This week, the Wall Street Journal published a brief interview with Andreessen Horowitz Partner Scott Weiss in which he seemed to indicate that the firm is moving away from Series A investments in consumer startups. He also compared many consumer companies to “fruit fly experiments.”
It was unclear what Weiss meant by this, but A16Z founder Marc Andreessen jumped into this Hacker News thread over the topic to clarify the firm’s stance on Series A investments.
He writes in response to a comment on Hacker News: “Just to be clear we didn’t publicly announce that we are not doing Series A investments anymore. They remain the bread and butter of what we do. Scott was making a more nuanced point about a difference between how we look at consumer vs enterprise companies right now, and our relative preference for enterprise A’s and consumer B’s.”
We’ve all seen the swing of VC sentiment towards enterprise investing from consumer startups over the past year. So Andreessen’s commentary on how the firm is approaching consumer vs. enterprise investing isn’t particularly surprising given all the talk about the Series A crunch and the rut in consumer investing.
Andreessen goes on to say in the thread that Weiss’ interview with the WSJ is being “over interpreted.” He adds that the firm isn’t refusing to do Series A investments and is working on multiple investments at this stage in both consumer and enterprise. Weiss was merely addressing how the firm is currently thinking about consumer vs. enterprise in the current state of the VC world and environment.
Why is A16Z leaning towards consumer B’s and enterprise A’s in this climate? Andreessen says that currently, consumer startups either have the “lightning in the bottle” effect or they don’t. This effect doesn’t necessarily correlate to the capabilities of the founders, either. Getting traction is hard and he says that’s also why we are seeing more acqui-hires of the startups that haven’t been able to get the “flywheel spun up.”
He writes, “So, if we have the theoretical ability to invest in a given category — remembering that we can only make one primary venture investment per category — in either the A or B round, we find it often makes sense to let other firms fund the A rounds before anything is proven and wait to see the early signs of lightning and then step in hard at the B. The end markets are so large for the winners that the investment returns in the B can still be outstanding, and we can still offer a lot of useful help to the companies at the B stage such as talent sourcing.”
He also says that the firm sees many more great consumer teams struggling to get traction than great enterprise teams struggling to get traction (on a proportional basis).
Enterprise startups are more predictable, he maintains. The combination of a great founder, engineering team, idea in a big market is a reliable bet that “magic will happen.” And the A16Z can actually talk to the companies who are using these enterprise products to get real feedback. He adds that the firm also sees 1,200 big company management teams coming through their office, and A16Z will ask these corporate execs then what they think about new ideas in the enterprise. So it’s easier to bet at the Series A on an enterprise company.
Perhaps this is what Weiss meant by “Fruit Fly Experiments,” an instability, and tendency to throw multiple products or business models against “a wall” (the consumer) to see what sticks.
Andreessen explains, “None of this is religion — we still do plenty of consumer A’s and enterprise B’s. We just think it’s useful to talk about these things in public so that entrepreneurs know before they come see us how we are thinking about things — it optimizes their chances of getting to the right outcome with us (whatever that is).”
After reading Weiss’ initial commentary, some hypothesized that A16Z is changing its strategy to adapt to having a $1.5 billion fund, and how to best approach this for returns and scalability. But Andreessen clarifies that the firm always prepares to invest more than just series A and reserves another 2-3x of the A-round investment size for participation in future follow-on rounds for a given company. He also says that A16Z is not an either-or situation when it comes to rounds: “We do venture rounds as small as $3-5M and we do growth rounds as high as $100M. Each fund has a blend of both…When we get a great A round opportunity, we take it. Same with B rounds, and same with later-stage growth rounds.”
If A16Z is limiting its Series A rounds in consumer towards enterprise, we’re also curious how this is affecting the firm’s seed funding. Is the firm scaling back on seed rounds in consumer tech, as well?
We’ve reached out to Andreessen and the firm for further comment on Weiss’ remarks and the Hacker News thread and will update if we hear back.