Jun 14, 2019 · 26m · a16z
How to Understand and Choose a Venture Investor
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Hosted by Frank Chen and Scott Kupor of Andreessen Horowitz, this video provides a comprehensive breakdown of venture capital mechanics, LP funding structures, portfolio economics, and strategic guidance for startup founders choosing investment partners.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The host as informed peer 4.5 Guest teaching 3.8 Guest disagreement 0.2 The host pushing back 0.8
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 22:38 Questioning VC necessity in the age of crowdsourcing and ICOs
Frank delivers a provocative challenge from a Twitter user questioning why founders need VCs when advice can be crowdsourced online and money raised via crypto, forcing Scott to defend the firm's core value proposition.
Hardest push from the host ▶ 20:03 Reframing CVC advice into a mandatory sequencing rule for foundersFrank refuses to leave the corporate VC discussion on abstract terms and explicitly reframes Scott's advice into a concrete operational rule of thumb regarding when to take corporate money.
Biggest teaching moment ▶ 5:06 Explaining the Swensen endowment strategy and imperfect market returnsScott articulates David Swensen's Yale endowment model, explaining how long time horizons permit institutional investors to seek outsized returns in illiquid, imperfect markets.
The host holds their own ▶ 7:00 Connecting David Swensen's model to broader LP capital flowsFrank demonstrates deep subject matter expertise by explaining how institutional emulation of David Swensen's 40 percent private equity allocation created the macro flood of LP capital benefiting modern startups.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| The Fundamental Role and Definition of Venture Capital | 5 | 4 | 0 | 0 | Frank sets up a friendly educational interview roleplaying as a startup founder, contributing insightful knowledge on university endowment allocations and the prudent man rule while prompting Scott to explain the purpose of venture capital. | |
| The Power Law and VC Return Expectations | 4 | 4 | 0 | 1 | Frank asks how venture returns function using baseball metaphors, extending Scott's explanation by pointing out how power law returns must fill the financial pothole created by failed portfolio investments. | |
| Fund Lifecycles, the J-Curve, and GP Capital | 4 | 4 | 0 | 1 | Frank probes into fund lifecycles, J-curves, and GP skin in the game, framing how fund vintage years create follow-on funding risks for startup founders. | |
| VC Decision-Making Dynamics and Internal Governance | 4 | 3 | 0 | 1 | Frank draws an explicit analogy between venture fundraising and enterprise sales mapping, prompting Scott to clarify internal governance vs decision-making authority. | |
| Understanding Corporate Venture Capital (CVC) | 5 | 4 | 0 | 1 | Frank distills Scott's warning about corporate venture capital into a concrete sequencing strategy for founders seeking maximum option value and financial alignment. | |
| The Value-Add Model and the Future of Venture Capital | 5 | 4 | 1 | 1 | Frank poses sharp Twitter questions regarding whether VCs are becoming extinct dinosaurs in an era of ICOs and crowdsourced advice, prompting Scott to outline VC value-add and future market trends. |
Statements from this episode (12)
Cooper: Capital scarcity defined venture capital from the 1970s to mid-2000s
“And that was kind of most of actually the first 30, 40 years of venture capital from kind of early 19 seventies to mid 2000, I think was characterized by that. You know, capital was scarce. The VCs had it and therefore You went to the BC to get the money.”
Cooper: Yale Endowment allocates up to 50% of assets to private markets
“Venture's probably almost 18, 20% of his assets. And then if you layer on other private assets, he probably has, you know, kind of 40 plus percent, maybe even 50% of his assets in the private markets.”
Cooper: 1970s Prudent Man Rule changes unlocked institutional venture capital
“Before the kind of mid-nineteen seventies, you know, institutional asset managers like Yale actually were prohibited from being able to invest in assets like venture capital that were considered too risky, and, you know, kind of, there were a lot of changes th…”
Cooper: 40% to 50% of venture capital investments result in total loss
“The basic way to think about a venture portfolio is you know, about half, 40 to 50% of what we do, we're gonna get wrong. And there's this very euphemistic word that we have in this business, which I know you and I've talked about, called you have an impaired …”
Cooper: Top 10% to 20% of VC investments drive 90% of returns
“So basically what that means is the way this business works, the difference between success or failure in this business means you've got 10 or 20% left of your investments that need to basically generate, you know, 90% of your returns, and so”
Cooper: VC incentives conflict with founders aiming for moderate early exits
“There's, you know, there's no normative you know, kind of reason why you shouldn't do that, but that's probably not the kind of alignment of interest that you would have if you took venture capital. The venture capitals would probably be disappointed with that…”
Cooper: General partner commitments in VC funds range from 1% to 5%
“The general partners typically do invest. It ranges anywhere from, you know, on the low end, one percent of the fund will come from general partners. Some funds, it will be as high as five percent, so it's meaningful.”
Cooper: Any Andreessen Horowitz GP can independently approve investments
“Here at Injuries and Horowitz, we do things differently, which is as long as people follow the process, you know, consistently, you know, any single general partner has the ability to ultimately make a decision to invest and go on the board of a company.”
Cooper: Corporate VCs participate in 15% to 20% of startup deals
“Something like 15, 20% of deals often have a corporate partner in them, so it's grown a lot over the last 10 years.”
Cooper: VC funds must deliver 2.5x to 3x returns to succeed
“To be successful in this business over the long term, you probably need to return two and a half to three times the money that the LPs give you over that 10 year period”
Cooper: Startups will continue staying private 10 to 12 years before IPO
“I think the other phenomenon we've seen, which I think is going to continue, is this idea of companies staying private much longer. And so it used to be that companies would go public six, six and a half years after they were started. Now it's 1012 years. I do…”
Cooper: Regulated secondary markets for private stock will expand over 10 years
“And I think the third big thing that we're going to see over the next 10 years is more of a blending of private and public markets. So today you have this interesting dichotomy, which is you're private, and then we flip a switch and all of a sudden, you know, …”