As a firm, we strive to be unusually transparent in our thinking, where through our blogs, we all go into great detail on our reasoning for each investment. In addition, we are diligent in getting back to entrepreneurs after every meeting with us to give them a detailed explanation of our internal deliberations and outcome. It is through these constant public and private discussions that we want the founder community to better understand our evolving thinking and investment criteria.
In the vein of transparency, I wanted to clarify some of my recent comments. Late last week while in NYC, I stopped by the Wall Street Journal for an informal conversation to discuss what I was seeing that was new and interesting in venture capital. The resulting article has been the subject of much debate and, in my view, over-interpretation. As a result, I would like to offer up a more detailed explanation and context of what I said and meant…
One of the many things that I mentioned was how, as a partnership, we’ve had some internal discussions about the relative differences between the consumer series A and the enterprise series A. I was trying to make the point that by and large, we were raising the bar for most consumer series A rounds such that we would be looking for more traction and/or evidence that the entrepreneur’s idea were actually working as opposed to the enterprise A. This is not an absolute, just an observation based on our recent deliberations. Let me explain further.
Many of the seed and series A consumer companies, especially mobile applications, that I have seen recently are still in the throes of proving out product/market fit for their idea. The entrepreneur is usually in the middle of A/B testing to try to get one or more important end user statistics working such as downloads, daily active users (DAU), monthly active users (MAU), and a compelling cohort analysis of usage over time. This messy, but necessary, experimentation process where theories are rapidly tested and retested was the stage that I referred to as “Fruit fly experiments”. Although it was not my intention, I see how this analogy could be offensive to entrepreneurs that are in the thick of this problem – I don’t mean to make light of their struggle. Having been in the thick of it myself multiple times, I have a deep appreciation for how hard and emotionally draining the product/market fit process is and apologize for the careless analogy.
Coming back to the central point, I was not speaking categorically about a policy change within Andreessen Horowitz – we do and will continue to invest in consumer and enterprise series As – full stop. I was attempting to make a more nuanced point about the difference in criteria: we will often do an enterprise series A when it is at the idea stage or an unproven prototype. The reasoning is that the enterprise opportunities and landscape usually includes a unique technology advantage or business insight borne out of the entrepreneur’s deep understanding of the subject area. This usually stands in contrast to many of the consumer ideas that are primarily business model innovations that are very interesting but still need proving out.
For consumer businesses that are in this ideation stage, we are more likely to become active seed investors or we will typically wait until it is clear that the business has caught “lightning in a bottle” which usually takes place at the B round. Now there are many exceptions: Anki, for instance, came in at the idea/prototype phase and we jumped all over doing the Series A – why? The entrepreneurs had a deep background in robotics from Carnegie Mellon and were taking that expertise into an entirely new category, toys. The founders had a technological secret and an unusual background for prosecuting the opportunity.
Part of why I love my job is because we get to hear from entrepreneurs everyday about the problems they are trying to solve – both on the consumer front and in the enterprise. As we continue to evolve the way we think about our investments, we are committed to keeping an open dialogue with entrepreneurs at any stage and focus.