Why this venture capital firm is forming an RIA
One of the richest and most famous firms on Sand Hill Road is giving up its venture capital designation to become an RIA.
Andreessen Horowtiz registered with the SEC last month. The firm looks to gain greater flexibility when dealing with new forms of securities, particularly cryptocurrency. Last year, the firm launched a16z crypto, a $350 million fund that exclusively invests in crypto companies and protocols. Andreessen designed the fund to include the best features of traditional venture capital with an updated crypto twist.
The SEC has designated the distribution of cryptocurrencies or initial coin offerings as securities, thus requiring firms that deal with them to register as an advisor. ICOs generally fall under the jurisdiction of federal securities laws, according to the SEC’s website.
“A16Z has an amazing network in this area, so to take full advantage of it for their investors, they need to register,” says Mark Casady, a general partner at Cambridge, Massachusetts-based Vestigo Ventures, adding that the move may validate new crypto technologies. “This seems like a smart longer-term view that this new form of security is here to stay.”
Andreessen recognized these compliance and regulation burdens can be a boon as it seeks to grow its franchise, says Casady, who is also the former CEO of LPL Financial. While there is a compliance cost to registering, there is also an ability to earn significant revenue from trading in crypto and being paid out in lucrative ICOs, he says.
“[Andreessen already has] compliance people because they are regulated by the SEC for their various funds, so there’s lots of lawyers running around their shop,” says Ryan Gilbert, a partner at Propel Venture Partners in San Francisco. “In a nutshell, this is a situation where more accountability leads to more flexibility.”
A spokeswoman from Andreessen declined to comment on whether it’s considering creating a traditional wealth management division.
The 10-year-old firm is set to win big this year. Founded by Marc Andreessen and Ben Horowitz, the former VC will look to cash in on some of its largest investments — including Slack, Pinterest and Airbnb — which are all expected to go public in the coming months, according to reports.
Boosted in part by trades in digital currency, fintech funding hit a new record in 2018, jumping 38% year over year to nearly $11 billion. In total, 184 U.S. firms raised $100 million or more in funding rounds last year, according to analysis by PwC and CB insights. One of the largest funding rounds was for the cryptocurrency exchange Coinbase, which secured one of the top fintech investment rounds last quarter. It obtained $300 million in a Series E funding round and a valuation of over $8 billion.
While cryptocurrency firms are seeing record amounts of funding, the move to register with the SEC does come with risks. The two most pressing concerns will be increased scrutiny and compliance costs, Gilbert says. “There will be a lot more discussion about each deal,” says Gilbert. “There will be increased scrutiny of every employee — and I do think that on the edges there are risks when you have large teams and individuals not used to operating in a compliance-operated environment.”
While the move makes sense for some of the largest venture capital firms, other firms will likely continue along more traditional paths to providing capital, Gilbert says. Most VCs are simply comfortable with the fund structures they have and are familiar with the controls and flexibility they provide.
“If this is a sea change, then it will be the big guys following first,” Gilbert says.