Marc Andreessen puts his money where his mouth is

All Grown up: Andreessen, photographed in Palo Alto, has gone from cocky kid entrepreneur to sought-after investor.

Buddy act: Andreessen and Horowitz at the Creamery, a favorite hangout

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(Fortune Magazine) -- Ben Horowitz was toiling as an unheralded product strategist at Netscape Communications when he opened a scathing e-mail from his boss, Marc Andreessen. It was the winter of 1996; Netscape's public offering, several months earlier, had ignited the dotcom craze, and co-founder Andreessen had just appeared on Time's cover, sitting on a throne, feet bare -- the very portrait of a cocky 24-year-old tech wunderkind.

But Horowitz was irked to learn that Andreessen had leaked news to a trade publication about an upcoming software release Horowitz's team had been working on. So Horowitz sent the Netscape co-founder a note that simply said, "I guess we're not going to wait until March 7" -- the date of the planned announcement.

The blast back from Andreessen: "We are getting killed killed killed by Microsoft! You're destroying the value of the company and it's 100% server product management's fault. I'm just trying to help. Next time, do the f***ing interview yourself. F*** you. Marc."

More than a dozen years later Andreessen and Horowitz sit around a table in Manhattan on a muggy June day, sipping iced tea and laughing uproariously as they retell the story. "This is why I should not run a company," Andreessen interjects, and the two men chuckle some more.

They're playing out one of those buddy-movie plots where two guys at first can't stand each other and then wind up bonding as perfect foils -- Midnight Run with computers and cubicles instead of guns and trains. Andreessen later co-founded his second enterprise, Loudcloud, with Horowitz and made him the CEO. Andreessen has since invested -- often with Horowitz, sometimes alone -- his own money in dozens of tech companies, including Silicon Valley's star of the moment, Twitter.

Now Horowitz and Andreessen are turning their hobby into a full-time gig, with other people's money: On July 6, armed with $300 million, they officially launched a new venture capital firm that aims to reinvent the way money is doled out in Silicon Valley while reflecting the founders' obsessively Net-centric world view. The firm's name: Andreessen Horowitz. "We took months and months and spent hundreds of thousands of dollars in consulting fees to come up with the name," Andreessen jokes in an exclusive interview in advance of the fund's launch.

The billing isn't merely alphabetical. Over the past two years Andreessen has emerged as the most connected, prescient, right-place-right-time force in Silicon Valley. In addition to his Twitter stake, he sits on Facebook's board and advises the CEOs at both companies. He is co-founder and chairman of Ning, a service that lets people create their own niche social networks, like 50 Cent's ThisIs50.com. Ning, co-founded with CEO Gina Bianchini, adds 2.5 million members a month. Andreessen owns stakes in Digg, LinkedIn, and Will Ferrell's Funny or Die comedy site. He recently joined the board of eBay (EBAY, Fortune 500) to help that company turn around, and he is the author of a hugely influential blog that went on hiatus in August 2008. By the time this story appears, he promises, the blog will be back with a new design.

Entrepreneurs and investors seek him out for his blunt advice and because he's experienced the ups and especially the downs of life in the Valley. Netscape got trounced by Microsoft (MSFT, Fortune 500). Loudcloud, a too-early stab at so-called cloud computing services, had to retrench and lay off five-sixths of its employees before stabilizing under a new name, Opsware. Just five years ago Andreessen's image was more that of a smart, amiable billionaire playboy who dabbled ineffectually at technology's fringes. He seemed more Paul Allen than Bill Gates. "Marc is like a rock star who had his first album hit big, and then the next ones were not quite the same," says Steve Case, who ran AOL when it bought Netscape in 1999 and made Andreessen AOL's chief technology officer. "There's a lot of respect for the fact that he persevered. He evolved a couple of times and ultimately succeeded."

Could Andreessen end up becoming the next great tech investor? He certainly is taking a great leap: There's a huge difference between dabbling in startups with your own pocket change and investing big slugs of institutional money. Expectations for Andreessen's venture may be especially high. Venture capitalists are always on the lookout for the "next Netscape," a game-changing company that can produce off-the-charts financial returns for its initial investors; now imagine the pressure the co-founder of the original Netscape faces. Sure, Andreessen has been on a roll of late, but can he maintain his startup-picking hot streak? And so, at the ripe old age (by Silicon Valley standards) of 38, Andreessen is once again having to prove that he still has not only tech chops, but financial and management savvy too.

Andreessen's faith in the power of the web isn't terribly surprising, given his front-row seat at the outset of the Internet revolution. But Andreessen is an online absolutist. "No clean tech, no rocket ships, no electric cars. No China or India," he says, explaining Andreessen Horowitz's investment strategy, which differs from a lot of established VC funds that are fervidly pursuing all those areas. Andreessen's unwavering view is that the Internet will soon take over all aspects of our lives. Online services won't merely supplement your TV viewing or newspaper reading, but will replace those activities altogether. Amazon's Kindle is okay, but it would be so much better with access to the Net.

In some ways Andreessen has already put his money where his mouth is. He invested in LinkedIn partly because he believes employees won't be hired through jobs listings and résumés but through myriad connections. He built Ning because he feels people will move narrow aspects of their social lives onto the Net, convening online in groups specifically for, say, beagle owners.

He tells me Facebook "will be bigger than Apple" and declares that the social-networking company will become the mass-market window to the web, much as Google has been for the past six or seven years. Twitter, so far criticized for having no way to make real money, will get advertisers to pay to reach people as they are sending messages about the sponsor's products.

His vision of an all-online world extends to corporations; he believes most applications are going to be delivered over the Internet. Companies such as Salesforce.com (CRM) and Netsuite already offer "software as a service," but Andreessen thinks the applications online today are just a start; even hard-core business tools will move to the so-called Internet cloud. He has personally invested in AppNexus, which aims to deliver the capabilities of an entire data center via the web, and in Good Data, which serves up data analytics.

He is, above all, bullish on Silicon Valley, where he sees the recessionary fog lifting. His new fund still has a chance to invest while valuations are low. Even better, a generation of entrepreneurs burned by the dotcom crash is being replaced by a generation that doesn't remember the dotcom crash. Facebook CEO Mark Zuckerberg recently asked Andreessen what exactly Netscape did, then had to remind the mock-outraged Andreessen that at the time, Zuckerberg was still in junior high. The Valley's fearlessness is coming back, Andreessen tells me.

And he does adore the little wunderkinds. He talks about how technology moves so quickly that only the young can keep up with what the latest stuff can do. "So the 24-year-old coming out of Stanford will have a view of technology that the 29-year-old -- who was 24 just five years ago -- would never think of," Andreessen says, animated and grinning. "We love that kind of thing."

Andreessen's fund has Silicon Valley buzzing for a few reasons. One has to do with money and the hope it brings. The first quarter of 2009 marked the lowest level of venture investment since 1997, according to the National Venture Capital Association. It's remarkable in this economy that Andreessen Horowitz pulled in $300 million. That sum is less than one-third the size of the biggest boom-year venture funds, but $50 million more than Andreessen Horowitz planned to raise. And while other established players may raise money this year, Andreessen's outfit will probably be the only major new fund raised in 2009.

Andreessen started the fund because he saw a chance to exploit a shift in the startup milieu. As he explains it, technology and software tools have driven down the cost of starting a tech company by more than 100 times compared with a couple of decades ago, when modern venture capital structures were put in place. A company that needed $20 million to get a product out the door in the late 1980s now needs just $200,000. If most cool tech startups today need six-figure investments or less, traditional venture funds can't join in. Their rules allow them to invest only bigger amounts -- usually in the millions -- either to fund expensive first-stage companies or to get in on later stages.

The Andreessen Horowitz solution: It can invest as little as $50,000 in a company, and up to $50 million. Andreessen promises the fund will do quite a few seed investments -- 60 to 80, say -- while reserving 75% to 80% of its money for later-stage investments. Other firms are starting to embrace strategies that let them look at smaller deals, but Andreessen and Horowitz say they'll pursue upstarts with gusto. "We'll have deal days and see five to 10 companies a day," Horowitz says. "Most VC firms don't see a high number of deals. It's something we both like to do." It also gives the new firm a strategic advantage. The partners will get to see every crazy idea in the Valley, which will add to their mental map of where things are heading and what might work.

Entrepreneurs are sure to be attracted to Andreessen, who expresses more kinship with founders than with his peers in the finance world. (One blog post, titled "The truth about venture capitalists," raised the question: "VCs: soulless and rapacious capitalists, or surprisingly generous philanthropists?") "One of the defining attributes of Marc and Ben is the fact that they've led effectively in booms, busts, and equilibrium environments," says Jim Breyer of venture firm Accel Partners. "It's that set of skills I find greatly attractive, and suggests long-term success."

Mark Zuckerberg, 25, founder and CEO of Facebook, is wildly unlike Andreessen in so many ways. Zuckerberg is reticent, aloof, and determined, carrying his small frame carefully as if he never wants to leave a wake. Andreessen takes over a room. He is huge -- 6-foot-5, with a polished bald head that can't be ignored. Garrulous, funny, and strident, he talks in high-speed bursts, firing out references to geeky new technologies, pop culture, dead economists, and global trends, with a quip or two in between. He concedes he is guided by the motto "Often wrong, never in doubt."

The two men have a common, very exclusive experience, however: Both were just out of college when they were thrust into guiding a rocketing company intensely watched by the media and public. If Facebook avoids the fate of Netscape -- i.e., straight up and then straight back down -- Andreessen will have helped play a more important role than most people know.

Andreessen had a charmed start in business before suffering his hard lessons. Raised in small towns in Iowa and Wisconsin, he studied computer science at the University of Illinois at Urbana-Champaign. He and his computer geek friends started messing around with the emerging World Wide Web and created Mosaic, which became the first widely used browser. Andreessen moved to Silicon Valley after college and met super-entrepreneur Jim Clark, and the two started Netscape, funded by blue-chip venture fund Kleiner Perkins. Almost instantly Netscape exploded into a business and cultural touchstone, and its August 1995 IPO -- the stock, offered at $28, zoomed to $75 by the close of trading -- was the checkered flag at the start of the dotcom boom. Andreessen, then 24, would sit in meetings eating Honeycomb cereal from a box.

Then Microsoft woke up to Netscape's threat and literally set out to kill the young company. The intense, emotional battle left Netscape in tatters. In 1999 a still-ascendant AOL bought Netscape for $9.6 billion of AOL stock -- which of course turned out to be highly inflated. (AOL crashed to earth after buying Time Warner (TWX, Fortune 500), this magazine's parent.) Andreessen spent a little more than a year strategizing at AOL but having no direct responsibilities, and then left.

He by then had become tight with Horowitz, and the two foresaw the popularity of cloud computing, which lets users tap into software and services stored in data centers instead of on the user's PC. Loudcloud and a hadful of competitors soon learned that the world wasn't quite ready for cloud computing., while the dotcom bust had all but frozen the tech industry. "We were going to go bankrupt if we stayed in the business," Horowitz says. Instead of giving up, in 2001, Horowitz and Andreessen fired 500 to 600 employees and turned Loudcloud into a software company, renaming it Opsware. Six years later, in 2007,Hewlett-Packard (HPQ, Fortune 500) paid $1.6 billion for the company.

Andreessen by then did not seem like tech industry hero. He began rebuilding his reputation a piece at a time, starting with Ning, making the angel investments, and writing a blog that endeared him to a new generation. One of those ardent followers was Zuckerbeg. "I moved to Silicon Valley in 2004, and I was introduced to Marc [by Facebook backer Peter Thiel] in 2005," Zuckerberg says. "He became a sounding board about management and how to build a strong technology company. He has strong views on that, and they helped shape mine."

The two started meeting once a quarter, almost always at the Creamery, a diner-like joint in Palo Alto. Andreessen lives in Palo Alto and prefers never to leave it. Oddly, for a guy so supremely connected, he describes himself as a homebody who'd rather not see people. That preference has become harder to indulge since his 2006 marriage to Laura Arrillaga, a prominent Silicon Valley socialite and daughter of real estate billionaire John Arrillaga. She gets him out to Stanford basketball games, where he reads blogs on his iPhone during time-outs. ("Plus," he says, "I'm there with the hottest woman in the stadium, so there's that.") He is interested, intellectually, in just about everything else, soaking up history books, scientific papers, and business news. He's on the board of Stanford Hospital and is helping eBay CEO Meg Whitman with her run for California governor. Otherwise he has few activities outside business.

Despite the billions floating around his family, Andreessen is so unpretentious that he takes the bulk of his meetings at either the Creamery or another local old-school sandwich joint, Hobee's -- often showing up in T-shirt, shorts, and flip-flops. "It got to the point where we'd go to the Creamery and we wouldn't even have to order. They'd just bring the food," Zuckerberg says. "Marc loves fried food."

Andreessen became Zuckerberg's friend and mentor, and last year joined Facebook's board. He doesn't advise Zuckerberg on what to do day-to-day. He just helps him be a CEO. "A lot of it is just helping me think at a higher level," Zuckerberg says. "Marc homes in on important things. It's very liberating. He has helped me not worry so much about the unimportant things."

Now Andreessen is playing a similar role for the Net's latest darling, Twitter. The CEO, Evan Williams, is 37 -- nearly as old as Andreessen. But Williams has no experience steering a runaway train. "I'm certainly not driving the train," Williams told me early this year. "I'm just trying to see where those tracks are going." Andreessen read about Twitter in 2007 and realized it was a great idea, but didn't know any of the founders. He cold-called and said he wanted to invest -- a tactic he calls "throwing the harpoon." These days Andreessen meets with Williams mostly to talk about how to scale up quickly to meet exploding demand, something else Netscape had to tackle in the mid-1990s.

This is how Andreessen works, and what has made him valuable in tech circles. He pulls from a wellspring of experiences and is willing to offload them to entrepreneurs. While the roughest times at Netscape and Loudcloud might have left another person bitter, Andreessen says he doesn't regret any of it -- and he proudly points to both outcomes. A year or so ago, when I asked him something about making a comeback, he quickly pointed out that he'd created two billion-dollar companies, and wondered what comeback I was talking about.

At our sit-down in Manhattan, I ask Horrowitz to describe his business partner. They are seated next to each other, both in dress shirts and dark slacks, a thick watch on Horowitz's wrist and one twice as big -- a Jaeger-LeCoultre Master Compressor Extreme World Chronograph -- on Andreessen's. Horowitz says that Andreessen vacuums up information and ideas. "One thing that separates him from almost everyone in Silicon Valley is that he knows what's going on not only in all the tech businesses, but in all the media business, the financial business, the porn business ..." At this, Andreessen guffaws. "You name it, he'll understand where tech meets the market."

Weaknesses? Blind spots? Of course Andreessen has them. Ask those who've worked with Andreessen, and they'll tell you he's a lousy manager -- and Andreessen will tell you the same. In the same vein, he's not a great judge of character. That's why teaming with Horowitz is critical. The Silicon Valley consensus says that Horowitz is a terrific manager and CEO coach, and he's good at reading people.

The Andreessen Horowitz strategy of investing in a menagerie of startups could pose hazards. "If I were one of the guys whose company stumbles, will [Andreessen and Horowitz] be there to help me, or will they have time?" says Paul Holland, general partner at Foundation Capital, a Silicon Valley venture firm. "Where the pain part of it comes in is when you get up to those 60 or 70 investments. It will be an interesting chore to keep track of all that." Adds another investor, who doesn't want to be quoted and risk alienating Andreessen: "Marc is so good and persuasive, he should pick six companies and have a concentrated focus."

The strategy will also lead to conflicts. It has happened already. When Andreessen invested in Twitter, no one thought it would turn into a Facebook competitor. Increasingly, though, that's happening, and Andreessen is trying to straddle both companies. Ning, which allows organizations to create their own mini Facebooks, obviously could bump up against Facebook and Twitter. Andreessen says he doesn't see a problem as long as he discloses his conflicts and guards confidential information.

Andreessen tends toward the bluntness of a man who doesn't need more friends. "When we're in a meeting, I'm not getting blasé kumbaya comments," says John Wood, who heads Room to Read, a charity that builds schools and libraries in developing nations. Andreessen sat on the board until this year. In his blog Andreessen inaugurated what he dubbed "The New York Times Death Watch," which hardly endeared him to Times management. Entrepreneurs who accept Andreessen Horowitz funding should expect that same treatment. And that's when Horowitz's experience getting flame-mailed by Andreessen in 1996 comes in handy. "People come to me and say, 'Man, Marc really yelled at me today,' " Horowitz says. "And I say, 'Let me tell you this story ...' "