Andreessen Horowitz's Scott Kupor warns of selling to other startups

Scott Kupor joined Andreessen Horowitz after working with founders Marc Andreessen and Ben Horowitz at LoudCloud, one of the first enterprise software-as-a-service startups that catered to other startups, leading up to the 2000 tech crash.

Having lived through the last big tech bubble, Kupor told Business Insider that he sees some of the same patterns in today's tech environment, particularly in startups that rely on other startups as primary customers.

While the model can work for some companies, Kupor cautioned founders to do their diligence on their customers to make sure they are protected in the case of an economic downturn.

Click here for more BI Prime stories.

The dot-com bubble burst almost twenty years ago, but legendary Andreessen Horowitz partner Scott Kupor says that today's startups still have a lesson to learn from it.

Kupor survived that first tech crash in 2000 at LoudCloud, one of the first enterprise software as a service startups, founded by Marc Andreessn and Ben Horowitz.

In his new book “The Secrets of Sand Hill Road,” Kupor writes that there were many reasons behind the ultimate failure of LoudCloud — not least the bursting of the bubble, which happened not long after its 2000 IPO.

But he highlights another, less obvious factor in the demise of LoudCloud: Its reliance on other startups as customers. When that dot-com bubble burst, it took out some of LoudCloud's best customers, and its business model couldn't withstand the strain.

“If you're going to do that strategy, you just have to understand the risks associated with it,” Kupor told Business Insider. “You just have to almost do reverse financial diligence on your customers when you sign them up and make sure you understand how much of your revenue is potentially at risk if we have a catastrophic event like we did in 1999 or 2000.”

Read More: The legendary Andreessen Horowitz partner who worked on its Facebook and Airbnb deals shares his best advice for entrepreneurs trying to strike it big in Silicon Valley

Kupor's advice is especially valuable as worries of an economic downturn continue to circle Silicon Valley. The sky-high valuations, massive funding rounds, and tendancy of startups to market to other startups are eerie parallels to Kupor's anecdotes from his LoudCloud days.

Still, there's a way to do it right. He offered up Twilio, Square, and Brex as examples of current tech companies successfully building a business by selling to startups and other smaller entities.

“I don't know Brex well enough but you can imagine the conversations that they're having in their boardroom,” Kupor said. “We get the benefit of a portfolio. Some of those hopefully will grow and become the next Squares and Facebooks. You can avoid kind of getting over your skis where all of a sudden you have a dramatic fall off in revenue.”

For the curious, LoudCloud ultimately sended up selling a big chunk of its business in 2002 in what Kupor characterizes as a fire sale. What was left of the company rebranded as Opsware, and ultimately sold to HP in 2007 for $1.65 billion.