7 ms·

Defending A16Z

49 points by rgbrgb 11y ago

ojbyrne 11y ago
I suspect that due to the well known creative accounting in Hollywood, Avatar returned significantly more than 11x. Top line costs are inflated.
- dunkelheit 11y ago
  That's interesting, could you elaborate on "creative accounting"?
  - ojbyrne 11y ago
    https://en.m.wikipedia.org/wiki/Hollywood_accounting https://en.m.wikipedia.org/wiki/Hollywood_accounting
  - Buge 11y ago
    According to Hollywood accounting, Return of the Jedi has never been profitable. http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-return-of-the-jedi-hasnt-made-a-profit/ http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-re...
harmegido 11y ago
| Noam doesn't make a data-based argument. He uses an anecdote. And that argument is then countered with another anecdote. The only way to really win this argument is by releasing all the data. Not thinking that's likely to happen.
- asdfologist 11y ago
  Definitely agree. This reminds me of Nick Ciubotariu's attempt at a "data"-driven rebuttal to the NY Times article on Amazon working conditions: "The NY Times said so-and-so happened at Amazon, but I have never seen it with my own eyes!"
- 7Figures2Commas 11y ago
  You can probably find IRR figures. But there's a wise saying in private equity, "You can't eat IRR."
  - ironchef 11y ago
    The first fund's were around 50% if I recall (as they included Skype and Nicira which were both _great_ returns).
- gozo 11y ago
  It's also a very strange anecdote since the NYT articles primary point is that A16Z are pushing up valuations so deals like the one Peter Thiel made are no longer possible. Quoted in this blog post from the NYT article: "It’s easier to triple or quadruple your money when you’ve invested $10 million in a $100 million company than when you’ve invested nearly $100 million in a $1 billion company [...]" Peter Thiel invested $500,000 for 10.2% i.e. in a $5 million company. Unless there's something I'm missing here?
  - austenallred 11y ago
    The point is that A16Z is paying high prices (and you correctly note that everyone is). Tan's point is that there are still power laws at play, and that choosing one random investment to disprove portfolio theory is incongruent.
    - chetanahuja 11y ago
      "Tan's point is that there are still power laws at play, choosing one random investment to disprove portfolio theory is incongruent." Except that he made no such point and just countered the anecdote with his own anecdotes. The original NYT article comes across as a well-researched, sensible piece of writing compared to this lazy, ill thought out blogpost.
      - austenallred 11y ago
        > Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart — and when you have the potential for 100X to 4000X returns, it's not about avoiding loss or minimizing downside. A proper venture portfolio is not like your 401K. The only way startup investors truly lose is if they miss the Uber.
jasonwilk 11y ago
The only fact I'd point to is that if A16Z were to raise a new fund, it would be wildly oversubscribed as with most other top VC firms. If I'm Andreesen, that's the only thing I'd point to.
Patrick_Devine 11y ago
I'm not sure why this even needs a rebuttal. If venture capital wasn't profitable, Sandhill Road wouldn't exist.
- HillRat 11y ago
  Well, it's profitable for the general partners. Whether it's a good deal for the LPs is another issue entirely.
- chillydawg 11y ago
  That's not strictly true. As long as interest rates are kept so low, there will be vast amounts of capital looking for any kind of return possible. The guys running the VC firms always make money as they get their 2/20 cut and people too rich to care will always invest in new funds. The sector as a whole is almost certainly not more profitable than a simple index tracker for the FTSE100 or similar.
- doctorpangloss 11y ago
  Because when you're A16Z and take a 3% management fee, regardless of profits, you don't need venture capital to be strictly speaking profitable. You need your particular brand of venture capital to be perceived to be profitable. If you have $4.2 billion under management during a year, you took $126 million in non-performance based fees that year. A16Z could make a ton of risky investments, collect fees, and die out in 7 years (2009 + 7 = 2016)—it really doesn't matter to its partners. They banked their fees. Mutual funds aren't necessarily more performant than buying index funds. Many forms of investment aren't. You're not appreciating how a smart manager can use time and a fee structure to enrich himself handsomely without actually delivering results for investors. Venture capital wouldn't exist if it wasn't profitable, sure, but Sandhill Road? That's an artifact of how venture capital is done and taken advantage of by real human beings, not of how profitable it is.
  - austenallred 11y ago
    But A16Z isn't doing that. The people who started A16Z have had multiple billion dollar exits, and are investing their management fee in services for their founders. They only make money from carry (if the fund is successful).
7Figures2Commas 11y ago
> Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart... It's kind of funny to see some of these companies uses as examples of "perfect execution." Two of Dropbox's latest late-stage investors have already reportedly written down their investments by ~20%[1], and Uber and Instacart are facing class action lawsuits that, in worst-case outcomes that are not entirely improbable, could upend their business models. > ...it's not about avoiding loss or minimizing downside. This is silly. Good fund managers are always concerned about downside. That doesn't mean they don't take on risk, but they try to understand and mitigate risk as approprite for the kind of fund they're managing. In the world of VC, there's a reason liquidation preferences, ratchets, etc. exist. Just because FOMO in this market has made it difficult for VCs to get terms they'd normally like doesn't mean they aren't exposed to downside risk. As Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." When the cycle turns, we'll learn which VCs didn't have their speedos on. [1] https://www.theinformation.com/mutual-funds-mark-down-dropbox-holdings https://www.theinformation.com/mutual-funds-mark-down-dropbo...
staunch 11y ago
A16Z isn't doing $500k checks in the next Facebook. They're waiting for the "15 important companies" to emerge every year and trying to snatch them up on the basis of their superior brand and checkbook. Exactly what the old guard of VCs used to do. They used to claim their partners were all successful founders. They gave that up a long time ago. Now they hire pedigreed market analysts to be partners. Their primary job seems to be to judge startups and tweet wisdom about them, even though they've never done it themselves. They passed on investing in Oculus because they thought Microsoft would crush them. Probably because they underestimated the creator of Oculus, Palmer Luckey, because he didn't go to any of the fancy schools. Then, later, when they realized what millions of Carmack fans had already realized (Carmack was involved long before any investor) they bought their way in to a later round and flipped the company to their friends at Facebook for a cool $2 billion. And of course, when it came to funding RapGenius.com, they had tens of millions to spare. They weren't worried Microsoft would beat them at the lyrics SEO game. The ultimate test of a Silicon Valley investor is whether they help bring about great new stuff that would otherwise not exist. Most VCs do not pass this test with a very high grade.
- drumdance 11y ago
  Well, to be fair, Andreessen's first company was crushed by Microsoft.
  - npalli 11y ago
    Yes, it was bought by AOL for $4.2 Billion. Wish someone would crush my company that way.
    - brazzledazzle 11y ago
      Yes, I'll have the $4+ Billion disappointment please.
- austenallred 11y ago
  Yes, they mostly invest in later stages than the seed round. They do some seed but it's not their bread and butter. Does that make them a shitty VC? They're still making big bets and hoping for a few winners to return the fund. That's what VC has always been and will always be.
__derek__ 11y ago
That's a silly comparison. Avatar was made by James Cameron, someone as established as it's possible to be in Hollywood. If Mark Zuckerberg or Larry Page or Jeff Bezos started a new company, then that company would be a good analogue because you aren't going to get the terms that you'd get out of a long-shot like Facebook. A better comparison would be something like Paranormal Activity (12,893x ROI) or the Blair Witch Project (11,111x ROI). Avatar is a good proxy for how much revenue-generation Hollywood is capable of, not its profitability measured by ROI.
- austenallred 11y ago
  The point is that the ceiling for the multiple a Hollywood film can return is way lower than the ceiling for the multiple VC can return. The discussion is around paying high prices and still getting a huge return, which makes Avatar a more apt analogy than the Blair Witch Project. That having been said, perhaps the analogy is a bit flawed, but at the going market cap Thiel has a 60,000x return on Facebook (on a large sum of money), and that will likely continue to go up. Even if the analogy is Twitter, started by the already successful Ev, or Slack, started by the already successful Stewart, both are likely to return a greater multiple.
- prbuckley 11y ago
  I was thinking the same thing, quora has a list of highest ROI films of all times. Most are low budget break away global success's. https://www.quora.com/Which-movies-have-the-highest-Return-on-Investment-ever https://www.quora.com/Which-movies-have-the-highest-Return-o...
- deleted 11y ago
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- deleted 11y ago
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chetanahuja 11y ago
The OP starts off with: "Noam doesn't make a data-based argument. He uses an anecdote" And then goes right on to the rest of the post with zero data and a couple of anecdotes to make his case.
dunkelheit 11y ago
So the nytimes article goes like "maybe, just maybe if we are in a bubble then it is going to hurt. and here are some signs that it is indeed a bubble". And the response is like "don't worry there is no bubble because you know, facebook is huge and software is eating the world". Not very convincing if you ask me.
rock57 11y ago
I have great respect for Garry Tan. However, I find the key quote on "how profitable Hollywood can be at best" a bit strange, and want to correct his statement below based on specific data. Here's the quote "...11X return on capital. That's the highest grossing film ever made, and a good proxy for how profitable Hollywood can be at best." Since 3,800X return on capital for Peter Thiel's FB investment is an obvious outlier/best case scenario, let's compare apples to apples and take the best case for Hollywood-type investments: "Paranormal Activity With just $15,000, the visionaries behind this project created a movie that took in a worldwide gross of almost $197 million." That sounds like 13133X return to me, which is even greater than 3800X... See http://www.businesspundit.com/10-most-profitable-low-budget-movies-of-all-time/ http://www.businesspundit.com/10-most-profitable-low-budget-...
- supster 11y ago
  The real point here isn't really Hollywood vs SV but rather that VC portfolios can outperform on just one stellar investment despite the rest being losers bc the ROIs can get so high. So paying a premium to get into a contested round of a high growth startup is worth it if you think the company can be one of these outliers. For example: a "mere" 20x return on one of ten companies will more than pay for the other 9 companies that lost you money on.
  - gozo 11y ago
    I just don't see how that invalidates the anecdote. Because if you're investing "$100 million in a $1 billion company" you're probably aren't expecting a 20x return, not to mention a greater one. So that would suggest that there is something else going on, which is the greater point of the NYT article.
    - supster 11y ago
      If you are investing at that late of stage you'll likely negotiate downside protection like liquidation preferences which significantly de risk the deal. In which case a 2-10x return is actually really good b/c you are not expecting to lose all your money in your individual investments. So in a late stage portfolio you would break even on a few and hopefully make returns on one or two.

49 points by rgbrgb 11y ago

I suspect that due to the well known creative accounting in Hollywood, Avatar returned significantly more than 11x. Top line costs are inflated.

dunkelheit 11y ago
That's interesting, could you elaborate on "creative accounting"?
- ojbyrne 11y ago
  https://en.m.wikipedia.org/wiki/Hollywood_accounting https://en.m.wikipedia.org/wiki/Hollywood_accounting
- Buge 11y ago
  According to Hollywood accounting, Return of the Jedi has never been profitable. http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-return-of-the-jedi-hasnt-made-a-profit/ http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-re...

harmegido 11y ago

| Noam doesn't make a data-based argument. He uses an anecdote. And that argument is then countered with another anecdote. The only way to really win this argument is by releasing all the data. Not thinking that's likely to happen.

asdfologist 11y ago
Definitely agree. This reminds me of Nick Ciubotariu's attempt at a "data"-driven rebuttal to the NY Times article on Amazon working conditions: "The NY Times said so-and-so happened at Amazon, but I have never seen it with my own eyes!"
7Figures2Commas 11y ago
You can probably find IRR figures. But there's a wise saying in private equity, "You can't eat IRR."
- ironchef 11y ago
  The first fund's were around 50% if I recall (as they included Skype and Nicira which were both _great_ returns).
gozo 11y ago
It's also a very strange anecdote since the NYT articles primary point is that A16Z are pushing up valuations so deals like the one Peter Thiel made are no longer possible. Quoted in this blog post from the NYT article: "It’s easier to triple or quadruple your money when you’ve invested $10 million in a $100 million company than when you’ve invested nearly $100 million in a $1 billion company [...]" Peter Thiel invested $500,000 for 10.2% i.e. in a $5 million company. Unless there's something I'm missing here?
- austenallred 11y ago
  The point is that A16Z is paying high prices (and you correctly note that everyone is). Tan's point is that there are still power laws at play, and that choosing one random investment to disprove portfolio theory is incongruent.
  - chetanahuja 11y ago
    "Tan's point is that there are still power laws at play, choosing one random investment to disprove portfolio theory is incongruent." Except that he made no such point and just countered the anecdote with his own anecdotes. The original NYT article comes across as a well-researched, sensible piece of writing compared to this lazy, ill thought out blogpost.
    - austenallred 11y ago
      > Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart — and when you have the potential for 100X to 4000X returns, it's not about avoiding loss or minimizing downside. A proper venture portfolio is not like your 401K. The only way startup investors truly lose is if they miss the Uber.

jasonwilk 11y ago

The only fact I'd point to is that if A16Z were to raise a new fund, it would be wildly oversubscribed as with most other top VC firms. If I'm Andreesen, that's the only thing I'd point to.

Patrick_Devine 11y ago

I'm not sure why this even needs a rebuttal. If venture capital wasn't profitable, Sandhill Road wouldn't exist.

HillRat 11y ago
Well, it's profitable for the general partners. Whether it's a good deal for the LPs is another issue entirely.
chillydawg 11y ago
That's not strictly true. As long as interest rates are kept so low, there will be vast amounts of capital looking for any kind of return possible. The guys running the VC firms always make money as they get their 2/20 cut and people too rich to care will always invest in new funds. The sector as a whole is almost certainly not more profitable than a simple index tracker for the FTSE100 or similar.
doctorpangloss 11y ago
Because when you're A16Z and take a 3% management fee, regardless of profits, you don't need venture capital to be strictly speaking profitable. You need your particular brand of venture capital to be perceived to be profitable. If you have $4.2 billion under management during a year, you took $126 million in non-performance based fees that year. A16Z could make a ton of risky investments, collect fees, and die out in 7 years (2009 + 7 = 2016)—it really doesn't matter to its partners. They banked their fees. Mutual funds aren't necessarily more performant than buying index funds. Many forms of investment aren't. You're not appreciating how a smart manager can use time and a fee structure to enrich himself handsomely without actually delivering results for investors. Venture capital wouldn't exist if it wasn't profitable, sure, but Sandhill Road? That's an artifact of how venture capital is done and taken advantage of by real human beings, not of how profitable it is.
- austenallred 11y ago
  But A16Z isn't doing that. The people who started A16Z have had multiple billion dollar exits, and are investing their management fee in services for their founders. They only make money from carry (if the fund is successful).

7Figures2Commas 11y ago

> Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart... It's kind of funny to see some of these companies uses as examples of "perfect execution." Two of Dropbox's latest late-stage investors have already reportedly written down their investments by ~20%[1], and Uber and Instacart are facing class action lawsuits that, in worst-case outcomes that are not entirely improbable, could upend their business models. > ...it's not about avoiding loss or minimizing downside. This is silly. Good fund managers are always concerned about downside. That doesn't mean they don't take on risk, but they try to understand and mitigate risk as approprite for the kind of fund they're managing. In the world of VC, there's a reason liquidation preferences, ratchets, etc. exist. Just because FOMO in this market has made it difficult for VCs to get terms they'd normally like doesn't mean they aren't exposed to downside risk. As Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." When the cycle turns, we'll learn which VCs didn't have their speedos on. [1] https://www.theinformation.com/mutual-funds-mark-down-dropbox-holdings https://www.theinformation.com/mutual-funds-mark-down-dropbo...

staunch 11y ago

A16Z isn't doing $500k checks in the next Facebook. They're waiting for the "15 important companies" to emerge every year and trying to snatch them up on the basis of their superior brand and checkbook. Exactly what the old guard of VCs used to do. They used to claim their partners were all successful founders. They gave that up a long time ago. Now they hire pedigreed market analysts to be partners. Their primary job seems to be to judge startups and tweet wisdom about them, even though they've never done it themselves. They passed on investing in Oculus because they thought Microsoft would crush them. Probably because they underestimated the creator of Oculus, Palmer Luckey, because he didn't go to any of the fancy schools. Then, later, when they realized what millions of Carmack fans had already realized (Carmack was involved long before any investor) they bought their way in to a later round and flipped the company to their friends at Facebook for a cool $2 billion. And of course, when it came to funding RapGenius.com, they had tens of millions to spare. They weren't worried Microsoft would beat them at the lyrics SEO game. The ultimate test of a Silicon Valley investor is whether they help bring about great new stuff that would otherwise not exist. Most VCs do not pass this test with a very high grade.

drumdance 11y ago
Well, to be fair, Andreessen's first company was crushed by Microsoft.
- npalli 11y ago
  Yes, it was bought by AOL for $4.2 Billion. Wish someone would crush my company that way.
  - brazzledazzle 11y ago
    Yes, I'll have the $4+ Billion disappointment please.
austenallred 11y ago
Yes, they mostly invest in later stages than the seed round. They do some seed but it's not their bread and butter. Does that make them a shitty VC? They're still making big bets and hoping for a few winners to return the fund. That's what VC has always been and will always be.

__derek__ 11y ago

That's a silly comparison. Avatar was made by James Cameron, someone as established as it's possible to be in Hollywood. If Mark Zuckerberg or Larry Page or Jeff Bezos started a new company, then that company would be a good analogue because you aren't going to get the terms that you'd get out of a long-shot like Facebook. A better comparison would be something like Paranormal Activity (12,893x ROI) or the Blair Witch Project (11,111x ROI). Avatar is a good proxy for how much revenue-generation Hollywood is capable of, not its profitability measured by ROI.

austenallred 11y ago
The point is that the ceiling for the multiple a Hollywood film can return is way lower than the ceiling for the multiple VC can return. The discussion is around paying high prices and still getting a huge return, which makes Avatar a more apt analogy than the Blair Witch Project. That having been said, perhaps the analogy is a bit flawed, but at the going market cap Thiel has a 60,000x return on Facebook (on a large sum of money), and that will likely continue to go up. Even if the analogy is Twitter, started by the already successful Ev, or Slack, started by the already successful Stewart, both are likely to return a greater multiple.
prbuckley 11y ago
I was thinking the same thing, quora has a list of highest ROI films of all times. Most are low budget break away global success's. https://www.quora.com/Which-movies-have-the-highest-Return-on-Investment-ever https://www.quora.com/Which-movies-have-the-highest-Return-o...
deleted 11y ago
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deleted 11y ago
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chetanahuja 11y ago

The OP starts off with: "Noam doesn't make a data-based argument. He uses an anecdote" And then goes right on to the rest of the post with zero data and a couple of anecdotes to make his case.

dunkelheit 11y ago

So the nytimes article goes like "maybe, just maybe if we are in a bubble then it is going to hurt. and here are some signs that it is indeed a bubble". And the response is like "don't worry there is no bubble because you know, facebook is huge and software is eating the world". Not very convincing if you ask me.

rock57 11y ago

I have great respect for Garry Tan. However, I find the key quote on "how profitable Hollywood can be at best" a bit strange, and want to correct his statement below based on specific data. Here's the quote "...11X return on capital. That's the highest grossing film ever made, and a good proxy for how profitable Hollywood can be at best." Since 3,800X return on capital for Peter Thiel's FB investment is an obvious outlier/best case scenario, let's compare apples to apples and take the best case for Hollywood-type investments: "Paranormal Activity With just $15,000, the visionaries behind this project created a movie that took in a worldwide gross of almost $197 million." That sounds like 13133X return to me, which is even greater than 3800X... See http://www.businesspundit.com/10-most-profitable-low-budget-movies-of-all-time/ http://www.businesspundit.com/10-most-profitable-low-budget-...

supster 11y ago
The real point here isn't really Hollywood vs SV but rather that VC portfolios can outperform on just one stellar investment despite the rest being losers bc the ROIs can get so high. So paying a premium to get into a contested round of a high growth startup is worth it if you think the company can be one of these outliers. For example: a "mere" 20x return on one of ten companies will more than pay for the other 9 companies that lost you money on.
- gozo 11y ago
  I just don't see how that invalidates the anecdote. Because if you're investing "$100 million in a $1 billion company" you're probably aren't expecting a 20x return, not to mention a greater one. So that would suggest that there is something else going on, which is the greater point of the NYT article.
  - supster 11y ago
    If you are investing at that late of stage you'll likely negotiate downside protection like liquidation preferences which significantly de risk the deal. In which case a 2-10x return is actually really good b/c you are not expecting to lose all your money in your individual investments. So in a late stage portfolio you would break even on a few and hopefully make returns on one or two.