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Last week, two Andreessen Horowitz (a16z) LP decks leaked to Newcomer. As far as I (and Google and ChatGPT) can tell, this is only the second time ever that internal Andreessen Horowitz documents have leaked. The firm is notoriously secretive.
I am much too humble and my fund is much too insignificant to seriously believe that my Substack from September 3—“Andreessen Horowitz is not a Venture Capital Fund”—and its subsequent republishing on Fast Company could possibly have annoyed the Sand Hill Road behemoth so much that it decided to leak its own LP deck for the first time in history.
But you gotta love the timing. 😜
Regardless of why the decks were leaked or by whom, the data they contain is a rare look at how the firm has evolved. I spent some time yesterday afternoon trying to piece together a picture of a16z’s profits, based on what’s publicly known, and the new data that leaked. I hesitate to share them in full because any detailed conclusion requires too many assumptions to be useful. But I will tell you three indisputable takeaways from my analysis:
Which brings me back to the post I had been planning to share this week before the leak:
Three years ago, I wrote a piece titled, “A great disruption is coming for venture capital.”
For context, after graduating business school, I worked with Clayton Christensen—the man who developed the theory of disruptive innovation, whom I also studied under while at Harvard. His body of work is among the most impactful in the history of management science, because it predicts why and how massively successful companies—the incumbents in an industry—can make all the right, rational strategy decisions, only to be disrupted by lower-cost, higher-access upstarts.
As you might imagine, working for the guy shaped how I see the world to this day.
Even before I started VC investing, I realised venture capital was on a predictable path to disruption. Looking at venture through Christensen’s lens, I saw big funds moving upmarket, leaving the door open to disruptors (in this case, smaller emerging funds) to eat the category from the bottom up.
Key to the theory of disruptive innovation is the idea that incumbents are incentivised to focus on their most profitable customers in order to capture more revenue and higher margins. In doing so, they leave their less profitable customers for the taking. Upstarts come in with a right-sized alternative, and get better over time, until all or most customers—even the biggest, most profitable ones—flock to them. This is how incumbents get disrupted.
This is how I recently realised that one key part of my initial analysis was wrong.
I wasn’t wrong at the headline level: Incumbent VC funds (aka megafunds) are absolutely getting disrupted.
I was wrong about who their customer is.
As an early-stage VC, I believe the founder is my customer. If I do right by them, I’ll be massively successful in the long term. This is how I run my fund to this day, and it’s the lens through which I published the original “disruption of venture capital” essay.
But after raising my own funds, I’ve come to realise that, when it comes to how VCs make money, the founder is not the customer—the limited partners (LP) or the people and institutions that invest in VC funds are. Which means that incumbent funds aren’t moving upmarket because they’re chasing their most profitable founders—they’re moving upmarket because they’re chasing their most profitable LPs.
Let’s go back to the leaked decks. a16z’s most recently announced fund from earlier this year claimed $7.2 billion of assets under management. Assuming standard VC terms (2% fee, 1% stepped down fee, 10-year fund term), a16z would make $144 million per year in fees alone during the investment period, and half of that amount every year after that until the end of the fund cycle.
If you add up the fees a16z is earning from every one of its reported funds, assuming the standard VC terms above, then this year it stands to make about $700 million in fees alone. Given the limitations of the data that leaked, it’s hard to tell how much it makes in carry (it’s mixed in with recycled capital in the slide). But, needless to say, it is a lot of money.
Andreessen Horowitz is now reportedly raising a $20 billion fund. If successful, this new fund will net the firm another $400 million per year on fees alone during the investment period.
In other words: The bigger the fund, the bigger the fees. As you raise more funds, the fees accumulate. It’s a sweet business model.
I mean this honestly: Can you blame these guys for chasing the biggest LPs and pitching increasingly gigantic funds, considering how much they stand to make here? That’s why they keep inventing new strategies to absorb and deploy more and more capital. Because you can’t cost-effectively deploy $20 billion in small, high alpha, early stage rounds. It needs to deploy big numbers. So that it can raise even bigger funds.
And this is exactly what “incumbents moving upmarket” looks like. Literally a textbook example. I wish Clay were still alive so I could talk to him about it.
As incumbents move upmarket, they leave the bottom of the market ripe for disruption. Small funds, disciplined early-stage investors, and emerging managers are the ones filling the gap. Because of our fund sizes, fees are tiny—this sector of the market makes money off the carry, not the fee, in perfect alignment with our LPs, which our LPs also love. The best of these disruptive managers are hungrier, more aligned, and structurally motivated to find alpha-rich founders and ideas—exactly what LPs want.
Over time, more and more LPs will realise this and will add a pocket for “new VC” to their portfolios. These upstart funds will thrive—historically, smaller and emerging funds return way more to their investors. And eventually, this emerging layer of investors will become the true, new venture capital industry.
The megafunds will continue to make money, right up until the opportunity to deploy it profitably in gigantic pre-IPO megarounds disappears. They’ll be competing with large asset allocators, not only for deals, but more critically, for LP dollars. At that point, they’ll have a choice.
They can fully morph into asset managers, more like banks and hedge funds; they can try to disrupt from within; or they can join the ranks of bygone incumbents of yore.
I wrote about this last time more at length, but it’s worth revisiting. As megafunds move upmarket, their deployment strategy doesn’t resemble venture capital anymore—they’re making large consensus bets and competing away the alpha.
If you’re a non-consensus founder planning to pitch consensus funds, my advice is just to “know before you go,” and don’t be discouraged by the outcome. Find true VC funds—early, non-consensus, founder-first—and prioritise pitching there. And don’t take your eye off your traction.
If you’re a VC investor, know your strategy and stick to it. Alpha is being eaten away by consensus firms. If you don’t have the assets under management (AUM) to compete at that level, discipline and focus are key.
And finally, if you’re an LP, know what you’re investing in. If your VC portfolio is all consensus funds, I’d venture to say you no longer have true, alpha-seeking VC exposure.
That’s why more and more LPs are starting to shape an emerging fund strategy—smaller allocations by design, just like their original VC portfolio from 20 to 30 years ago, before today’s incumbents morphed into megafunds.
This article was originally published in Leslie Feinzaig’s Venture With Leslie newsletter.
ABOUT THE AUTHOR
Leslie Feinzaig is the founder and managing director at Graham & Walker Venture Fund. You can connect with her on Twitter/X.