With Software Eating The World, Venture Will Deviate From Historical Returns, Horowitz Says

Upstart venture firm Andreessen Horowitz is betting that, as software permeates more and more traditional industries, venture returns will break out from their stable track record.

“Historically, the tech industry has been sized at a certain level. Total returns have been very consistent over the past several years, but as software eats other industries we think the technology opportunity is expanding itself,” said Ben Horowitz, one of the firm’s founding partners. Horowitz gave examples like Pixar eating Disney’s traditional animation business and Amazon eating retail.

Horowitz’ remarks come in spite of an ongoing debate about disappointing 10-year returns for venture as an overall asset class. CalPERS, a prominent limited partner in many funds and the nation’s biggest pension fund, said last month that poor returns may compel them to cut virtually all of their venture allocation.

However, even as the amount of overall dollars dedicated to venture capital has declined from four or five years ago, there has still been plenty of room for very young, nimble players like Andreessen Horowitz to barge in. Andreessen Horowitz was able to close $1.5 billion in the first quarter of this year, and Nicira’s $1 billion sale to VMWare may help return the firm’s first fund two times over.

Because venture returns are disproportionately concentrated in a few companies, access to the very best deal flow is paramount. Andreessen Horowitz very savvily positioned itself as a firm with a lot of operational know-how that goes beyond solely providing capital to startups.

“I really felt that VC had become too abstract with respect toward what it takes to build a company,” Horowitz said. “At least when I spoke to others in the industry, there was a lot of focus on business models, on market sizing and segmentation. But company building is really about a whole other set of things. It’s about the struggle and doing something for each other even when the company’s falling apart.”

Andreessen Horowitz helps with recruiting, networking and leadership coaching. They built a talent agency that recruits recent college graduates to work in portfolio companies, and they have a section of the office where portfolio companies can connect with potential Fortune 500 clients.

“When you first found a company, you don’t know 30 good executives you can hire. You don’t know 50 good engineers. You don’t know the press. You don’t know Fortune 500 CEOs you can get to buy your products,” Horowitz said. “With the organization we’ve built, as a founder you can go in and plug into a professional CEO-quality network.”

Horowitz says he also coaches portfolio CEOs on developing leadership and management skills.

“It’s hard for a founder to be a CEO. They’re really missing two things that professional CEOs bring to the table. They do not have the skill set. They don’t know how to do the job, so all of the general partners that we selected, we wanted them to have experience running or founding companies.”