After Sequoia Capital’s reorganization last week, rumors are spreading that Andreessen Horowitz is considering a public offering. Whether true or not it begs an important question. Should VC seek to list publicly and trade on Wall Street? Or should it remain open only to large fund investors and wealthy families?
The Information published the speculation or rumor. The publication is very well informed in general so it is prudent to assume there is a fire in the smoke. It also aligns perfectly with the evolution of the asset classes within venture capital - seed, venture, and growth.
As with most products, as they evolve, the competitors start to look alike in features and structure. Usually following on the heals of who is defining the market.
With venture, it is easier to say who is not defining the market than saying who is. Clearly, the past couple of years has seen the growth investors with mega-funds - Tiger Global, Coatue, Insight, Softbank - and the private institutions entering venture later - Blackrock, Fidelity, and others - as the key players shaping the market.
Andreessen decided early to morph from a VC fund to an “investment advisor” and Sequoia did the same last week. However, these are both reactions to events and not the end game. The end game is to be able to play in the emerging big leagues. In order to do that, a firm has to be able to command enormous resources. Why? Because others can. And the entity with the largest checkbook focused on long-term outcomes can buy its way into almost any deal. Tiger is operating fast, at scale with professional diligence and lightning pace.
For a venture fund to compete it needs to do the same.
The first challenge is to command sufficient assets to attract large volumes of capital cheaply. Hence Sequoia choosing to aggregate all its assets under a single entity.
A public listing is another way to aggregate assets under one roof. However, it additionally enables liquidity for the investors. Aggregate assets with high growth and the markets will give you capital. The difference to a traditional venture fund is large. Venture funds pay 2-3% of the fund annually in fees and 20% of the profits, after any hurdle, in carried interest. The cost of capital to the fund is very large. Public market investors invest in your stock and you keep 100% of the profits whilst setting fees (expenses) where you feel they should be.
So, yes, successful, scalable venture capital can and should list on Wall Street. Then there is another outcome, arguably even more important than the benefit of a public entity is to the fund managers. The public is allowed to buy stocks. They are excluded from investing in startups and in venture funds. But what if the best curators of startups are listed? Then ordinary investors could choose to invest in their funds and so curate the curators. The benefits of the wealth produced would no longer reside in the hands of the few but would be widely distributed.
Think of the Robinhood-centered crowd investing that propelled various questionable stocks to the moon. Now imagine that same energy released onto the venture landscape. Raising funds would become a thing of the past and venture capital could focus on what it is good at (ar at least some are) - finding and investing in great startups.
So I do believe that the best, large, funds will eventually be public companies. Where does that leave the seed stage? As this week’s “Tweet of the Week” illustrates, the returns from seed managers are very good. Often well ahead of those from later stage funds and significantly ahead of the market in the best cases. But each seed fund is too small to be able to leverage that into an Andreessen or Sequoia scale plan. However, in the aggregate, the seed stage is very attractive. Today there are no aggregators of seed-stage investing except for a small number of seed-focused fund-of-funds. That I predict, will change.
More in this week’s video, as well as this week’s startup of the week - Bitcoin.
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