As the model of social networks seems to be unraveling, a16z didn't manage these last years to launch a new wave of tech startups. Clubhouse, Substack, Twitter, anything crypto, web3, or blockchain... nothing seems to stick anymore. Behind the scene, it gets more apparent that the logic of hyping a new tech fad to the max, massively investing in a flag-bearer startup to pump up its valuation, and getting out when followers will want to be in for fear of missing out, doesn't work anymore.
The firm, once self-described as “a media company that monetizes through VC,” has introduced many transformative businesses to the market. But most, maybe even more importantly, it changed the startup playbook forever by notably always being more focused on the founders' quality than the underlying technology.
Despite all this, the business model of a16z always was akin to pump and dump. Nothing illegal nor explicitly amoral if you are aware that you shouldn't be the last sucker buying into a pumped stock while initial investors prepare to dump it.
One thing that a16z was known for was the ballooning valuations of its portfolio companies. Take Clubhouse, the then-buzzy startup that raised $100 million, led by a16z, at a $1 billion post-money valuation in January 2021. Three months later, it raised again at a $4 billion valuation in a round also led by a16z.
In this game, questioning too much the underlying unit economics or simply the reality of the startup technology was not cool.
One of the most useful things about Elizabeth Holmes’ trial for fraud was the amount of time the defense spent reaming Theranos investors for failures of due diligence. Her investors didn’t want to offend her lest they be shut out of the round. This didn’t just happen at Theranos, and it didn’t stop after Theranos, either. (See also: WeWork.) As investors competed for companies, firms relaxed their due diligence, especially in crypto. Some didn’t do it at all.
The limit of a16z model seems now apparent. Without zero or negative interest rates, there's no more free money to invest in non-sensical valuation.
In 2022, as the Fed raised rates, some VC firms sliced valuations of their portfolio companies by as much as 95 percent. There are probably still more markdowns coming. VC fundraising slowed in 2022, a trend that continued in 2023. Exits slowed, too. (...) The Wall Street Journalreported in October that the a16z crypto fund was down “around 40 percent” in the first half of 2022. It’s not hard to see why: crypto is currently in the toilet.
But also, the next big tech trend never appeared, not as something that would mean quick and easy scaling, such as everything social networking was for years. In 2023, it's now all about hard problems such as healthcare, energy, or urbanism. Nothing that could create an overnight x30 valuation if properly pitched to a few stakeholders. And there's obviously AI, which as rupture innovation twenty years in the making, was incompatible with a16z business model.
For the rest of us? All this is relatively good news.