Andreessen Horowitz: the Smartest Firm in the Valley or the Most Dangerous?

As most industry observers already know, today Andreessen Horowitz, the Sand Hill Road firm, announced it has closed on $1.5 billion in fresh capital, bringing the money raised by the firm – founded less than three years ago — to a stunning $2.7 billion.

Whether that’s good news or bad for Silicon Valley is an open question.

The firm’s LPs are clearly pleased with the direction of the firm thus far. Cofounder Ben Horowitz tells me the firm could have easily raised “$5 billion. We had guys wanting to write really big checks.”

The LPs’ zeal is understandable. While Horowitz says he “doesn’t want to overstate where we are,” he adds that according to one of the firm’s LPs, Andreessen Horowitz enjoys the second best IRR in the venture industry right now.

The firm made at least a 3x return on its $50 million investment in Skype (which sold to Microsoft last May), money that Andreessen Horowitz returned to investors. It also liquidated its entire position in Fusion-io, which went public last June. The data storage systems company had raised more than $111 million in venture funding from New Enterprise Associates, Lightspeed Venture Partners, and others. Andreessen Horowitz participated in its $45 million Series C funding in 2010. (It owned less than 5 percent of the company at the time of its offering, judging by Fusion-io’s S-1, and redirected its proceeds into the firm.)

Andreessen Horowitz has also taken stakes in some of the hottest Web companies on the planet, including newly public Zynga (it owns less than 5 percent), Facebook (it splurged on $80 million in secondary shares in November 2010, when Facebook’s stock was being valued at $33 billion), and Twitter (it bought $80 million worth of secondary shares when the company was valued at around $4 billion last February).

So what’s not to like?

Well, for one thing, it’s easy to question how much value the firm can add to startups when it’s already juggling hundreds of companies in its portfolio. Horowitz himself already sits on 10 boards. And the firm, run by five GPs, has no plans to add more top-level partners right now. Instead, it’s adding to its already vast “operational staff,” according to Horowitz.

A much bigger reason for concern centers on whether Andreessen Horowitz is simply driving up valuations by investing so aggressively.

“I think most of that is sort of like silly and exaggerated and guys getting their butts kicked and crying,” Horowitz says of the perception that the firm has impacted pricing.

“[LPs have told] us: ‘VCs say you overpaid for this deal or that deal.’ And in most of those cases, including [flash sales site] Fab.com [which has raised $51 million since January 2010, including in a $40 million slug led by Andreessen Horowitz last December], we weren’t even close to being the highest bidder.”

Andreessen Horowitz can claim that it’s merely doing the job it set out to do. Still, with a fresh $1.5 billion to invest “over the next two-and-a-half to three years,” there’s reason for investors and startups alike to worry that valuations will spiral out of control —  whether or not the firm intends them to.

“We’re considered smart money, and rightly so,” says Horowitz. “So when people see us invest, they’re willing to follow us. But to say that we’re driving up prices, or that because we’re in a deal, a company becomes more valuable, is giving us too much credit.”

Perhaps, though from the look of things, I think Horowitz might be giving others too much credit.

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