a16z, a venture capital firm known for its large fund sizes and for shaking up the VC game when it piled into the industry back in 2009, is cooking up a new strategy to potentially bolster its deal flow, according to a recent report. It’s creating a fund-of-funds to invest in smaller venture capital pools, giving it visibility on the next generation of breakout tech companies.
a16z did not respond to requests for comment on this story.
The trend of large funds — traditionally more focused on later-stage deal-making, as it’s hard to deploy big funds into smaller, earlier deals — trying to find a way to get involved in earlier-stage companies is not new. And it is not hard to see the logic behind the a16z effort, provided that it pans out as expected: If it is hard for huge funds to go early, and therefore small, why not simply fund the folks investing early, and then leverage those relationships?
The new a16z effort sparked up a little conversation inside of TechCrunch+, so we decided to take to our traditional “talk about it out loud” model of sharing different perspectives on the matter from inside our newsroom.
This is not the first time that we’ve seen funds try to go earlier in the investing world; scouts were a similar effort, and we’ve seen venture funds also build out programs for early-stage deal-making apart from their more traditional stage focus. Will the a16z effort pay off? And will it be ultimately good for founders?
Becca’s take
I think the easy argument to make is that Andreessen Horowitz wants to get access to companies earlier. But I’m not really sure if this would make a material difference.
While the Insider story that scooped this potential strategy got a lot of it right, I struggled with one thing: The story said that this would be the first time Andreessen Horowitz invested in other venture funds. Sure, maybe it would be the first time it had a dedicated fund of funds, but it would not be the firm’s first foray into LP investing by any means.
Both a16z as a firm, and its individual partners, have already been doing this for years. The firm has long backed a16z spinout funds or those with past connections to the conglomerate like Larsen Jensen’s Harpoon Ventures (focused on military and defense) and Katie Haun’s Haun Ventures. The former of the two focuses exclusively on early-stage deals.
The partners are also LPs themselves. Marc Andreessen has backed funds from managers including Kearny Jackson, Moxxie Ventures and Vice Ventures. Chris Dixon is an LP in multiple crypto funds, including Canonical Crypto’s $20 million inaugural fund and a $30 million NFT-focused fund run by Curated, which garnered LP backing from four other a16z partners, too.
There is speculation that raising this fund would give Andreessen a sneak peek into attractive companies earlier. But what companies does a16z really think it would uncover with this strategy?
While the firm has definitely lost a little bit of its shine when it comes to its reputation in recent years, it is literally Andreessen Horowitz. It is one of the largest venture firms in existence with an eye-watering amount of capital on hand and a vast network of spinout funds and scouts. The majority of startups still want to be backed by the firm, and their existing investors want Andreessen to follow on, too.
In addition to that, aren’t the majority of seed funds already looking to work with it? The fund probably has a good idea of what kinds of companies would be a good fit down the line just based on its large network and existing relationships with earlier investors and angels.
The only reason I could see this potentially increasing the number of companies is if this alleged fund came with a lot of mandates or internal tranches to, say, back early-stage, emerging manager-led funds outside of Silicon Valley, or those run by women or people of color, or focused on businesses started by those groups.
If this were the case, which I doubt it would be, this would be the only way I could see a fund of funds strategy actually helping Andreessen find young companies that wouldn’t have otherwise crossed its radar.
But that is likely not the scenario. And if that is indeed not the case, this is largely just a nice way for the firm to market something it’s already using both LP capital and partner funds to do.
Alex’s take
A decade ago, a16z was talking about getting out of the seed-stage investing game. Eight years later in 2021, the venture giant put together a $400 million seed-stage fund. And a16z has had a scout program and its START effort to boot that it announced just last year.
In short, the venture capital firm that is best known for raising massive general funds and large capital pools to pursue particular sectors when it deems appropriate has a long history of working to find the most effective way to get involved with the earliest-stage startups, using both capital, relationships and mentoring. From this perspective, the idea that a16z staff are considering a fund of funds to put capital into smaller GPs and firms tracks neatly; try, try and try again.
Seed investing is, after all, less of an MBA-type activity and more a gambit in which investors make bets on founding teams over concrete business results. Some venture firms make seed deals their bread and butter. Others prefer later deals where there are more hard figures to weigh. Some even try to do both, but that can be tricky.
It’s very easy to be generally bullish on a16z finding new ways to inject capital into the early-stage market. After all, seed-stage capital can help lay the groundwork for the next generation of breakthrough tech companies to crash their way through the existing economic landscape; there is a reason why our flagship conference here at TechCrunch is called Disrupt, after all.
More capital, better-funded small firms and solo GPs, what’s not to like? Concentration, I think. Given the massive size of a16z venture funds historically, the firm has a lot of sway. If the fund of funds strategy works out, money from a single fund could thread its way from the very earliest days of a startup’s life. Good? For a16z perhaps, but it could also wind up concentrating the venture perspective along a single axis. Would the funded smaller firms not invest in companies that they hope a16z would later fund through IPO? That could narrow the types of companies — the types of ideas? — that are funded.
Not great, not terrible. The best answer to any sort of business success, of course, is competition, so if this effort winds up working for a16z, we should anticipate others to work to mimic it.
The idea that a venture capital firm should be able to invest in a startup from birth through exit is not new; recall that during the last boom, some venture firms were forming their own SPACs so that they could help shepherd their backed companies onto the public markets — bonus points if the firm that fired up its own SPACs also did seed deals.
That effort did not work out so well, as SPACs wound up being what they always had been: namely, ways to take out the trash instead of a method for floating viable companies. But the itch to purchase greater stakes in winning companies is never going to go away. So, the a16z strategy is the opposite of a shock.
But if the crypto world has managed one thing, it constantly beat the drum that centralization is not always the best path forward. Ironic, given that a16z is one of the largest and more prolific investors in web3 companies, but here we must protest gently against the largest firms working to consume as much of their market as possible. Sure, there are antitrust overtones in that comment, but that’s just more irony for our enjoyment.
Here’s to a large and intensely competitive venture landscape in terms of both capital availability and the interfirm battlefield of ideas over something more single flavor.
Anna’s take
My understanding of a16z’s supposed plans is that it’s driven by FOMO.
The more eyes, the more chances at spotting the best opportunities from day one — the same reason that also inspired scout programs.
Not that the firm wouldn’t eventually get pitched by all of these companies, presumably during or not long after their seed phase. But by getting in even earlier, the firm gets a chance at securing much better returns than by doing it even a few months later.
This argument might particularly appeal to limited partners. As is, these may feel envy when they see existing a16z partners already invest in other funds, but as individuals and not through the firm.
As Becca rightly pointed out, a16z is actually no stranger to investing in other funds. But if Business Insider missed that, we can presume that not all prospective LPs know this, either.
By making its fund of funds official, a16z adds another arrow in its quiver and further improves its pitch to LPs, who can now be ensured that the fund can invest in the best startups from inception to public markets. No more FOMO.