Andreessen Horowitz Burns through First Fund in 15 Months

Fifteen months after opening shop, the stage agnostic venture firm Andreessen Horowitz has raised a new $650 million fund, more than doubling the size of its original fund and defying the broader pressure affecting the venture capital industry.

The fresh capital will allow the firm to place more bets on fast-growing Web startups and established technology firms alike, adding to earlier investments in a diverse group of companies that include social-gaming powerhouse Zynga Game Network, location services company Foursquare, and Skype, the Internet voice and video call software company that recently filed to go public.

Marc Andreessen, the inventor of the Netscape Web browser who co-founded the venture firm with partner Ben Horowitz last year, told Reuters that the firm had worked its way through the initial $300 million fund sooner than the two to three years he had expected.

“I don’t expect it will be as fast,” he says of the second fund, noting that a $50 million investment in Skype contributed to the first fund’s shortened lifespan. A little more than half of the first fund’s money has been invested, with the rest reserved for follow-on investments in the 28 companies that Andreessen Horowitz has invested in.

Besides Foursquare, Skype and Zynga, Andreessen Horowitz has invested in Boku Inc., which offers a payment service for online purchases; Factual Inc., a provider of online tools that enable users to share and manipulate databases; Fusion Multisystems Inc., which makes enterprise storage devices; Kno Inc., which is developing an electronic reading device; RockMelt, which has developed an Internet browser; and Tiny Speck Inc., a developer of online games, according to Thomson Reuters (publisher of VCJ).

While it took Andreessen Horowitz three months to raise the initial $300 million fund, the firm raised the new fund in three weeks from a group that included all of the initial investors and some new ones. The complete list of limited partners is undisclosed, but LPs from the firm’s initial fund include San Francisco-based Horsley Bridge Partners, Stanford University and well-known individual investors and veterans of the tech industry, including Reid Hoffman, founder of the social networking site LinkedIn and a partner at Greylock Partners, and Peter Thiel, former CEO of online payment service PayPal and managing partner of the Founders Fund.

A regulatory filing from mid-November indicated the firm raised $601 million from institutional investors for the second fund, which could mean that the firm raised the remaining $49 million from its own partners or other individual investors.

The quick fund-raising pace for the sophomore fund comes at a time when many venture capital firms are struggling to raise money in the wake of the financial crisis and with the venture industry delivering negative returns to investors when averaged over the past 10 years.

“It’s a pretty tortuous road right now,” says Mark Heesen, president of the National Venture Capital Association (NVCA), noting that some firms are taking as long as two years to raise funds compared to the more typical six-month to one-year period.

“You’re seeing some firms saying it’s just not worth going out at this point, and so delaying fund-raising, and you’re seeing others just slog along for a longer period,” Heesen says.

Seed investing is not as attractive as it was in the first round.

Marc Andreessen

Fund-raising among venture firms in the first three quarters of 2010 totaled roughly $9.1 billion, compared to $12.4 billion in the first three months of 2009, according to the NVCA and Thomson Reuters. Venture capital firms raised $28.5 billion for the full year in 2008 and $35.4 billion in all of 2007.

Venture capital firms have also faced increased competition from the new generation of angel investors and so-called super angel investors, who typically invest smaller sums of money in startups at a very early stage in the company’s life.

Andreessen Horowitz’s second fund, like its first, will be stage agnostic, meaning it can invest in everything from tiny startups to larger companies, and even public companies.

About half of the investments in the first round were seed investments, meaning the investments ranged from $50,000 to $500,000. But Andreessen says that seed valuations have surged by a factor of 4 to 5 times from what they were 15 months ago.

“Seed investing is not as attractive as it was in the first round,” says Andreessen.

On the other hand, he notes that the opportunity to invest in growth-stage companies—investments that typically range from $30 million to $100 million—has expanded, as some successful tech startups have opted to hold off on becoming public companies.

Andreessen Horowitz invested in Zynga by buying shares from existing shareholders through the secondary market, a tactic that Andreessen says the firm would consider doing again with the right companies.

And while the firm’s Zynga investment gives it a stake in the No. 1 social gaming company, Horowitz says he believes there are more opportunities in social gaming that would not conflict with its Zynga investment.

“Social gaming, we think, is a bigger market than traditional gaming,” Horowitz says. —Alexei Oreskovic, ReutersVCJ staff contributed to this report.