VCs have made billions of dollars using the Internet to drive over-paid middlemen out of industries. So it may only be fitting that it’s finally starting to happen to the venture world.
Sometimes the story line gets over stated — as I’ve argued before, there’s still a need for the classic partner-to-entreprenuer investing that built this industry. But that only works if you actually add value. Many VCs don’t. And there are a host of factors making sure those who aren’t the best aren’t profiting in quite the same way.
Y Combinator and angel funds have replaced a lot of the lucrative very early stage investing that mega Sand Hill Road brands used to do. AngelList has killed proprietary deal flow, argues its founder Naval Ravikant. First Round is building software products to leverage its partners’ time and networks better.
But the most expensive “hack” on venture capital classic is Andreessen Horowitz’s “agency” model. Why? Because instead of a handful of partners and admins splitting lucrative management fees, it employs an army of recruiters, sales experts, publicists, and everything else a startup may need. As if that’s not enough, Andreessen Horowitz’s general partners also give away half of their income to charity.
It’s almost as if the firm doesn’t want to make money… except, yunno, from the carry which is how VCs classically made their money in a time of smaller funds and hence smaller management fees.
Originally management fees were meant just to keep the lights on. As the amount under management has swelled to billions, plenty of limited partners have griped that expectations aren’t aligned anymore. If we’re gonna defend venture capital “classic,” we should probably acknowledge that VCs classically made the bulk of their money from returns, not fees.
Many other firms have publicly followed the popularity of the agency model, hiring all kinds of professionals to help out their portfolios. But take it from me: There is no end to the complaining and griping about the model behind the scenes. One prominent firm refers to the agency model as “pushing down Tom Cruise” — or the Hollywood agency model of a superstar agent (Marc Andreessen or Ben Horowitz in this case) signing a big star and then passing him onto minions to manage, while they go close more deals.
Others simply argue the margins are unsustainable for partners who aren’t already millionaires or billionaires. After all, the more team members you have, the larger and larger funds you need to raise to support them. And that flies against conventional wisdom that modestly sized funds are the ones that produce the best returns.
In our conversation last week, I asked Andreessen about this widely voiced concern that they were bullying the venture business into worse economics.
As usual, he didn’t hold his tongue in his response. Take a look: