What Venture Capital Firms Around the World Can Learn From One of Silicon Valley’s Top VCs
Despite the devastating effect of the COVID-19 pandemic in 2020, many technology companies grow significantly including startup firms. These companies needed funding, and the venture capital firms came through for them. Records show that capitalists invested around $125 billion within the first three months of 2021. The last time such massive investment by venture capital firms took place was in 2018. Even then, there was no quarter with as much as $100 billion. It is expected that the surge in global funding will increase, and now might be the time venture capital firms have been waiting for, but the industry is also competitive and risky. To succeed requires extra precaution, hard work, and innovation.
Running a venture capital firm is both profitable and risky. There is no doubt, the return on investment is high. You’ve got a chance to hold stakes in promising companies. Most importantly, there are many startup firms out there that are looking for capital.
Surely, capital is one of the most important factors of production. Many potential entrepreneurs have brilliant ideas but not enough capital to make their dreams a reality. Many startup businesses couldn’t survive just because of a lack of funds. That is why venture capital firms are important to new businesses. If you run one, many potential clients are waiting for you. But according to Forbes estimate, nine out of ten startup companies will collapse. Hence, investing in a venture capital firm is a huge risk. However, it is a risk that is worth taking, especially if you have done your homework perfectly before venturing into the business. But first, how are venture capital firms structured, and how can you succeed in the business?
How Venture Capital Firms Operate
Venture capital firms simply provide funds to startups, companies in their early stages of operation, and existing companies that want to expand. In exchange for the capital provided, the firm will take up equities from the company it provides funds for. Even though venture capital firms will only fund companies that have been projected to expand significantly, most of these companies might still fail as they are new in the industry. However, the return on the few that will succeed will be well above what is obtainable from other investments to cover up for those that failed. Venture capital firms seek funds from partners, but they must convince their partners that the capital provided will be invested in the right venture.
As this year appears to be a good year for venture capital firms, let’s begin by sharing three great lessons from Andreessen Horowitz LLC, a successful venture capital firm in Silicon Valley.
These tips will be of great benefit to all venture capital firms across the globe.
#1: Don’t Start Unless You Have Experienced it Before
According to Ben Horowitz, one of the Andreessen Horowitz LLC founders, the first requirement to be a venture capitalist is experience. In his book, The Hard Thing About Hard Things, Ben narrated how they struggled to make the firm survive and also shared his winning formula.
He wrote, “As these thoughts rolled around in my head, I sent Marc Andreessen an instant message. “We ought to start a venture capital firm. Our motto for general partners would be ‘Some experience required’ as in some experience in founding, and running companies is required to advise people who are founding and running companies.” To my surprise, he replied, “I was thinking the same thing.”
Why is experience important in running a venture capital firm?
A venture capital firm provides funds to startup businesses and small businesses that have a good chance of growing rapidly. VC firms do not only provide funds; they also provide logistics, advice, and technical and managerial supports. As a reward, the companies earn equity from companies they funded. A venture capitalist needs to be able to identify companies that will survive and grow in the future. To predict with a significant level of accuracy goes beyond figures or just theoretical knowledge. The investor needs basic knowledge of running business and funding business activities.
#2: Do Something Different
Another vital factor Ben Horowitz pointed out is how to introduce a new concept into the industry. The operations of venture capital firms are indeed straightforward. They provide financial assistance to new companies and companies that need capital to expand. They own shares in the company in exchange for their contribution. However, new concepts can be added to the system. In the case of Andressen Horowitz LLC, the founders observed the industry’s procedure and decided to add a new service to their offers. “We needed to be better, we also needed to be different,” he wrote in the book.
The idea of being different led the venture capitalists to introduce mentorship to their trade. They found ways of training technical founders to be professional CEOs. With that, they developed a reputation and a brand that made them popular. Thereby, ranking them among the top venture capital firms, despite having no track record. Of course, there are still more ideas that can be introduced into the industry. The primary lesson to be learned here is that you must be different. Do things in a way that is different from the way others are doing it.
#3: You Can Change the Rules
One of the significant trademarks of venture capital firms is secrecy. Companies in this business are not disclosing their style, mode of operation, or any form of PR. Instead, they rely on their track records. Since the beginning of the history of VC, this practice had been in place, and nobody thought of changing it. Andreessen Horowitz LLC defied this long-standing rule. The company hired a marketing agency and made known to the world how different and special they are.
There are many rules that you can change. You don’t have to follow procedures because it is the tradition. You can redesign the system. Make your own rules and create new trends.
Final thoughts
What they do: Founded in 2009 by Silicon Valley venture capitalists Marc Andreessen and Ben Horowitz, Andreessen Horowitz invests in technology companies throughout the growth process, whether a company is in the seed stage or late stage. Their team is made up of professionals with previous CEO and CTO experience in the tech industry, and have raised over $4 billion in venture capital. The firm is known for its diligence and industry experience in identifying, evaluating, and funding strong growth technology companies.
Why they’re a hot startup to follow: Andreessen Horowitz is one of the most respected venture capital firms in the world. Their team has been around for almost a decade and has previously funded companies such as Twitter, Zynga, Airbnb, Square, Pinterest, Warby Parker, Stripe, Shyp, FourSquare, and Instagram. They’ve always had a strong focus on data, especially artificial intelligence. And AI is big in cybersecurity.
After buying an AI startup last year, AI-focused Andreessen Horowitz has found that artificial intelligence and machine learning can help provide new types of security services.
How they got here: Andreessen Horowitz launched in 2016, but they already have about 730 customers including The New York Times, PayPal, JPMorgan, among others. One of their biggest accomplishments in the past year was securing $16.7 million in funding from Foundation Capital, SV Angel, Forerunner Ventures, and others. They are expected to cross $100 million in ARR (revenue + annualized billings). The term of their $37 million A round is still unknown, but they do have a very healthy $50 million valuation as of January 2018.
Why you should watch: We are huge believers in this team and culture. They have been very smart in building their company culture and finding some of the best products in the market. They have been relentless on the product side and are bringing users into their service with each of their funding rounds.
What they’re working on: As they continue to grow, their revenue streams are diversifying. However, since the majority of their clients are media companies, monetizing through advertising is still one of their biggest revenue streams.
Finally, as the primary platform for many of these media companies, Andreessen Horowitz’s focus on building a healthy ecosystem seems prudent.
“Over the past few years, we have seen some market volatility as well as a shift from desktop to mobile. But it is encouraging to see people still making content and consuming it in high-quality ways.
On our end, we are shifting our business from focusing solely on the media to the entire ecosystem around the content — from digital advertising to content discovery to event management. And we are starting to see tangible results,” Ben Horowitz, co-founder of Andreessen Horowitz explained.
