"We’ll have a long period of companies staying private” Andreessen Horowitz’s Scott Kupor

Menlo Park, California: As billions of dollars flow into privately-held companies, the number of new tech IPOs in the US has shrunk dramatically compared to the pre-2000 era. Scott Kupor, partner and COO at Andreessen Horowitz, one of Silicon Valley's newest and hottest venture funds managing $2.7 billion in assets, says this trend is here to stay. In a one-on-one chat with TOI at its headquarters on Sandhill Road, Menlo Park — a veritable venture capital office space—Kupor talked about trends in venture investing, why his firm with investments across Facebook, Airbnb, Pinterest and Lyft, among many others, hasn't set foot in India and soaring valuations of tech startups.Excerpts:
You've been writing about how tech companies are staying private in your blog posts. Tell us why this trend is so prominent now?
If you look at the data, it used to be four years from the time a company was venture-funded to when it went public during 1970 to 2000. But now, it's nine years on an average. Also, the number of IPOs has dropped precipitously. Last year, was a good year when we had 50 tech IPOs versus 350 in 1999. Today, you have a confluence of two things — companies want to stay private longer and financing sources are willing to make that happen.
Is the trend of staying private here to stay?
We'll have a long period of companies staying private. This is not a trend that's going away, at least not in the US.If you look at some of the financing rounds that have happened, most of these would have gotten done in the public markets. Now even the traditional public market investors like the big hedge funds and mutual funds are seeing that most of the exciting things are happening in the private markets and therefore they are shifting their dollars.
These billion dollar financing rounds are being called pseudo IPOs, India is seeing a lot of them. Will these valuations reflect in the public market?
So far, it's been the case, with few exceptions like Zynga where one financing round was higher than what it ever saw in the public markets. The reason for that is, when you look at the way investors are valuing these companies, it's no different from how they price IPOs. So if I'm a Fidelity or a T Rowe Price, I've to buy into the IPO anyway. But if I get in now, I average down on costs — it helps me have a bigger position at the underwriting table and be a long-term shareholder.
What does it mean for VC firms like you as more companies stay private?
Most of the money that we raise is for the long term whether it's university endowments, foundations, they all have a 50 year plus time horizon. Also our funds have a minimum of ten years plus gestation period. The VC business is structured to handle longer periods of companies staying private. Where you have to be able to play well is that you've to be a major firm to fund these companies over their lifecycle. Smaller players don't have the ability to make those follow on financing rounds which puts a premium on the firms that have bigger capital capacity and who can participate in $50-100 million rounds five years from now.
So what happens to the smaller funds during this cycle?
The venture industry is seeing all the growth taking place in the sub $100 million seed funds and the large funds while we see the decline in $100-$500 million sized funds. A small number of firms are raising most of the money so 90% of the dollars have been concentrated among the top 20 firms. You'll find a number of what we call opportunity funds come up where you see them top off on deals. This trend will continue in the US. Limited partners will mostly put money in large funds or will experiment with the smaller funds.
You only invest in the US. Why haven't you explored India and China yet?
There is a practical reason for that considering the way we are modelled we have 100 people in the firm and many are on the non-investing side. We're still a new firm having been around only for five years. There are too many complexities to expand geographically. The more fundamental issue though is that we think we understand the Silicon Valley market the best. As for India and China, you can't dabble in those markets, we'll have to develop expertise as we have here to make it work.
Also, if you look, outposts in other markets for US venture investors have been mixed. by any measure. Look at what happened to Sequoia India — the entire team left and started all over, while Benchmark Ventures moved away from Europe. So, if I were an investor today I'd much rather bet on native firms in those markets than on an US offshoot.
So if you were to enter India, how'd you come?
To me, if you're really good and you're the China/India team for a US firm, you'll figure out pretty quickly that you're paying a tax back to the US that you don't need to pay. So once I get established I can go raise money on my own and quite literally control 100% economics than share it with a US partner who is lending me a brand name. It seems to me that's what happened in India— the team (Sequoia India) was good and they decided it was best to do their own thing or if they are bad then they are obviously not the people you want anyway. That's inherently an unstable state. If we were to do it, we'll do it as a major effort and would almost be like a free standing institution. But it's not a priority right now. However, if the landscape changes here and there were no opportunities, we'd clearly revisit that assumption.
What about the astronomical valuations of tech startups in the US, India? Is it similar to 1999-2000?
There has been a structural change in the nature of capital markets with a shift of dollars from public to private investing. We scratch our heads at these billion-dollar valuations because we haven't seen this kind of private market valuations before, they'd have been in the public markets then. It's nowhere near what we had in 1999-2000 — whether it's the number of IPOs, maturity of companies when going public or valuation metrics. It's markedly different, this does not feel like a bubble. However, at some point, we will get to a bubble. But right now, it feels more like 1996 to us than 1999 in terms of where we are in the cycle.