Microsoft just announced that they will pay $8B to acquire Skype. What caught my notice was that Marc Andreessen got his first exit as a venture capitalist. For those who don’t know Marc Andreessen, he was co-founder of Netscape and is like the father of web startups. He recently started a VC firm, Andreessen Horowitz, with Ben Horowitz, who is also a renowned ex-entrepreneur. They had invested $50M in Skype about 16 months ago and got a 3x return out of today’s deal.

What I don’t like about their investment strategy is that they only focus on late-stage companies. They invested in companies like Facebook, Groupon and Twitter not in the early days, but after it became pretty clear to everyone these companies would succeed. At this point, everyone was jumping on the band-wagon trying to get a piece of these hot companies. Not just VCs, but also investment banks and private equities were begging to participate in funding rounds even when they had to pay hefty premiums for sky-rocketing valuations. These types of private markets are not like the public stock market where anyone can buy shares, so you need to have the right connections to participate. As the father of web startups, Marc Andreessen used his extensive Silicon Valley network to get a hand in these mega-funding deals, and Skype has become his first exit.

Can you really call this VC investing? How is this different from private equity firms investing in steel and oil industries? You might say it’s all about making money, so it doesn’t matter how you do it. You might argue it’s nonsense to say that VCs should focus more on helping small early-stage startups grow. You might say VCs are not some non-profit out there trying to help others. It’s all about the money. If you can make money, do whatever’s within your ability and power.

Although this might be the case, it is still very saddening to see a very successful entrepreneur turn into a VC that doesn’t really help startups grow. Yes he is giving money to Facebook and Twitter, but there’s hundreds of other people who are willing to do that. Giving money to Facebook and Twitter doesn’t require any special insight. Mere mortals reading the Wall Street Journal would love to get a piece of these companies. Marc Andreessen is not a mere mortal. He really has the ability to find gems in Silicon Valley that could be the next Google and Facebook. He could have chosen to be a VC like John Doerr, who invested in Google, Amazon, Sun Microsystems, Netscape, all in the early stages. John Doerr wasn’t sniffing around to get into deals that everyone wanted to get into. He wasn’t using his network to earn easy money by investing in companies that everyone else wanted to invest in. He tried to find hidden talents that no one else could find, and help them grow to be extremely successful companies. There’s a bunch of people waiting in line who can replace Marc Andreessen in funding rounds. There are few people who have the guts to invest in two drop-outs out of Stanford with a search engine called Google.

I love this quote by Matt Cohler, a partner at Benchmark Capital, a VC firm that is not participating in the hot late-stage rounds of web 2.0 startups.

There’s also money to be made in pork bellies and oil futures, but that’s not what we do.

VCs should not move in herds. They should not invest in companies just because his business school friend down the road got a lucrative exit from a similar company. They should invest with insight on how technology will develop in the future. They should provide the oil to drive innovation. It is unfortunate that someone like Marc Andreessen, someone who has the capability to find and help future entrepreneurs, chose to go the “invest in oil and steel” route. Who knows, once he gains reputation as a VC, he might jump into riskier early-stage investments.

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