Marc Andreessen explains why venture capital isn't one industry but a skewed market where a few firms capture most returns. He covers the professionalization of angel investing, how the best angels now rival top VCs, and the rise of large later-stage investors like DST that buy big stakes as companies stay private longer.
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How are the economics of the venture capital industry changing? And in particular, like what are the changes— what structural changes are going to happen in venture capital as a consequence of these economic changes? So first of all, I don't believe there is such a thing as the venture capital industry. I don't think it exists. I think you've got a set of firms, you've got 20, 30, 40 boutique firms. Venture capital firms that do really well over time, and then you've got about 660 firms that will generally very much break your heart as an investor if you invest in them. They'll return you less than the stock market with much higher risk. So venture capital is one of those things. Venture capital firms, hedge funds, buyout firms, investment firms operating in sort of special markets that are illiquid or have special knowledge, you tend to have a few firms that generate all the returns, and then you tend to have a lot of people who want to generate those returns that can never actually figure out how to how to hurdle the bar and so like if you pull up, you see these, you can download this list online. If you pull up like venture capital firms in the US, it's like 700 and you can read through that for like 3 hours and like you won't recognize the vast majority of the names on that list and how they get funded, I don't have the first clue. Like it's the same thing with hedge funds, there's like 8,000 hedge funds, like it's just like you don't even know who these people are. The problem is when you talk about the venture capital industry, all that data gets rolled up and then they look at it and they say, well, venture capital is terrible because venture capital doesn't make any money and it's like, well, yeah, if you include all the bad firms, It's terrible. So there's really no— it's this really striking thing where it's— and entrepreneurs— what's interesting is entrepreneurs know this. And it's not like there's a shortage. There's a bunch of good firms, but entrepreneurs are well aware that there's a set of firms that know what they're doing and there's a set of firms that really don't. And so there's a whole adverse selection thing that kicks in. So there's two ways of asking the question. One is what's going to happen to venture capital broadly, and I almost spent almost no time on that topic. To me, the very interesting question is what's going to happen to the really good venture capital firms. and I think there's a whole variety of things that are happening there. So one is there's this whole tier of sort of angel or seed funding because it's so much cheaper to start these companies. There's a whole tier of angel or seed funding that has now appeared and is becoming sort of very professionalized. In fact, a lot of the best angel investors are now starting actually raising funds. So for example, Ronnie, my colleague Ronnie's father, Ron Conway, is one of the really well-known Silicon Valley VCs and he's just raised angel investors and he's just raised a new fund to even ramp up his activity. And that's very exciting because the best angels are really good and if anything the best angels are at least as good or better than the good VCs in a lot of cases. So on the very early stage that's very exciting on the one hand. On the other hand there's this equally interesting phenomenon that's happening in later rounds and the classic case study there is this Russian firm called DST that has become a major investor in both companies like Facebook and Zynga. And most recently Groupon. And so you may have noticed in the last 10 years since my last appearance here on April 7th, 2000, there are very few IPOs. And so you've got some of the— you've got companies like Facebook and Zynga and Groupon that are getting very successful financially and getting very large and they're not going public nearly as early as they used to. And so there's this new category of investor that is coming in and some of these are existing firms that are now getting larger and some of these are new firms that are being created. That are coming in and are investing later and later in sort of the company lifecycle. And some of these firms are taking ownership stakes of hundreds of millions of dollars, $500, $600, $700 million of an individual ownership stake in a sort of high-growth company at a later stage.
