Will the DOJ’s Investigation of a16z Dissuade Other Venture Capitalists?

A report from Bloomberg indicates that the Department of Justice is looking into the venture capital firm Andreessen Horowitz due to its relationships with rival AI companies, causing concern among venture capitalists, according to TechCrunch.

On a recent episode of the Equity podcast, hosts Kirsten Korosec, Sean O’Kane, and I shared our surprise regarding this news. Kirsten raised an intriguing question: while conflicts of interest are a major worry for VCs, “Of all the issues the DOJ could focus on, why this particular one?”

This revelation took many by surprise, especially considering a16z’s links to the Trump administration and their relatively reserved response to the inquiry. This is notably different from the Biden administration, where, as Sean highlighted, “even slight policy changes related to crypto ignited widespread discussions.”

Sean pointed out that this investigation could serve as a warning for smaller firms operating in the venture capital space.

Continue reading for a refined excerpt from our conversation, edited for clarity and conciseness.

Kirsten Korosec: Anthony, your perspective is especially relevant here, given your past experience at a VC firm, which contrasts with Sean and me, who mostly cover the industry.

Anthony Ha: Regular listeners of Equity know I spent some time at an early-stage VC firm, which, although smaller than Andreessen Horowitz, still contributes to the larger ecosystem.

My understanding of Andreessen Horowitz’s roles on boards, especially relating to their competitors, has significantly shaped my perspective.

I was genuinely taken aback, echoing the mild shock experienced by many other VCs. While I’m not a legal professional and wasn’t engaged in legal issues at my previous firm, it’s evident that there are standards—and reportedly laws—pertaining to board memberships in rival startups, which aren’t always enforced.

Generally, founders prefer to avoid having representatives from their main competitors on their boards. However, as many startups frequently pivot, investing in one company might inadvertently lead to competition with another, especially in the rapidly evolving AI sector. This context makes the year-long investigation by the DOJ puzzling, particularly regarding its broader implications.

Kirsten: In this situation, we can see Ben Horowitz on the Databricks board and Martin Casado on the Fivetran board. To your earlier point, amid this AI boom, many companies are shifting their focus to explore AI or specific niches. Given a16z’s extensive portfolio and diverse board positions, it’s clear how these conflicts could emerge.

What interests me, Sean, is why this matter has caught the DOJ’s attention over other pressing issues?

Sean O’Kane: I’m keen to see if this triggers any substantial change. What would it look like to create a venture that incorporated AI on boards without conflicts of interest? That’s certainly something we should aim for.

This situation is indeed unusual for many reasons, and I found myself questioning the details when I first saw the headline.

Let’s zoom out. Bloomberg reported that this investigation has been ongoing for almost a year, initiated during the Trump administration. Executives at Andreessen Horowitz have built ties to Trump and held various roles in his administration.

Despite the previous administration’s focus on antitrust matters, tangible actions have been scarce. For instance, they settled with Live Nation without addressing the Ticketmaster issue, demonstrating unmet expectations.

The Justice Department should operate autonomously and not be a political tool. However, it’s noteworthy that they are focusing on this issue while being closely tied to the current administration.

I’ve observed several instances involving Andreessen Horowitz that have caught my attention. Two years back, we reported on Ben Horowitz facilitating connections between his portfolio startups and the Las Vegas police, which seemed far more questionable than the ongoing investigation, presumably rooted in business dynamics.

In contrast to their vocal responses during the Biden administration regarding slight policy changes, particularly in the crypto space, Andreessen Horowitz has remained notably quiet on this front—raising questions about whether they are adhering to legal advice or if something more severe is at play.

Anthony: From the DOJ’s perspective, maintaining neutrality in political matters raises critical questions about the department’s impartiality. This highlights the surprise surrounding the revelation of such a significant investigation involving a presumed ally of the Trump administration.

One last thought: the length of this investigation is quite striking. If it were merely about a few board positions, a swift resolution would appear fitting. This suggests that more serious issues may be at play, warranting extensive inquiries. Otherwise, what justifies the prolonged investigation?

Kirsten: I suspect two potential scenarios could be happening simultaneously. The DOJ might be undergoing a slow investigative process while uncovering a significant issue. Although it’s unwise to engage in excessive speculation, their cautious approach might indicate they are following legal guidance, which could imply deeper concerns.

I’m curious: how will this influence other VC firms? Are they monitoring the situation, or do they view this as an isolated incident and continue to secure board positions without concern for competitive conflict?

Sean: That’s a crucial query. If this matter has engaged the antitrust division, the DOJ could aim to establish a precedent with Andreessen Horowitz rather than directly confronting smaller rival firms. This might lead to increased caution among those smaller entities.

Moreover, it’s essential to note that the current administration has largely refrained from taking action against public companies. Both the SEC and the DOJ have emphasized individual accountability rather than corporate prosecutions.

While we’re discussing Andreessen Horowitz as a corporate entity, this shift in focus could be influencing the ongoing investigation—if larger corporations aren’t under scrutiny, the DOJ might be examining cases like this more closely.