John O’Farrell on That Surprising New Andreessen Horowitz Fund

Earlier today, the Sand Hill Road venture capital firm Andreessen Horowitz announced that it has raised an additional $200 million fund to invest in “growth stage” companies.

With a marketing blitz that has become routine for the firm — beginning with a blog post — the firm disclosed that the new monies, raised from existing LPs, will “be invested alongside our Fund II, enabling us to write larger checks for the best growth opportunities whenever necessary.”

Andreessen Horowitz also noted the new fund is isn’t charging any management fees on the $200 million. “In other words, we will only make money if our investors make money.” And it stressed that it’s “not a separate growth fund, meaning there’s no pressure to invest it. If we continue to see great growth opportunities, we’ll invest. If we don’t, we won’t!”

Given that the 22-month-old firm burned through its first, $300 million, fund in little more than a year’s time and closed it second, $650 million, fund just last November, it’s hard to imagine that the $200 million will be left untouched for long.

John O’Farrell, who will be managing the fund — and who most recently ran business development at the smart grid company Silver Spring Networks — talked with me about the firm’s pacing earlier this afternoon. Our conversation, following, has been edited for length.

You just raised another $200 million. On the heels of some big bets of late [including the firm’s $80 million secondary investments in Twitter and Facebook and its $49 million investment in headset maker Aliph] the question begged is: how much of that second fund is left? Is it running out of money?

We don’t disclose how much of a fund is committed, except to say of course that Fund I is fully committed. But it’s really important to understand that this [new fund] isn’t a reflection of being far along in Fund II. It’s not a separate growth fund; it’s a co-investment fund that’s directly connected to Fund II. Basically, it’s a war chest; it’s completely discretionary and lets us put more into late-stage growth deals that we’re already investing in as part of our second fund.

Are you going to pour more money into the names already in your portfolio or will we see only new names backed by this growth fund?

We won’t comment on specific companies. It’s certainly possible that we’ll do late-stage investments in companies that are [in our funds now]. I think it’s more likely that you’ll see us invest in new companies [as we add them to our second fund]. What you won’t see us do is invest in something from this co-investment fund that’s not also in our second fund.

How many growth-stage investments are in the portfolio now?

We have eight [Twitter, Facebook, Groupon, Zynga, Aliph, Skype, Box.net, and Fusion.io]. Some are real household names; others, we believe can be among the household names of tomorrow. So we continue to see really high-quality growth companies coming out, and some are looking for significant checks. This gives us the ability to [fund them].

I thought you already had that ability. Marc [Andreessen] told us a couple of months ago that the firm could invest up to $100 million in any one company.

A few things. First, we raised the money to address our two customer sets: great companies who are seeking us out, as well as us seeking them out, and our LPs. Some said, ‘We love the access [you enjoy] and want more exposure [to the companies you’re backing] but couldn’t get it because Fund II was oversubscribed.’

Did LPs ask for this fund or did you approach them?

It was really driven by us seeing great opportunity. We had a happy confluence here where it wasn’t just that we were seeing high-quality companies but investors said, ‘We want to put more money into what you’re doing.’ So we went to LPs and said: ‘Here’s what we’re seeing.’ And we went to our advisory board and ran a few approaches by them [and settled on what you see today].

You aren’t charging any management fees on the $200 million. Why?

Because it’s not strictly a third fund. When Fund II is completely committed and we raise a third, we’ll have a management fee because we need it [to run our operations]. The reason we decided against management fees for this fund is that we’ll only co-invest in opportunities that we pursue for Fund II, meaning we’re already sourcing them, doing our due diligence, putting a partner on the board [etc.].

Of your eight growth-stage investments, how many include board seats?

We have Aliph, and Facebook [whose board Marc Andreessen was invited to join in 2008]. And we have a board seat at Skype.