Andreessen: VC-entrepreneur misalignment is a myth

By Michael Carney , written on March 25, 2015

From The News Desk

There has been a chorus of high profile investors beating the fear drum in recent weeks on Twitter, on their personal blogs, and on stage by criticizing overheated valuations and predicting a near-term market correction. It’s a necessary discussion, and the frequency with which we’re having it publicly today suggests that there may be more near-term risk than many are ready to acknowledge.

Yesterday evening Andreessen Horowitz partner Marc Andreessen* switched things up slightly, launching one of his infamous tweetstorms exploring the topic of entrepreneur-VC alignment and when and why companies should (or should not) raise venture capital. It was a welcome respite from the doom and gloom and reminds everyone that some of the best companies, and thus the best investments, emerge in downturns. But for anyone to find success, the alignment of all parties involved needs to be right from the outset.

In Andreessen’s mind, there are very few cases where the incentives of founders and venture investors are misaligned once an investment has been made. This is because by taking venture capital, a startup team is deciding that they want to “go big” and that this capital is the best way to do so. Because VCs and entrepreneurs are courting the same big outcome, and accepting the same high risk along the way, the incentives of both parties should be well aligned – if everyone’s being honest with themselves.

Where Andreessen sees misalignment is when companies that are shooting for large “venture-style” outcomes, raise capital from non-VCs – e.g. angels, corporate strategic investors, and other non-VC institutions. At the other end of the spectrum are the rare cases when small-outcome oriented founders raise from VCs. This, Andreessen believes, is a far less common occurrence than people believe, and when it does occur it means someone made a mistake at the outset of the deal either in evaluating or communicating true expectations.

Andreessen further argues that once it’s clear that a company isn’t going to achieve a large outcome, it’s better not only for VCs to move on but also for the team of employees at that startup. He points to the portfolio of “bets” that entrepreneurs make, starting or joining multiple potentially high-growth companies over their career, comparing this to the portfolios that VCs construct.

It’s a fascinating and often contrarian conversation – or at least one that rarely happens publicly.  Check out the original Tweetstorm below:

Naturally these statements were provocative and led to a rich discussion in which many entrepreneurs challenged Andreessen’s notions of what a successful outcome looks like for the various parties involved in building and financing a startup. One of the themes that came up was, what do great VCs do in situations when existing portfolio companies are struggling, and how do VCs manage existing and potential competition between portfolio companies? Andreessen’s thoughts, and those of some of his followers are below:
(Image via South Park)
[*Disclosure: Marc Andreessen is an investor in Pando.]
[Disclosure: Michael Carney has accepted a position as an associate at Upfront Ventures that begins in April. To the best of Pando’s knowledge, the companies in this post and their competitors have no affiliation with Upfront. This post went through Pando’s usual editorial process.]