Hot off the virtual press: my partner Ben has posted a great essay on leadership over at TechCrunch.

The post should be of particular interest to entrepreneurs who are raising money from our venture fund, as Ben articulates the three key traits we look for in the leaders of the startups we fund. 

Bonus feature: in the post, you'll learn what we like best about three Silicon Valley icons: Steve Jobs, Bill Campbell, and Andy Grove. 

[This blog post is by Ben Horowitz, the Horowitz of Andreessen Horowitz.]

At our new venture fund, we’ve been spending time looking into new ways that will make the lives of entrepreneurs seeking funding easier. To that end, we’ve linked up with Ted Wang who has been working on an open source legal project called the Series Seed documents. We’re impressed with his work and are going to use these standard funding documents as part of our seed stage investments wherever appropriate.

We have to give a big shout out to Ted: he nailed this. It’s exactly in step with our intention of letting entrepreneurs focus on building businesses in today’s environment, without having to follow old VC rules.

In a nutshell, entrepreneurs and the businesses they are starting have evolved. Start ups today don’t need to build a manufacturing plant (as DEC, the very first high-tech VC investment, did in 1957) to start a business. They need less money to build a product and prove that it works before scaling the business. Yet, the paperwork involved in funding entrepreneurs hasn’t changed to meet these needs. Series Seed is the first to establish this new way of supporting funding suited for today’s entrepreneurs – and we’re big fans.

Let us know what you think: check out the Series Seed documents, and share your thoughts.

Here’s more background on our thinking behind how entrepreneurship has changed, creating the need for these simplified funding documents. I’m speaking here from the point of view as both an angel investor and a venture capitalist, two very different kinds of investors.

Angels vs. Venture Capitalists

Why do angel investors exist?

Before answering these questions, it’s useful to ask and answer a related question: why are there angels and why have they become more prominent in the last 10 years? After all, doesn’t the definition of venture capital include all of the activities that angels perform?

The answer lies in the history of technology companies and the differences between how they were built 30 years ago and how they are built now. In the early days of technology venture capital, great firms like Arthur Rock and Kleiner Perkins funded companies like Digital Equipment Corporation (DEC) and Tandem. In those days, building the initial product required a great deal more than a high quality software team. Companies like Tandem had to manufacture their own products. As a result, getting into market with the first idea, meant, among other things, building a factory.  Beyond that, almost all technology products required a direct sales force, field engineers, and professional services. A startup might easily employ 50-100 people prior to signing their first customer.

Based on these challenges, startups developed specific requirements for venture capital partners:

  • Access to large amounts of money to fund the many complex activities
  • Access to very senior executives such as an experienced head of manufacturing
  • Access to early adopter customers
  • Intense, hands-on expert help from the very beginning of the company to avoid serious mistakes

In order to both meet these requirements and build profitable businesses themselves, venture capitalists developed an operating model which is still broadly used today:

  • Raise a large amount of capital from institutional investors
  • Assemble a set of experienced partners who can provide hands-on expertise in building the product and then the company
  • Evaluate each deal very carefully with extensive due diligence and broad partner consensus
  • Employ strong governance to protect the large amount of capital deployed in each deal. This includes requisite board seats and complex deal terms including the ability to control subsequent financings
  • Manage own resources effectively by calculating the amount of capital/number of partners/maximum number of board seats per partner to derive the minimum amount of capital that must be invested in each deal

It turns out that building a company has changed quite a bit since the early days of venture-backed technology companies. Building a company like Twitter or Facebook is quite different from building Tandem. Specifically, the risk and cost of building the initial product is dramatically lower. I emphasize product to distinguish it from building the company. Building modern companies is not low risk or low cost: Facebook, for example, faced plenty of competitive and market risks and has raised hundreds of millions of dollars to build their business. But building the initial Facebook product cost well under $1M and did not entail hiring a head of manufacturing or building a factory.

As a result, for a modern startup, funding the initial product can be incompatible with the traditional venture capital model in the following ways:

  • Lengthy diligence process. Venture capitalists take too long to decide whether or not they want to invest because they are set up to take large risks and have complex processes to evaluate those risks.
  • Too much capital. Venture capitalists need to put too much capital to work – often a VC will want to invest a minimum of $3M. If you only need 4 people to build the product and get it into market, this likely won’t make sense for your business.
  • Board seat. Venture capitalists often require a board seat and, for that matter, a board of directors be formed. If 100% of the company is building the product and the team knows how to do that, then a board of directors may be overkill. In addition, it may be too early to decide who you want to be on the board.

As a result of the above, a venture capitalist usually requires a serious commitment from the entrepreneur to pursue an idea that is highly experimental. If the product doesn’t stick, it might make sense for the entrepreneur to pursue a totally different idea or drop the business altogether. This is much easier to do if you’ve raised $300,000 than if you’ve raised $3,000,000.

As entrepreneurs needed someone to bridge the gap between building the initial product and building the company, angel investors stepped up.

Angel investors are typically well-connected, wealthy individuals. They generally use their own money and come with none of the above VC constraints describe above: they don’t go on boards, they don’t need to put in lots of capital (in fact, they usually don’t want to), they prefer dead simple terms (as they often don’t have legal support), they understand the experimental nature of the idea, and they can sometimes decide in a single meeting whether or not to invest.

On the other hand, angels do not manage huge pools of capital, so entrepreneurs need to find someone else to fund the building of the company (as opposed to the product) and most angels do not plan to spend a great deal of time helping entrepreneurs build the company.

One more thing before answering the original question

Before getting back to the need for the Series Seed documents, it’s important to distinguish venture rounds and angel rounds from venture capitalists and angel investors. It’s possible for a venture capitalist to invest in an angel round and vice-versa. Sometimes this is a great idea and sometimes it’s tragic. We’ll first examine the rounds and then the investors.

When should you raise an angel round and when should you raise a VC round?

This question really comes down to the company’s development. If you are a small team building a product with the hope of “seeing if it takes” (with the implication being that you’ll try something else if it doesn’t), then you don’t need a board or a lot of money and an angel round is likely the best option. On the other hand, if you’ve developed a strong belief in your product or your product idea and you are in a race against time to take the market, then a venture round is more appropriate. You will benefit from both the extra capital and extra support that comes with a serious and large commitment from your investors.

So who is qualified to invest in each?

Obviously angels can invest in angel rounds, but what about VCs? Is it safe to have them participate? The answer turns out to be “if and only if they behave like angels.” What does it mean for a VC to behave like an angel? Well, they must:

  • Be comfortable investing a small amount of money, e.g. $50,000.
  • Be able to make an investment decision quickly, e.g. in one or two meetings
  • Be able to invest without taking a board seat
  • Not require control of subsequent funding rounds
  • Not impose complex terms

If the VC wants to be in the angel round, but refuses to behave like an angel, then entrepreneur beware. Having a VC who behaves like a VC in the angel round can jeopardize subsequent financings.

Angels can be great participants in venture rounds, but it’s generally better to have a VC lead those deals as they have more financial and other resources required to build the company.

What does this mean about Andreessen Horowitz and the types of investments we’ll do?

As I stated above, at Andreessen Horowitz, we invest in both venture rounds and angel rounds. When we invest in angel rounds, we behave like an angel. As angel investors, we can invest as little as $50,000, we do not take board seats, and we do not require control.

Rooted in this desire to help germinate quality ideas, our support for Seed Source legal docs will allow both us as investors and the entrepreneurs we fund to focus on building a winning product rather than scrutinizing legal docs.

My partner Ben Horowitz and I are delighted to announce the formation of our new venture capital firm, Andreessen Horowitz, and our first fund — $300 million in size — aimed purely at investing in the best new entrepreneurs, products, and companies in the technology industry.

Between the two of us, Ben and I have started three companies directly, created many new products and services, run operating businesses at high levels of scale, angel invested in 45 tech startups in the last five years, and served on a broad cross-section of company boards with some of the best entrepreneurs and investors in the industry. Through all this, we have worked closely together for 15 years, and we could not be more excited to extend our partnership into venture capital.

In undertaking this new mission, our core principles include:

  • Technology and its advancement is absolutely central to human progress. Entrepreneurs who create new technologies and technology companies are improving the standard of living of people worldwide and unlocking amazing new levels of human potential.
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  • While broad investor psychology whips wildly between euphoria and depression, technology change not only continues but is accelerating. In fact, we believe that technology change cascades — each new generation of technology contains within it the seeds for even more profound advances to come. And, technology change creates continuous opportunity to build important and valuable new companies.
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  • A technology startup is all about the entrepreneurial team and their vision. Our job as venture capitalists is primarily to support entrepreneurs by helping them build great companies around their ideas.
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  • The process of building a new technology company is changing rapidly. For example, many of the best new technology companies require far less money up front to build the first product, but far more money later to scale into today’s enormous global market, as compared to historical norms. We intend to not only embrace these changes but drive them forward as hard as we can.
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  • Building a great company is a team sport — including the selection of the best possible set of investors and advisors for a specific opportunity. We have been lucky enough to work with many of the industry’s best investors, advisors, mentors, and coaches over the last 15 years, and we look forward to continuing to be a great partner to all of them.
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  • Trust is essential to building a great company. Trust requires the highest standard of ethical conduct, which we will strive hard to achieve and maintain.
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  • While there are many exciting new entrepreneurial opportunities in fields like energy and transportation, there continues to be gigantic opportunity in information technology — which is where we will focus.
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  • And, while there are many extremely bright and capable entrepreneurs all over the world, there continues to be a special magic to Silicon Valley — which is where we will focus.
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We will hang our hat as a firm on the fact that both of us have extensive direct entrepreneurial and operating experience. We have built companies, from scratch, to high scale — thousands of employees and hundreds of millions of dollars of annual revenue. In short, we have done it ourselves. And we are building our firm to be the firm we would want to work with as entrepreneurs ourselves.

Here are some more specifics about how we will operate:

  • We have the ability to invest between $50 thousand and $50 million in a company, depending on the stage and the opportunity. We plan to aggressively participate in funding brand new startups with seed-stage investments that will often be in the hundreds of thousands of dollars. But we will also invest in venture stage and late stage rounds of high-growth companies.
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  • We also have the ability to participate in a variety of investment structures, including but not limited to buying founder shares, investing in public stocks, and contributing to leveraged buyouts. We do not have a goal to do any of these things specifically, but rather we will be maximally flexible to suit our investing strategy to the opportunity.
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  • Ben and I will be the only General Partners in the firm, at least to start. We may add a small number of additional General Partners in the future, but we are not assuming that will be the case. We will also build a professional staff to support us in our efforts and to help our portfolio companies in various ways. However, we will not have associates or other General Partner-track junior positions.
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  • Ben and I will go on boards of companies in cases where we are investing serious money — generally, $5 million or more, although there could be exceptions in both directions. We will generally not go on boards of raw startups — in fact, in many cases, we don’t even think today’s raw startups should have boards.
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Here are some more specifics about what kinds of entrepreneurs and companies we are looking for:

  • Above all else, we are looking for the brilliant and motivated entrepreneur or entrepreneurial team with a clear vision of what they want to build and how they will create or attack a big market. We cannot substitute for entrepreneurial vision and drive, but we can help such entrepreneurs build great companies around their ideas.
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  • We are hugely in favor of the technical founder. We will generally focus on companies started by strong technologists who know exactly what they want to build and how they are going to build it.
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  • We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but most of the great companies in our industry were run by a founder for a long period of time, often decades, and we believe that pattern will continue. We cannot guarantee that a founder can be a great CEO, but we can help that founder develop the skills necessary to reach his or her full CEO potential.
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  • We believe that the product is the heart of any technology company. The company gets built around the product. Therefore, we believe it is critical that we as investors understand the product. We are ourselves computer scientists and information technologists by experience and training; therefore, we plan to focus on products in the domain of computer science and information technology.
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  • Here are some of the areas we consider within our investment domain today: consumer Internet, business Internet (cloud computing, “software as a service”), mobile software and services, software-powered consumer electronics, infrastructure and applications software, networking, storage, databases, and other back-end systems. Across all of these categories, we are completely unafraid of all of the new business models — we believe that many vibrant new forms of information technology are expressing themselves into markets in entirely new ways.
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  • We are almost certainly not an appropriate investor for any of the following domains: “clean”, “green”, energy, transportation, life sciences (biotech, drug design, medical devices), nanotech, movie production companies, consumer retail, electric cars, rocket ships, space elevators. We do not have the first clue about any of these fields.
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  • We are primarily but not entirely focused on investing in Silicon Valley firms. We do not think it is an accident that Google is in Mountain View, Facebook is in Palo Alto, and Twitter is in San Francisco. We also think that venture capital is a high touch activity that lends itself to geographic proximity, and our only office will be in Silicon Valley. That said, we will happily invest in exceptional companies wherever they are.
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Finally, one personal note — my role as an active Chairman of Ning will continue unchanged, along with my board roles at Facebook and eBay.

If you have read this far, thank you very much for your interest in our new firm — we will keep you updated over the months and years to come by blog!