Made Men: Why Venture Capitalists Sponsor Other VCs

Check out this blog post I just published on BusinessWeek’s TechBeat blog:

The big news out this week in the venture capital market is the launch of Andreessen Horowitz, a new $300 million venture capital fund co-founded by Marc Andreeseen, a tech visionary who founded Netscape Communications, the startup that triggered the Internet tsunami.

Raising $300 million for a first time fund is an incredible achievement in today’s depressed capital-starved economy. How did Andreessen and his long-time business partner and co-investor Ben Horowitz pull it off? Well, tops on the list is the stellar reputation and track record of this pair. Andreessen has been at the forefront of the three major technology trends of the last 20 years: The Web, cloud computing and social networking.

After Andreessen launched Netscape, he and Horowitz founded tech service provider Opsware, which Hewlett-Packard bought in 2007 for $1.6 billion. Andreessen also co-founded Ning, a social networking company that is growing fast and generating revenue. “Marc understands technology on a deeper level than 99% of the public,” says Todd Chaffee, partner with Institutional Venture Partners.

But one other big reason that the two were able to attract so much money, a key detail that I broke in my story for BusinessWeek, was the duo gained the support of three of Silicon Valley’s most established and successful venture capital firms: Kleiner Perkins Caufield & Byers, Accel Partners and Greylock Partners.

The lead partners of these three firms (Kleiner’s John Doerr, Accel’s Jim Breyer and Greylock’s Aneel Bushri) sponsored Andreessen Horowitz, say several sources. Being sponsored is sort of like being a made man in the mob. You are tapped on the shoulder and invited into an elite club.

Concretely, this means that these sponsors made personal introductions to several of their limited partner investors to help Andreessen raise money. No doubt, that sponsorship gave the investors more comfort to invest their dwindling capital with a group of first-time VCs. “Those are great anchor tenants that will give them more credibility,” says Roger Lee, partner with Battery Ventures.

Read the rest of the post here.

Inside Marc Andreessen’s New Venture Capital Fund

Happy Fourth of July!

Let’s celebrate entrepreneurs and venture capitalists who embody economic freedom!

On that note, check out the story I wrote about Netscape cofounder Marc Andreesseen’s new $300 million VC fund. Bonus: a video of me blabbing about it with tech editor Peter Elstrom.

Here’s the top:

With the financial world in turmoil, this may seem like a terrible time to start a new venture capital firm. But not for Marc Andreessen, co-founder of Internet pioneer Netscape Communications, and business partner Ben Horowitz. The two Silicon Valley entrepreneurs just raised $300 million to launch the firm, dubbed Andreessen Horowitz, say several sources involved in the effort. The pair had originally planned to raise $250 million, but boosted the amount because of strong investor interest.

Andreessen and Horowitz are expected to publicly unveil their firm later this month and declined to comment. But sources say the duo raised most of the money from institutional investors, including Horsley Bridge Partners, a San Francisco firm that invests corporate and government pension-fund money in venture firms. Among the new firm’s other backers are prominent tech industry players including Reid Hoffman, founder of the social networking site LinkedIn, and Peter Thiel, former CEO of the payment service PayPal. “Marc is doing some innovative things,” says Hoffman, who confirmed his involvement. “I like the direction he is going.”

Click here to read the rest of the story.

Creative Capital a “Must read”: New Amazon.com Review

I wanted to share this new customer review with you.

5.0 out of 5 stars Venture Capital Insights: A Must Read, June 29, 2009
By Jennifer Jones (Woodside California)

Spencer Ante’s book Creative Capital is one of the most insightful books I have ever read. Having spent the last 20 years working in venture capital as a marketer with firms including Mayfield Fund (mentioned in Ante’s book), Allegis Capital, Canaan Partners, and Versant Ventures, I was enthralled by the detail and story-telling of Spencer Ante. His ability to put a legacy figure as Georges Doriot into perspective and “connect the dots” in an industry that is a mystery to many is impressive. It made me wish i had the opportunity to experience Doriot personally. If I were to recommend to anyone what books they should read to understand venture capital, Ante’s is such a book.

Brazil: The next hotbed of venture capital and private equity?

Yesterday, I attended a packed conference about investing in Brazil. The event, which was sponsored by the Brazilian-American Chamber of Commerce, drew more than 150 investors, executives and technologists at the Palace Hotel in New York City.

There were several good panels but the one on venture capital and private equity really caught my attention. Luiz Figueiredo, president of the Brazilian Association for Private Equity and Venture Capital, told the audience that as of the end of 2008 investors had committed $28 billion in venture and private equity capital to Brazil. That is up from $6 billion in 2004, amounting to an incredible 50% compound annual growth rate over the last four years. To date, 500 Brazilian companies have received venture capital or private equity investments, and there is $12 billion left to invest over the next few years from that $28 billion kitty.

The conference was capped by two big announcements. On June 25, the Brazilian stock exchange Bovespa hosted the world’s largest IPO of the year, a $4.3 billion offering by Brazil credit card processor VisaNet. On the same day, Boston-based private equity firm Advent International announced that it bought a 50% stake in Brazilian holding company PAP for $142 million. PAP control Kroton Educational, a fast-growing education company. It was Advent’s 15th investment in Brazil since 1997.

An April 2009 survey by Coller Capital found that investors plan to increase their exposure to emerging markets, and that Brazil’s stock was rising. In the survey, Brazil ranked as the second most attractive choice for private equity investment, behind China and ahead of India. Last year, Brazil ranked fourth.

Why is Brazil such a hotbed for investment? Figueiredo pointed to several factors. Among them: A large, stable and growing economy, a modern financial system that escaped the financial crisis, a solid and improving legal framework, a strong local investor base, and robust capital markets, including the country’s Bovespa stock exchange.

More than 50% of the growth in capital came from the nation’s pension funds. In Brazil, pension funds are allowed to invest up to 20% of their funds in alternative investments such as private equity and venture capital. “The industry is getting new money and we are ready for it,” says Figueiredo. “We are really well positioned to attract foreign capital.”

One of those new foreign investors is Draper Fisher Jurvetson. In May 2007, the Silicon Valley firm launched a partnership with a Brazil-based firm called FIR Capital. The two firms launched a $170 million fund. Marcus Regueira, a founding partner of FIR Capital who was on the panel, said that his firm is looking to invest in information technology, mining technology and agribusiness. “We’ve never had the quality of entrepreneurs that we have now,” said Regueira, a former executive at Bank of America who received an MBA from the Wharton School of the University of Pennsylvania.

Brazil has yet to produce a breakout technology startup that is a leader on the global scene. But Regueira says the influx of new capital will help the country reach that next level. As an example, he cited the experience of Akwan Information Technologies, a Brazilian search engine that FIR invested in. In 2005, Google bought Akwan Information Technologies and used it to set up a research and development center for Latin America. Regueira says Akwan and its investors had to sell the company because it could not attract more follow-on investment. Now, he says, that won’t be so much of a problem. Thanks to the flood of new capital, “now is the time to invest in Brazil.”

DFJ director Elizabeth Clarkson, who was also on the panel, predicted that the new vintage of Brazil funds will produce extraordinary returns. “DFJ was early in China,” she said. “We are looking for Brazil to be a similar experience.”

Twitter Diplomacy: Itinerary of the Tech Delegation to Iraq

This week, BusinessWeek published my story on the new strategy of the U.S. State Department to elevate technology to a top priority and use it as a diplomatic tool to help build civill society and spur free markets.

The most visible part of that strategy, until the Iranian presidential elections, was the tech delegation that the government set up in Iraq this past April. Similar delegations are planned for Afghanistan and other places.

I interviewed several of the tech execs who were invited on this trip, including Google’s Hunter Walk, AT&T’s Richard Robbins, Twitter’s Jack Dorsey, Howcast’s Jason Liebman, and tech savvy State Dept. official Jared Cohen. Execs from BLueStateDigital, Auttomatic, Meetup and Google also went on the trip.

This new tack we are taking is long overdue and is a great sign that innovation is coming to our foreign policy. Here is the exact itinerary of the delegation–courtesy of my new Scribd account. I found it interesting to see who the techies met with in Iraq.

View this document on Scribd

Middle East Censors Got You Down? How to Circumvent an Internet Proxy

Like many Americans, I have been riveted by the outpouring of dissent in Iran against the powers that be. It is amazing to see such a public expression of outrage in an oppressive society. And it is equally amazing that the government can’t seem to put a lid on it.

One fascinating element of this story is the role that the Internet is playing as an outlet for that dissent. There have been numerous reports that the Iranian government has blocked cell-phone calls and access to Facebook and other Web sites, and shut down text messaging services for two days.

So how do videos, pictures and blog posts keep popping up? Well, one reason may be that Iranian geeks are finding a way to run around the censors. Check out this video by Howcast, which was financed by the U.S. State Dep., which shows you how to circumvent Internet censors and keep publishing.

Video: Five Questions for Slide’s Max Levchin

Last week I interviewed Slide CEO and former PayPal co-founder and chief technology officer Max Levchin. It’s part of a new video series we’re doing at BusinessWeek based on questions submitted by readers.

Check out the video by clicking here.

Startups Are the Future: Michael Malone’s New Book, The Future Arrived Yesterday

I just reviewed Michael Malone’s new book, The Future Arrived Yesterday, and also interviewed him on video. Here’s the top of my review.

The Good: Malone’s prediction of a mercurial new corporate form is an idea that’s both simple and well-supported in the book

The Bad: In places, the author veers off track when he switches from prognosticator to management consultant

The Bottom Line: In 1993’s The Virtual Corporation, Malone’s calls were on the money. His new ideas are radical, but they ring true

The Future Arrived Yesterday:
The Rise of the Protean Corporation and What It Means for You
By Michael S. Malone
Crown Business; 295 pp; $27.50

When he became one of the first reporters to cover technology as a beat, back in 1980 for the San Jose Mercury News, Michael S. Malone made telling the story of Silicon Valley his raison d’être. Then, in books such as 1993’s The Virtual Corporation, Malone boldly—and presciently—described how technology would reshape corporate reality. In his 2007 book, Bill & Dave: How Hewlett and Packard Built the World’s Greatest Company, he reached into the past to chronicle the Valley’s first startup.

Now, with The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You, Malone has his forecaster hat back on and another game-changing theory. And because his past predictions about the impact of digital technologies were so often on the mark, many people really do want to know what he’s been noodling over.

The central idea here is both simple and powerful: The global economy has entered a new era, and a mercurial corporate form Malone calls the Protean Corporation will become the dominant species by the middle of the next decade. “These Protean Corporations,” he writes, “will behave like perpetual entrepreneurial startups, continuously changing their form, direction, even their identity. They will be true corporate shape-shifters.”

Click here to read the rest of the review and see my video interview with the author.

Reinventing Venture Capital

Today, Paul Kedrosky released a report, “Right-Sizing the Venture Capital Industry,” as part of his work as Senior Fellow at the Kauffman Foundation.

Now, I couldn’t agree more that the venture capital industry needs to reinvent itself. That was the theme of my recent feature in BusinessWeek, Super Angels Shake up Venture Capital. But I was a little surprised by the way that Kedrosky goes out of his way to diss the venture capital industry’s role in nurturing innovation, even though I know the Kauffman Foundation has a bit of an anti-VC bent.

“The industry has become conflated with entrepreneurship in the popular imagination as well as in policy circles, with the result being a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth entrepreneurship,” writes Kedrosky.

Kedrosky’s big data point? Of the 900 companies on the Inc. 500 list between 1997 and 2007, he reports that only 16% received venture capital backing. It’s an interesting data point. But to then argue that “venture capital and entrepreneurship are separate phenomena,” as Kedrosky does, seems like an overstatement to me.

Obviously, most new companies do not require venture capital but the ones that do need it play a hugely important role in the economy because they tend to be the ones that grow the biggest and create the most value. Think Google, which got a $25 million injection of venture capital at a key moment in its evolution. Without that money Google might have never become Google. There are many examples like this.

The rest of the report tries to figure out why venture capital performance has been poor lately and suggests how the industry will reshape itself. The upshot? The industry must shrink, perhaps in half in the coming years.

I basically agree that the industry needs to shrink. That’s pretty much what I argued in my super angels feature. The industry has an inversion problem: Fund sizes have gotten bigger while the capital needs of companies have shrunk. $500,000 is the new $5 million, as Mike Maples said in my story.

Will it shrink in half? Maybe. Maybe not. All I know is that it will get smaller and that’s a good thing for industry and for the economy. An excess of capital ends up wasting money and the scarce time of entrepreneurs to create great companies.

The more important issue to me is that the industry needs to develop new models to finance and nurture innovation that fit today’s capital-constrained economy. Super angels will be part of the answer but it won’t solve the whole VC problem.

My colleague Mike Mandel blogged about this issue, making the point that science-oriented VC requires more money and a longer time frame to come to fruition. I think he’s right. And I’ve heard many VCs who invest in clean tech make this point.

Another big issue: Without an IPO market, there needs to be a new type of capital market that helps young companies finance their growth once they graduate beyond venture capital.

In Memory of Rajeev Motwani

This morning I woke up and read the very sad news that Stanford computer science professor Rajeev Motwani passed away on Friday. He was only 45 and left behind a wife and children.

The tragic news hit me particularly hard because I had recently met with Rajeev and was actually working on a profile of him for BusinessWeek. It was only a few months ago that we connected over a cup of coffee at the University Cafe in Palo Alto and talked about all the great things he was doing at Stanford to help students advance their research and to help entrepreneurs to realize their dreams. I remember his kindness, his soulful eyes, and his deep desire to help others. Rajeev was one of those special individuals who, while not well known outside of Silicon Valley, represent the unsung heroes of the tech industry.

They push Silicon Valley forward through their teaching, their research, their financial support of entrepreneurs, and their tireless work as advisors to many, many startups. Most famously, Rajeev helped support the creation of Google through his tutelage of two young Stanford University grad students, Larry Page and Sergey Brin. At Stanford, Rajeev started the Mining Data at Stanford project (MIDAS), a research group that provided the intellectual sandbox for Larry and Sergey to develop the underlying technology of Google.

“In addition to being a brilliant computer scientist, Rajeev was a very kind and amicable person and his door was always open,” wrote Sergey Brin on his blog. “No matter what was going on with my life or work, I could always stop by his office for an interesting conversation and a friendly smile. When my interest turned to data mining, Rajeev helped to coordinate a regular meeting group on the subject. Even though I was just one of hundreds of graduate students in the department, he always made the time and effort to help. Later, when Larry and I began to work together on the research that would lead to Google, Rajeev was there to support us and guide us through challenges, both technical and organizational.”

Now more than ever, I feel an obligation to finish that story as a tribute to him and what he represented.