Newspaper article International Herald Tribune

How Venture Capitalists for Skype and LinkedIn Fumbled on Instagram

Newspaper article International Herald Tribune

How Venture Capitalists for Skype and LinkedIn Fumbled on Instagram

Article excerpt

In the three years since he started a venture capitalist firm, Marc Andreessen has scored big victories with Skype, LinkedIn and, if all goes well, Twitter. But he was less successful with Instagram.

Marc Andreessen, a co-founder of Netscape who went on to use his considerable wealth to finance scores of Silicon Valley start-ups, is regarded as one of the smartest technology investors. His victories have been spectacular: Skype, LinkedIn, and if all goes well, Twitter.

The tale of Mr. Andreessen's investment in Instagram, which was sold to Facebook for $1 billion, shows a lot about how Silicon Valley works in an era of me-too start-ups and over-eager venture capitalists. His firm, Andreessen Horowitz, will make an enormous amount of money on Instagram, but it could have made much more. And in Silicon Valley, where everyone keeps track of such things, what it left on the table matters.

By 2010, Andreessen Horowitz had earned a reputation as an aggressive venture capital firm. The founders, Mr. Andreessen and Ben Horowitz, of Netscape and Opsware fame, had started their firm one year earlier with a simple investment thesis: in any given year, 97 percent of venture capital returns come from just 15 start-ups. Mr. Andreessen and Mr. Horowitz would tap their extensive network of young entrepreneurs to get into those 15 companies.

Among the entrepreneurs the firm was tracking was Kevin Systrom, a former Google employee who was writing code for a location check- in application similar to Foursquare. Ronny Conway, the son of the prominent angel investor Ron Conway, knew Mr. Systrom from his days at Google and was now working at Andreessen Horowitz. He asked Mr. Systrom whether he would be willing to meet with his bosses.

It was too early for Mr. Systrom to be making the rounds among the venture capitalists of Menlo Park, California. He had already secured a $250,000 commitment from Steve Anderson, a seed investor at Baseline Ventures, but hardly had a product, let alone a PowerPoint presentation, according to people briefed on the meeting who said they were not authorized to speak about it.

Mr. Systrom eventually agreed to meet with Mr. Andreessen and Mr. Horowitz, thinking that if he ever raised more money, perhaps they would lead the investment round. The partners took one look at Mr. Systrom's working prototype -- then named Burbn -- and insisted on investing $250,000.

That would end up being the only money Andreessen Horowitz -- which manages $2.7 billion in capital -- would ever invest in Instagram. While Mr. Systrom's other investors doubled down at every opportunity, Andreessen Horowitz would ultimately bet against the company.

Mr. Horowitz said that in the months after that initial investment, he and Mr. Andreessen had spoken occasionally with Mr. …

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