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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

by 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.
    - gozo 11y ago
      Sure. I'm not saying it's a bad deal, just that it supports what the NYT article is saying and that the anecdote would therefor be relevant. > Within Silicon Valley, Andreessen Horowitz is famous for bidding valuations to heights that make rivals uncomfortable. To offset the dilution of ownership that comes from such prices, Andreessen Horowitz [...] increases the amount of money it invests. The firm often kicks in more than the entrepreneur asks for, according to rival V.C.s who have been involved in these deals. “They want to basically change the table stakes in a poker game,” said Greg Kidd, an angel investor in several companies Andreessen later funded. “There are some other folks who can cut checks like that, but there aren’t that many.” > More than is the case with other firms, the fate of Andreessen Horowitz may be closely tied to that of the overall tech market. If prices remain buoyant, the eye-popping valuations of the firm’s top-performing companies will keep it profitable and losses will be containable. But if the market turns, Andreessen Horowitz could have serious trouble. > Worse, Andreessen Horowitz isn’t just a beneficiary of behavior that’s driving up valuations. If a bubble is forming, it is ultimately because too much money is chasing too few companies. But the firm’s own aggressive bidding may be partly responsible. “Because there is competition for deals, when you have actors in the market showing no price discipline, it drives up the cost for everyone,” said one investor. And by the way, for completeness, the company in question sold for $2.6 billion three months after the article and post was written.
nopinsight 11y ago
That is not a good comparison because the absolute return is 1-2 orders of magnitude below what Peter Thiel and Accel made from their Facebook investments. Given the amount of funds VCs and big Hollywood firms control, an occasional $100-200M absolute return does not significantly change their portfolio success.

by rock57 11y ago

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.
  - gozo 11y ago
    Sure. I'm not saying it's a bad deal, just that it supports what the NYT article is saying and that the anecdote would therefor be relevant. > Within Silicon Valley, Andreessen Horowitz is famous for bidding valuations to heights that make rivals uncomfortable. To offset the dilution of ownership that comes from such prices, Andreessen Horowitz [...] increases the amount of money it invests. The firm often kicks in more than the entrepreneur asks for, according to rival V.C.s who have been involved in these deals. “They want to basically change the table stakes in a poker game,” said Greg Kidd, an angel investor in several companies Andreessen later funded. “There are some other folks who can cut checks like that, but there aren’t that many.” > More than is the case with other firms, the fate of Andreessen Horowitz may be closely tied to that of the overall tech market. If prices remain buoyant, the eye-popping valuations of the firm’s top-performing companies will keep it profitable and losses will be containable. But if the market turns, Andreessen Horowitz could have serious trouble. > Worse, Andreessen Horowitz isn’t just a beneficiary of behavior that’s driving up valuations. If a bubble is forming, it is ultimately because too much money is chasing too few companies. But the firm’s own aggressive bidding may be partly responsible. “Because there is competition for deals, when you have actors in the market showing no price discipline, it drives up the cost for everyone,” said one investor. And by the way, for completeness, the company in question sold for $2.6 billion three months after the article and post was written.

nopinsight 11y ago

That is not a good comparison because the absolute return is 1-2 orders of magnitude below what Peter Thiel and Accel made from their Facebook investments. Given the amount of funds VCs and big Hollywood firms control, an occasional $100-200M absolute return does not significantly change their portfolio success.