As I reported early last week, Andreessen Horowitz declined the chance to invest in Instagram’s first institutional round after placing a seed-round bet on the company. After we covered that story, the New York Times and many other outlets picked up on it.
The decision probably cost Andreessen Horowitz $100 million. We can guess that amount now that Andreessen Horowitz has posted its own account of the deal on partner Ben Horowitz’s blog.
According to Horowitz, the firm invested $250,000 in Instagram founder Kevin Systrom’s seed round (we’d guessed $500,000, but it appears that was the total size of the seed round, including other investors). That stake will be worth $78 million when the Facebook public offering happens, most likely next month.
By contrast, Andreessen Horowitz competitor Benchmark did invest in Instagram’s first round, and that firm’s share of the company is worth an estimated $180 million. So presumably, Andresseen lost a shot at another $100 million or so.
The firm made the decision, Horowitz wrote, because it had an made an earlier commitment to PicPlz founder and Andreessen-backed entrepreneur Dalton Caldwell not to invest in any competitors. When Andreessen first invested in Instagram, it wasn’t Instagram at all, but rather a location-sharing service called Burbn. By the time it was ready to raise a second round, Burbn had pivoted to focus on photo-sharing, which made it a competitor to PicPlz. PicPlz is now worth almost nothing, while Instagram has sold to Facebook for $1 billion.
The Times reports that Andreessen Horowitz’s refusal to invest in Instagram led to some bad blood between the VC firm and Systrom, who was upset at the firm’s lack of follow-through. Not so, writes Horowitz, who focuses on the fund’s former commitment to Dalton Caldwell.
After speaking with both entrepreneurs and much internal discussion, we concluded that funding Kevin to compete with Dalton would be a violation of the original implicit commitment we made to Dalton — to not fund competitors to PicPlz. … So our choices were: a) invest in Dalton, b) invest in neither, or c) invest in Kevin and violate our commitment to Dalton. As soon as we fully recognized those were the choices, we ruled out option c and elected option a.
Or, as I wrote last week, looking at the same options from another angle:
The firm could have dialed back its involvement in Instagram entirely, maybe even divesting itself of its shares (I’m sure Benchmark would have been happy to buy them). Or it could have dumped its shares of PicPlz, which in 2010 was already looking like a pale also-ran compared to red-hot Instagram. Or the firm could have said, screw it, we’re betting on both horses as a way of ensuring that we win no matter what — and really, since when do conflicts of interest present an insurmountable barrier to VC investments?
Andreessen Horowitz chose not to violate its earlier promise to Caldwell and missed out on a chance to increase its investment in Systrom. In so doing — and by publicizing its apparent mistake like this — Andreessen Horowitz is showing that it has a profound commitment to put entrepreneurs first, even when that means hurting its own short-term returns.
That’s a powerful statement that will no doubt be very attractive to many entrepreneurs.
And, since the firm made $78 million on the deal anyway, it comes out looking pretty good to investors, too. Besides, it recently closed a $1.5 billion fund (its third in three years), so it clearly doesn’t have to worry much about finding more capital.
That, in the business, is known as a win-win.
What do you think of Andreessen Horowitz’s decision? Let me know in the comments below.