Disrupting the disrupters
Marc Andreessen made his name taking on Microsoft in the
browser wars; now he is stirring things up again as a venture capitalist
From
The Economist, September 9th 2011
"Software is eating the world," proclaims Marc
Andreessen, the 40-year-old co-founder of Andreessen Horowitz, a
venture-capital firm in Silicon Valley that has leapt to prominence since he
set it up in mid-2009 with his partner, Ben Horowitz. That alimentary analogy
is shorthand, in Andreessen-speak, for the phenomenon in which industry after
industry, from media to financial services to health care, is being chewed up
by the rise of the internet and the spread of smartphones, tablet computers and
other fancy electronic devices. Mr Andreessen and his colleagues are doing
their best to speed up this digital digestion process--and make money from it
as they do so.
Andreessen Horowitz has raised piles of cash from
investors--it has some $1.2 billion under management--and has been eagerly
putting the money to work both in large deals, such as a $50m investment in
Skype, an internet-calling service recently acquired by Microsoft, and in a
host of smaller companies, such as TinyCo, a maker of mobile games. It has also
taken stakes in several of the biggest social-networking firms, including
Twitter, Facebook and Foursquare (a service that lets people broadcast their
whereabouts to their friends). Along the way it has attracted some prominent
supporters. Larry Summers, a former treasury secretary, is a special adviser to
the firm and Michael Ovitz, a former Hollywood power-broker, is among its
investors.
Some rivals argue that by making big bets on relatively
mature companies such as Facebook, Mr Andreessen’s firm is acting more like a
private-equity firm than as a nurturer of fledgling businesses--and is
contributing to a bubble in tech valuations too. "They’re behaving in ways
that will not be helpful to them in the long run," gripes a financier at a
competing venture firm, who insists on anonymity for fear of alienating
Andreessen Horowitz’s influential founders.
Pooh-poohing such criticisms, Mr Andreessen argues that
"growth" investments, such as the one in Skype--which was sold to
Microsoft for $8.5 billion in May, netting Andreessen Horowitz a return of over
three times its original stake--make sense because profound changes in the
technological landscape mean some relatively big companies can still grow to
many times their current size. He reckons that talk of overheated valuations
among social-media firms is being driven by people who got their fingers burned
in the dotcom bust and can’t see that the world has changed since then.
"All this bubble stuff is people fighting the last war," he says.
Mr Andreessen is also frustrated with Cassandras who
occasionally predict that innovation in computer science is pretty much over.
Andreessen Horowitz’s partners believe there are still plenty more "black
swans"--ideas with the potential to trigger dramatic changes in
technology--to come in computing, which explains why they have resisted the
temptation to copy other big venture outfits that have diversified into new
areas such as biotech and clean tech. "This is an evergreen area. Just
when you think computer science is stabilising, everything changes," he
says.
For instance, he believes that networking and storage
technology is about to go through the same kind of fundamental transition that
the server business experienced in the late 1990s, when expensive, proprietary
servers were replaced by much cheaper ones that used new technology. That shift
made possible the explosive growth of firms such as Google and Facebook, who
bought large numbers of cheap servers to power their businesses. Mr Andreessen
reckons a similar change in the networking and storage world will lead to the
creation of many more new companies.
He is also convinced that there will be dramatic changes in
the realm of personal technology. One of the companies that Andreessen Horowitz
has invested in is Jawbone. Best known for its Bluetooth-equipped headsets and
portable speakers, the firm is developing plans for a range of wearable smart
devices that operate on a single software platform, or "body-area
network". "Jawbone is the new Sony," claims Mr Andreessen, who
predicts that its future products will prove wildly successful as people carry
more and more networked gadgets around with them.
From boom to bust
It is tempting to discount such a grandiose claim as typical
venture-capital puffery. But Mr Andreessen is hardly a typical venture
capitalist. Raised in small towns in Iowa and Wisconsin, he started playing
around on the internet while at university and co-created Mosaic, which became
the first widely used web browser. After moving to Silicon Valley, he started
Netscape Communications when he was 22 years old. Its stockmarket flotation in
1995 marked the beginning of the dotcom boom and made Mr Andreessen a celebrity
in the business world.
Having at first dismissed Netscape, Microsoft sought to
crush the fledgling company, whose browser posed a threat to the dominance of
Microsoft’s Windows platform. Mr Andreessen maintains that most big companies
are painfully slow to react to upstarts that might threaten their business--a
point made in Clayton Christensen’s book, "The Innovator’s Dilemma",
which is one of the few business-school texts Mr Andreessen thinks is worth
reading. But he admits Microsoft "did a remarkably good job" in the
1990s.
After a bruising battle a much-diminished Netscape was sold
to AOL in 1999 and Mr Andreessen went on to found Loudcloud, a cloud-computing
firm, with Mr Horowitz and other executives. But Loudcloud was soon caught up
in the fallout from the dotcom bust. To survive, it shed staff, renamed itself
Opsware and focused on software development before being sold to Hewlett-Packard
for $1.6 billion in 2007. Mr Andreessen then spent some time as an angel
investor before launching Andreessen Horowitz.
Mr Andreessen’s own experience as practising entrepreneur
makes him ideally placed to counsel the bosses of start-ups that his firm has
funded, including Mark Zuckerberg of Facebook and Mark Pincus of Zynga, a
social-gaming company. Mr Andreessen seems especially fond of what he calls
"founder CEOs", perhaps because he was once one himself. Many venture
firms tend to back young entrepreneurs for a period before replacing them with
professional managers. But Mr Andreessen argues that founders who stuck with
their businesses for a long while were often the ones who created many of the
biggest successes in technology, including Microsoft (Bill Gates), Amazon (Jeff
Bezos) and Oracle (Larry Ellison).
Another reason that Mr Andreessen has become something of an
entrepreneur-magnet is his extensive network of contacts in Silicon Valley. He
sits on the boards of Hewlett-Packard, eBay and Facebook, among others. This
gives him an ideal perch from which to spot trends forming. "Marc has a
view of the entire tech ecosystem that very few people have," says David
Lieb, the boss of Bump, a wireless start-up in which Andreessen Horowitz has
invested.
His fans claim that Mr Andreessen’s ability to draw
insightful conclusions from these trends helps Andreessen Horowitz stand out
from the crowd. "In a world where there is a lot of dreaming, hoping and
guessing, Marc takes a really analytical approach," says Mr Summers, who
signed on as a part-time adviser to the firm after meeting with a number of
other venture outfits. Mr Andreessen’s symbiotic relationship with Mr Horowitz,
a highly experienced manager, is also said to be central to the firm’s success.
Tim Howes, a co-founder of RockMelt, a browser company in which Andreessen
Horowitz has invested, jokes that the two men have worked together for so long
that they are like an old married couple who complement one another perfectly.
The Hollywood treatment
Their partnership has spawned a bold new approach to
firm-building in Silicon Valley. Most venture firms employ a skeleton staff of
in-house experts in areas such as recruiting and marketing to help advise
start-ups. Andreessen Horowitz, which has a total staff of 36, has taken a
different approach. In addition to its six general partners, the firm has hired
a bevy of executives who are specialists in particular areas, including 11
dedicated to recruitment. This set-up, says Mr Andreessen, is inspired by Creative
Artists Agency, which used to be run by Mr Ovitz. It and other Hollywood
talent-management companies spend a great deal of time nurturing directors and
film stars, and helping them to find jobs. Andreessen Horowitz wants to do the
same thing for talented tech folk, whose career paths might one day involve a
stint at one of the firms it backs.
This in-house entourage also reflects Mr Andreessen’s firm
belief that many start-ups today are damaging their prospects by starving areas
such as sales and marketing of investment on the often misguided assumption the
internet will magically guarantee them a sizeable market. Mr Andreessen says he
really wants to back "full-spectrum firms" that aim to be outstanding
in every operational area, rather than just a few. Andreessen Horowitz’s team
will provide advice and guidance on how best to achieve this.
Many of these firms will be American ones. Mr Andreessen
won’t rule out investing in other countries--Skype, for example, started in
Estonia and is now based in Luxembourg--but says his firm has a preference for
America because he believes it remains the best place in the world to build
companies. Still, many internet start-ups need to think global early on these
days, which is one reason why Andreessen Horowitz has engaged Mr Summers to
give it advice on everything from pricing strategies to geopolitics.
Yet Mr Andreessen is especially bullish about Silicon
Valley, where the process of knowledge-sharing that drives innovation has been
greatly accelerated by the internet and the rise of social networking. "It
now feels like we were operating in the Stone Age when I first came out
here," he says. Another notable change is a democratisation of
entrepreneurialism in the Valley. Entrepreneurs no longer simply follow a
well-worn path to venture funds’ doors from a handful of giant technology
companies such as HP and Intel; today they come from a much wider range of
backgrounds. In addition, says Mr Andreessen, there has recently been "a
massive brain drain from Boston to the Valley, which has all but gutted Boston
as a place for high-tech entrepreneurship".
This narrow geographic focus means that Andreessen Horowitz
could be in danger of missing out on the fat profits to be made backing
entrepreneurial outfits founded in some of the world’s largest and
fastest-growing markets. But Mr Andreessen likes to point out that it is no
accident that Silicon Valley has produced a string of success stories from
Netscape to eBay, Google, Facebook and Twitter. China, India and other markets
may be exciting places, but a large proportion of the software that is
"eating the world" still seems to come from California.
"Just when you think computer science is stabilising,
everything changes."