Venture capital has existed in its modern form more or less since the late 1950s. For a comprehensive history of the asset class I’d recommend Sebastian Mallaby’s superb book, Power Law, which chronicles the history and scope of VC since its inception.
For all intents and purposes since Bill Draper helped pioneer the early days of West Coast VC with his friend Pitch Johnson, and then formed Sutter Hill Ventures in 1965, the model remained relatively unchanged until Andreessen Horowitz in 2009. This first wave of venture capital merely took third-party capital from limited partners in the form of a fund managed by general partners, a GP/LP structure, with a traditional carried interest structure with roughly 20 percent of profits going to GPs.
In 2009 Andreessen Horowitz, or A16Z as it’s more commonly known, took a departure from the traditional wave one model that was limited in scope by the number of GPs at a firm. Typically GPs were the only ones attempting to help portfolio companies, typically in the form of relatively infrequent board meetings. A16Z took a page out of the Hollywood agencies like William Morris Endeavor (WME) and Creative Artists Agency (CAA) by thinking about how they could offer greater help and support to their portfolio companies. Marc Andreessen and Ben Horowitz, the two proprietors, had both been successful entrepreneurs in the Valley through the 1990s where they saw the limitations of the traditional GP structure. They wanted to build a bigger fund that, like WME or CAA, could offer 360-degree support. They’d have in house developers, designers, business and corporate development personnel, and the goal would be to help the startup at every stage of the journey. I’d argue that A16Z created the second wave of services-heavy venture capital.
The only issue with this services-heavy model is the cost burden associated with employing so many people in house. In order to do this under a 2/20 fund model, fund sizes need to be absolutely massive to sustain the services component in-house. Larger funds tend to have more partners, more partners tend to need to agree with one another to invest, so without perfect agency and decision making, large consensus driven teams can revert to the mean, backing mediocre or less innovative companies. To sustain a large fund that’s also highly performant is exceedingly hard. If anyone can do it it will certainly be A16Z, but this model is not for everyone, nor can everyone raise the dollars necessary to build this type of back office and institution.
At Everywhere Ventures we created what we call Community Driven Venture Capital, the third wave of venture capital, distributed, and reliant on loose-ties.
We pioneered this starting in 2017 by only taking in capital from other founders and operators into our first and second funds. The premise was that if we created a community of helpful founders, loosely-tied, we could mimic the 360-degree support of the wave two “VC Agency” model, but do it in a distributed way. Community driven venture capital is more centralized than an angel network that operates independently and without central coordination. And it’s more decentralized than a traditional fund. Jenny and I make all legal decisions associated with Everywhere Ventures, but we rely on a loose collection of founders and operators to source and support our portfolio.
In venture capital funds have to Source, Select, and Win the best deals. Our loose network of founders enables us to index our investments around deep industry experts and the founders they respect most. We’re able to select by leveraging the insights of a network of LPs and trusted advisors who can quickly help us level up on a given sector, trend, or business model. And we’re able to win access to the best new companies because of the value of this community, this network, to our portfolio companies who become part of this fly-wheel of info and access to the new new.