Posted by Tom Foremski - January 31, 2012
(Photo:By Joi Ito.)
Marc Andreessen and Ben Horowitz made their reputation as savvy investors by making lots of small seed investments of up to $100,000. This then helped them raise billions of dollars, $2.7 billion so far, with the latest $1.5 billion fund announced today.
Mr Andreessen tells CNET's Paul Sloan that, "The opportunities seem very large." In his column "Bootstrap" he reports that Mr Andreessen is on a quest to find the next Zuckerberg, Bill Gates or Larry Ellison. There's no mention of a Larry Page...
But can seed investment success scale to a $1.5 billion fund? The size of the fund precludes it from managing $100,000 seed investments. A fund that large could seed more than 15,000 startups. But it could not hope to find or manage that many investments, which means it has to go for later stage investments -- which is not a proven specialty for the Andreessen Horowitz funds.
So far, Andreessen Horowitz's biggest success was its investment in Skype, which ended up getting bought by Microsoft. That was part of the firm's first fund. The second fund has investments in biggies like Facebook, Twitter, Groupon, and Zynga. Andreessen Horowitz has been criticized for getting into some of those companies late, but Andreessen says the valuations have risen since investing in them.
Overall, though, it's too early to call the strategy a success. "We just don't have the results on most of the money," Andreessen said.
An area where the investment duo have been able to put large sums to work has been in the private secondary markets where they bought into companies such as Facebook, Twitter, and Zynga. And it is in this shadowy market that some of this new money is likely to be used.
However, are there enough new private ventures to invest in? Or will the huge fund end up inflating the value of private shares in the already existing favorites? This could cause problems when those companies file for an IPO in that there could be little upside left for investors. Which means it could hurt prospects for other tech IPOs.
The likely result is that secondary markets will continue to be an important source of capital for many startups despite concerns that there are few regulations protecting investors. And with large funds being active in these secretive markets valuations of private companies could become highly volatile because of the lack of liquidity -- something which is moderated in public markets because of the larger pool of available investors. Volatility and inflated valuations could be damaging to the growth of young companies.