Marc Andreessen Is Betting on Wide Adoption of Digital Currency Bitcoin
March 21, 2014
Internet pioneer Marc Andreessen is doubling down on bitcoin amid turbulence in the virtual-currency world, in a bet that widespread adoption of the currency will fuel the growth of new businesses and technologies.
Venture-capital firm Andreessen Horowitz, where Mr. Andreessen is a co-founder and partner, has made about $50 million of investments in the area—believed to be more than any other firm—from a $1.5 billion fund, the firm says. The Palo Alto, Calif., firm plans to invest hundreds of millions of additional dollars over the next few years from other funds, people familiar with the firm say.
Mr. Andreessen says he is convinced of the bright outlook for digital currencies despite setbacks such as the collapse last month of Tokyo-based Mt. Gox, one of the most prominent bitcoin exchanges, which said it lost hundreds of millions of dollars worth of the virtual currency. “I’m completely unfazed and plan to invest more,” he said in an interview with The Wall Street Journal.
The move exposes Mr. Andreessen, best known for co-founding Netscape Communications more than two decades ago, and his investors to greater risks amid uncertainty over the future of bitcoin. The currency isn’t backed by a government but recently has become popular among technology enthusiasts, trading at various times over the past year for less than $100 and more than $1,100. It traded Friday at around $580.
For all of Mr. Andreessen’s enthusiasm, some bitcoin fans aren’t thrilled with the interest by venture capitalists and worry about the encroachment of big business. Bitcoin allows users to transfer money—or other items, like legal contracts—without an intermediary such as a bank.
“You’ve got a bunch of bitcoiners and young libertarians who don’t have enough confidence and life experience,” says Cody Wilson, a founder of Dark Wallet, which seeks to enhance anonymity within digital-currency networks. “So they are being lulled into the [venture capitalist] set in California and New York. There’s just not enough confidence to go against the grain and question the whole goddamn thing.”
And there is skepticism among other investors.
“For 99% of people, bitcoin doesn’t solve any problem they have,” says Bradley Golding, a managing director at New York investment firm Christofferson, Robb & Co., which specializes in investing in financial companies and has decided not to invest in bitcoin-related companies. “Most people are comfortable going to their bank, making a deposit and using a credit card…It’s a solution in search of a problem.”
Initially, Mr. Andreessen and his partners at Andreessen Horowitz were skeptical the world of virtual currencies held attractive investments. Even if they could discover ways to bet on the area, Mr. Andreessen figured it would be a challenge gaining the support of the firm’s investors, including institutions such as Princeton University and the Ford Foundation.
Further muddying the picture for some conservative investors, many fans of these digital currencies were eager to replace governments and other institutions, and some proponents seemed to rely on digital currencies to enable unlawful activities.
By last April, however, Mr. Andreessen decided it was time to approach his firm’s investors about bitcoin. He waited until the end of an annual meeting of Andreessen Horowitz’s advisory board at the Rosewood Sand Hill hotel in Menlo Park, Calif., to broach the idea.
“At first blush, you’re going to think we’re out of our minds,” Mr. Andreessen says he told the group of five investment firms on the Andreessen Horowitz advisory board, “but we’re going to invest in a fake mathematical currency.”
The comment met with stone-cold silence, before a brief discussion ensued. Some investors seemed intrigued, but many had little idea what bitcoin was.
Ultimately, Mr. Andreessen said investor resistance was less than he feared. Venture-capital firms have free rein to make almost any kind of investment. Their investors generally anticipate about half the investments will be losers, while some others will be home runs.
So far, Andreessen Horowitz has invested $25 million in Coinbase, which creates digital wallets, and a smaller amount in Ripple, a payment system, among other investments, according to Andreessen Horowitz.
Along the way, Mr. Andreessen has become one of bitcoin’s leading evangelists, writing frequent articles and blog posts about the possibilities of digital currencies. This month, Mr. Andreessen sent Twitter messages calling bitcoin an “important tech breakthrough.” He said that “the ideas stand on their own, the math stands on its own, the code stands on its own.”
Bitcoin was developed in late 2008 by a person or group called Satoshi Nakamoto. It is an electronic currency that doesn’t exist in a physical form. Bitcoin is created by “miners” as payment for verifying bitcoin transactions using a complicated mathematical algorithm, a process that requires intense computing power.
Mr. Andreessen says bitcoin reminds him of the early days of the Internet.
“I’m having déjà vu,” Mr. Andreessen says. Bitcoin is “weird and scary and nerdy, and it’s full of scams and frauds, just like the Internet was.”
Still, Mr. Andreessen says it took him years to appreciate the business possibilities.
He recalls reading an academic paper in 2009 about the launch of the bitcoin software, which seemed to improve on past related work, such as DigiCash, invented in 1990.
“I’m not a serious mathematician, but I know a lot of really good mathematicians and computer scientists and reached out to them,” he says.
Throughout 2010 and 2011, Mr. Andreessen discussed bitcoin’s development with Silicon Valley entrepreneurs and others but still didn’t think it was an appropriate investment.
Over time, Mr. Andreessen became convinced virtual currencies would enable a huge number of productive endeavors, raising intriguing investment possibilities that he and his colleagues hadn’t considered. If an Internet user can transfer digital contracts, signatures, money or other property in a secure fashion, while avoiding the hefty fees of intermediaries such as banks and credit-card companies, bitcoin and other digital currencies will gain mainstream popularity, he says.
When Mr. Andreessen realized more participants would adopt virtual currencies, which in turn would lead to more acceptance, he decided his firm had to act.
“I realized it’s a four-sided network effect—users, merchants, miners, developers,” he says.
By last spring, it was time to approach Andreessen Horowitz’s investors. Over lunch a few weeks after Mr. Andreessen’s embrace of bitcoin at the Andreessen Horowitz meeting, Elizabeth Obershaw, a managing director at Horsley Bridge, a San Francisco firm that invests in Andreessen Horowitz, returned to the idea.
“Tell me about that little teaser,” Ms. Obershaw, whose interest had been piqued, asked Mr. Andreessen.
Mr. Andreessen began explaining his firm’s interest to Ms. Obershaw and other investors.
“I was skeptical,” says Andrew Golden, president of the Princeton University Investment Company, which manages the university’s endowment and invests in Andreessen Horowitz. But, he says, “This was a smart team telling us we need to look at it in a different way.”
Like the Internet, bitcoin will emerge as an accepted technology, Mr. Andreessen argues, as it becomes more regulated and consumers and businesses become more comfortable with the idea of digital currencies. With those changes, he predicts, the subversive politics often associated with the currency will fade.
“We like fringe technologies but not fringe politics,” he says.
