Andreessen is equally pessimistic about the chances of his new peers, predicting that as many as half of the current firms won’t be able to raise new funds in the next 10 years.

LPs funded too many second-tier firms because they couldn’t get into the top firms, and “what you get is second-tier venture funds funding second-tier startups started by second-tier entrepreneurs building second-tier products,” he said. “It doesn’t make any sense, so the swamp should get drained.”

Lest you get the impression the Andreessen thinks he has nothing to learn from other VCs, you should know that he has not one but six venture capitalists he admires. In no particular order, they are Rachleff of Stanford, who used to be a general partner at Benchmark Capital; John Doerr of Kleiner Perkins Caufield & Byers; Jim Breyer of Accel Partners; Mike Moritz of Sequoia Capital; Aneel Bhusri of Greylock Partners; and Danny Rimer of Index Ventures.

Andreessen and Horowitz sought the opinions of those VCs and others before launching their firm.

“Interestingly, the people who have been in the industry for a long period of time have very open minds about structure and approach,” he said. “The younger guys were like, ‘Oh, that won’t work! You can’t do that!’”

In fact, one VC who he declined to name told him that they wouldn’t be able to raise $200 million, much less $300 million. His advice: Raise $100 million in $10 million increments from 10 other venture firms and entice those firms to invest by offering them part of the carry.

“It was basically, like, ‘Why don’t you become our butt-boy?’” Andreessen said with a laugh.

BusinessWeek last week reported that Andreessen and Horowith raised their fund from institutional investors, including San Francisco-based limited partner Horsley Bridge Partners, and well-known tech veterans, including Reid Hoffman, founder of the social networking site LinkedIn, and Peter Thiel, former CEO of the payment service PayPal and managing partner of the Founders Fund.

Horowitz and Andreessen met in the earliest days of Netscape, which Andreessen co-founded after he engineered the first widely-used Web browser at the University of Illinois at Urbana-Champaign. Horowitz, one of Netscape’s first employees, later co-founded the software company OpsWare with Andreessen, where Horowitz long served as CEO. Hewlett-Packard acquired OpsWare in 2007 for $1.6 billion.

More recently, Andreessen, who sits on the boards of Facebook and eBay, co-founded Ning, a developer of a platform that allows users to build their own social-networking websites. Ning has raised $104 million over the last five years from individual investors, Allen & Co. and Legg Mason Wood Walker.

Besides Twitter, Andreessen and Horowitz have backed 38 other companies as angels since 2004. Those companies won’t be folded into the fund, but the firm has the option of investing in them in follow-on rounds.

Among the duo’s angel investments are Aliph, which makes the popular Jawbone cell phone headset; FunnyOrDie, a comedy website co-founded by comedian Will Ferrell; Kaching, an investing website; Qik, which enables cell phone users to stream live video; Scribd, a social publishing website; and SocialMedia, an advertising network.

For a full transcript of our one-hour interview with Andreessen, click on the following link: Q&A with Marc Andreessen