A New Venture Firm Broke Its Own Rules on Skype and Quadrupled Its Money

Within months of closing its first fund, Andreessen Horowitz joined Silver Lake, the buyout firm, and Michael Dell, the computer company founder, in buying Skype, the internet calling service then owned by eBay.

It was an odd fit. The young firm had just told its investors it would do early stage venture investing, not buyouts of established companies.

Scott Kupor, the firm's first employee, said the firm had hinted the Skype deal was coming but could not say it was done because it had not closed yet. So it was not a surprise to its backers, but it was clearly different from the strategy it had laid out.

Skype had been neglected inside eBay, Kupor said, yet subscriber numbers just kept growing and growing. He called it an incredible network effect.

Other potential buyers had stayed away for a specific reason. There was a dispute between the original founders and eBay over who owned Skype's core software, and buyers feared they might pay for a company without really owning its technology.

Egon Durban, who led the deal for Silver Lake, proposed working with the founders to ease that ownership question. The bidders worked collaboratively with them to moderate the dispute.

The reaction was swift. Other venture investors said the newcomers were crazy and the buyout would never work.

Eighteen months later, the group sold Skype to Microsoft, the software giant, for four times what it had paid.

Kupor said the Skype win helped the firm raise its second fund well ahead of plan, in part because the deal had worked so well. He said momentum matters in the business, and the news cycle after the sale was unbelievable.

Combined with the early sale of Nasira, a networking company, to Cisco, the computer networking company, the firm returned half its first fund to backers within 18 months. Kupor said that speed was unheard of then, and remains unheard of today, and noted the early wins could easily have gone the other way.