How One Prominent Venture Capital Firm Evaluates Companies

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The Silicon Valley-based Andreessen Horowitz is one of the more well-known venture capital firms out there, with nearly $10 billion in assets reportedly under management. 

Scott Kupor has been there through it all, having served as a managing partner at Andreessen Horowitz, or A16z for short, since its inception in 2009. In October, Kupor sat down for a Talks at GS with Goldman Sachs’ Ken Hirsch, co-chair of the Global Technology, Media and Telecom (TMT) group. This wide-ranging discussion covered everything from Kupor’s new book about venture capital, to innovations in the capital markets. For anyone interested in venture capital, be sure to watch the interview. 

Here, Kupor outlined the fundamentals A16z and its investing partners pay attention to when evaluating early stage companies.

Expected returns

Venture capitalists, specifically limited partners, are incentivized to swing for the fences, as Kupor described. That means high cash-on-cash returns and a high internal rate of returns (IRR) over periods of time.

“We have to invest in things that if they're successful, they can become long-term, standalone, profitable, important businesses,” Kupor said.

He added: “And so the only way the math of this business works is you have to have 10 to 20% of your investments that return, quite frankly, 80 to 90% of the returns in your business.” 

Likelihood of the company becoming public

According to Kupor, for a company to go public and find long-term success it has to support a multibillion-dollar market cap, which means “can you get to $300 to $500 million of revenue and still have prospects to grow 30 to 50% over a period of time? And absolutely I’m talking about profit characteristics, too, but at the end of the day, you’ve got to be able to get to that scale.”

Qualitative factors

A16z’s investing principles extend beyond numbers and spreadsheets. They evaluate a company’s leadership team and its ideas, such as whether they’re uniquely qualified to win a particular market, if possess insights no other competitor has, and how they deploy that knowledge, or insights, throughout their product plans. And then there’s the gift of storytelling. Can they sell a vision?   

“We talk a lot in the book about storytelling,” Kupor said. “…How good are you able to articulate a vision that is admittedly a vision today because you’ve got to go compete in Silicon Valley, particularly for engineers, which is a hard thing to do. You’ve got to go compete for customers.”

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