Some people are not going to like this post, but it’s on my mind and I have to write it. Don’t worry, it will be short. Let me state up front that I have many friends at a16z, I’ve interviewed for a few positions there, and they’re a small early investor in the company that I work for, Swell. With that out of the way, I’ve been thinking about a16z’s model and performance of late. Now, I know they engage in lots of PR (smartly, I may add), but I wanted to peel back those PR layers and look at some of the fundamentals in their model. Keep in mind that this summer, a16z will mark its 5th birthday. Here are seven (7) bets the firm made as a matter of strategy, and how those bets may set them up for true success and reinvention of the venture category:
- Bet #1 – The Rising Tide Of Technology: The initial thesis of the firm was that, following the 2008 recession, technology was approaching a mainstream inflection point with strong fundamentals and without the trappings of what occurred during the Dot-com bubble. The public markets for tech have roared back and show little sign of stopping. There’s a new floor.
- Bet #2 – Technology Valuations, As A Result, Should Be Adjusted: The rising tide of technology would therefore render early-stage valuations of private companies to be readjusted to this new reality. If a firm has conviction about a startup investment, paying over the market price is OK because of Bet #1.
- Bet #3 – GPs Must Be Startup CEOs To Sell Executive-to-Executive: GPs sell the a16z vision and brand, as well as the services underneath, which creates a clear bar for LPs and future GPs in the fund, which in turn leads to Bet #4…
- Bet #4 – Agency Model Of Services In Venture: In order for GPs to focus on courting new investments, they’d build a services network underneath to (1) serve companies they’ve invested in and also (2) to help build up the firm itself.
- Bet #5 – Over The Air Marketing From Day 1: Almost from its origin, the firm rooted PR and a strong, bold new media presence as central to its strategy, going over-the-air with a mix of marketing messages that communicated the new model, the brand, and so forth.
- Bet #6 – Building An Engineering Recruiting Graph: Technology companies win by building the best products in the best markets. While the firm can evaluate markets from a distance, in order for those products to exist, the best builders must build them — hence, the firm invested in and built two types of databases for engineers (college, experienced) and use double-opt-in techniques to pair interested engineers with their companies. They’re creating a long-term relationship with engineers, not just companies. (As a commenter pointed out, the firm also does this for design talent, which is also critically important at the early-stages of product-building.)
- Bet #7 – Seed To Learn The Market, Shift To Fast-Follow Series B To Capitalize: The firm began investing at all stages, but eventually (recently) moved to a focus on later-stage deals, what I’d call “Fast Follower” after A rounds. This is what Greylock perfected in the mid-late 2000’s, and now a16z in pumping even more money into those winners who emerge from the A rounds and make it over the Series B Crunch. This fits their strategy as they have a big fund and need to deliver big returns. Oculus to Facebook after four months and a $75m check epitomizes this approach, and they played it masterfully.
Again, there’s a ton of PR and noise around a16z’s activities (it’s a full-court press), and this activity generates adoration (as we see on Twitter and in the press in general) as well as jealousy (as we see on Secret). As someone who is interested in investing and venture capital, I’m taking a more historical evaluation of what they’ve done in five years and wanted to present this as my own personal observations of the bets they made and how they’re on a track to be right on all of them. I have no skin in their game, I just wanted to look back on the bets they made and reflect on how prescient (and disruptive) those moves have been and may be as 2014-15 unfolds. I know some people will not like this post, but I think the facts are the facts. Yes, there’s a long way to go, but their early bets are proving to have been pointed in the right direction.