By Tom Sible
Andreessen Horowitz’s nontraditional approach to venture capital – moving away from a single-minded hunt for the next big tech or health care startup, and toward a broader asset manager’s business model – appears to be paying off. The firm raised two of the 10 largest funds in the market in 2019 and has jumped in this year with two more specialty vehicles pegged to raise more than $1 billion.
But while Andreessen and some of its large peers have won investor interest by adopting “institutional” asset manager traits – such as developing multi-product menus and registering with the Securities and Exchange Commission – most other firms aren’t likely to follow the model, say industry watchers, resulting in a bifurcated venture capital market.
Andreessen this year is further building out its diverse slate of products, targeting $1.3 billion across specialty vehicles investing in bio-health and cryptocurrency, and demonstrating further how a bigger menu can win over venture investors. That follows a decision last year to split its flagship venture strategy, shifting the primary vehicle’s focus toward early-stage investments and creating a large new late-stage fund. The new late-stage fund ended up as the second-largest capital raise in venture last year at $2.2 billion, while the refocused sixth flagship vehicle was the tenth-largest at $840 million, according to PitchBook.
The 11-year-old firm founded by Marc Andreessen and Ben Horowitz also bucked convention last year by choosing to register with the SEC, a move most venture capital firms can skip, but which officials at the $16.6 billion manager have characterized as a way to let it expand beyond the market’s standard product set, despite the added compliance costs.
But Andreessen’s moves to adopt traditional institutional asset manager traits aren’t likely to inspire or pressure other venture capital managers to similarly evolve, says Fernando Garip, managing director and director of portfolio strategy at Clearbrook, an investment consultant.
“Unless the goal is to raise huge pools of money, which has its own motivations, I see that model being a different playground,” he says. “It’s basically another market beyond traditional venture.”
The current coronavirus-pandemic-altered market also makes it less likely that the typical manager will embrace big business changes, says Jeff Grabow, U.S. venture capital leader at EY.
“Most of these funds are in a heavy triage mode figuring out where to double down and where to not be as engaged,” he says.
The venture market overall has been growing in recent years, according to a new report from the National Venture Capital Association, which counted 1,328 active venture managers at the end of 2019 with $444 billion in assets under management, compared to 788 firms with $229 billion at the start of the last decade. Last year, venture firms raised $51 billion across 272 funds, down slightly from the $58 billion across 304 funds in 2018, but still marking the sixth consecutive year of market fundraising topping $30 billion, according to the report.
Andreessen has been a star brand in the market’s rise, investing in prominent tech startups such as Facebook, Lyft, Groupon, Slack, Skype, Airbnb, and Instagram. But more recently, it has been expanding its profile further into bio/health care, financial technology, and crypto-blockchain investments.
Its new $750 million bio fund – following 2015’s inaugural $200 million vehicle and 2017’s $450 million successor offering – invests on the premise that technology, biotechnology and health care are merging into a single discipline. That specialty aims to tackle not only diseases and health care disparities and inefficiencies, but also “what we eat, what we wear, what we build, even how we heal our planet,” according to a statement from Andreesen.
The new $515 million crypto vehicle, its second following an inaugural $350 million fund in 2018, is an “all-weather” strategy that expects blockchain to flourish across investments in next-generation payments, currency, decentralized finance, and a 3.0 version of the internet.
A few of Andreessen’s larger peers have also been diversifying their menus, including Sequoia Capital, whose large venture lineup includes funds focused on India and China, and Founders Fund, which is adding a late-stage fund. Such moves aim in part to help managers get an edge in a market where many smaller managers are introducing ever more specific single-focus strategies, Grabow says.
“Being diverse may be the result of a market where everyone is looking for an advantage,” he says.
The overall venture market has been expanding beyond its traditional tech investing roots, Garip says. While software remains the most popular target, it no longer makes up the majority of new investments, with smaller venture firms now ranging into early-stage deals focused on health care, blockchain, and other narrow sectors – and with many of them targeting more modest startup wins rather than chasing blockbusters like Facebook, he says.
But such changes don’t require managers to adopt institutional-style practices, which many investors see clashing with the market’s entrepreneurial focus, Garip adds.
“They’re not sure institutionalizing some of these pools of capital necessarily benefits them,” he says. “It sort of defeats the purpose if it makes the decision-making more cumbersome.”
The asset manager model may also thrive, however, especially because of the potential to attract new investors to the venture market, Garip says. “These [larger institutional] managers have been able to raise capital and larger funds,” he adds.
Indeed, Sequoia raised most of an $8 billion global growth venture fund in 2018, while Lightspeed Venture Partners closed a $4 billion fund in late March.
And as they get larger and establish bigger brands, these managers have the ability to keep adding strategies, Grabow says.
“If top-tier, bulge bracket firms in the asset class open up new vehicles, [they’re] going to be on a lot of the [limited partner] shopping lists,” he says.
That’s even taking place today during the pandemic-slowed market, as some big venture managers are expected to raise opportunity-style funds, Grabow adds.
“They’re stockpiling,” he says. “Having more capital to deploy for a very good opportunity is not a bad thing in today’s market… The rule in venture capital is to raise capital when it’s available and not when you need it.”
Contact the reporter on this story at tstabile@fundfire.com or 212-542-1222.