7 ms·

Andreessen Horowitz Raises $1.5B for New Fund

77 points by brianchu 10y ago

w1ntermute 10y ago
There was a discussion on HN about a week ago on a16z and its performance[0]. Does anyone know how a16z's funds' IRRs compare to those of other top-tier VC firms (Accel, Benchmark, Greylock, Sequoia)? And are these "top-tier" firms actually providing the best returns for their LPs, or have they just created that perception? With so few IPOs or acquisitions, how are the LPs actually getting their cash back? And how much of that money is eaten up by the "services" that a16z provides to its portfolio companies, not to mention the insane amount of content marketing they've done over the last few years (blogs, podcasts, books, etc.)? 0: https://news.ycombinator.com/item?id=11836341 https://news.ycombinator.com/item?id=11836341
- jsprogrammer 10y ago
  1/3 of the raise can be used to pump cash to those who came on earlier funds.
  - deleted 10y ago
    [deleted]
  - mathattack 10y ago
    I interpreted it as additional cash for the same fund.
    - jsprogrammer 10y ago
      The cash is for "late-stage opportunities" in "portfolio companies".
      - bing_dai 10y ago
        Yup. It's called "reserve". VCs often reserve a minor portion of the fund (~30%) for investing in future rounds of the fund's existing portfolio companies.
      - mathattack 10y ago
        It's to avoid negative signaling that may occur if a VC firm doesn't invest in subsequent rounds.
  - gumby 10y ago
    Most fund agreements prohibit cross-fund investment, mainly because it's an incentive for fund n+1 to be used to prop up losing investments from fund n, deferring the day of reckoning.
    - jsprogrammer 10y ago
      Maybe. AH doesn't appear to roll that way.
      - gumby 10y ago
        Really? That's interesting, though not unheard of. I haven't seen their LP agreement of course. There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis. The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree. So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments. Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align. So: quite uncommon but not unheard of.
- ironchef 10y ago
  The only original IRR which was semi-published was the first fund (300 mil). If I recall it was a 200 ish % because of Nicira, Skype, Instagram, and FusionIO. You can get somewhat of an idea of the IPOs and acquisitions here: https://www.crunchbase.com/organization/andreessen-horowitz/exits https://www.crunchbase.com/organization/andreessen-horowitz/... I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs. As to the expenses...the marketing is quite inexpensive and has more than paid for itself. No idea on the costs around the services to the portfolio companies. Full disclosure: I've worked for quite a few of their portfolio companies.
  - w1ntermute 10y ago
    > I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs. If the IRRs for the follow-on funds are counting portfolio companies that haven't exited (according to their latest valuation), then it might be quite deceptive. If those companies can't IPO or be acquired without a significant drop in the valuation, then the paper IRR won't hold up.
    - deleted 10y ago
      [deleted]
- dharmon 10y ago
  So the big wins claimed were all early in the first round: Instagram, Twitter, Skype, etc. They made about $100M off Skype, and probably comparable or less from the others, but if they proceeded to raise $3B and invested it in companies like Jawbone, that completely kills their IRR. That's what I was getting at when I posed the question in the original thread. A few small wins do not undo many large losses. It will take at least a full cycle to see. In another 5-10 years we can compare to the firms you mentioned. Obviously in the meantime a16z don't mind being compared to Sequoia et. al. a16z charges 2 and 25. 2% of AUM each year, 25% of the profits. (2&20 is standard in hedge funds.)
  - caseyallen 10y ago
    Except you need to factor in a 30% carry, not 25%. This was stated in a 2015 New Yorker interview covering Marc and the firm. 2 and 30. Source: http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...
    - ohazi 10y ago
      I thought it was 3 and 30 (which seemed pretty arrogant at the time). Have they backpedaled? https://erickschonfeld.com/2012/08/28/3-and-30/ https://erickschonfeld.com/2012/08/28/3-and-30/
    - dharmon 10y ago
      Oh wow. You're right. I remembered that it was higher than the usual, but not that much higher. Thanks.
  - hkmurakami 10y ago
    Yeah the problem is that their instagram investment made great returns on a small investment, which just didn't make a big enough impact on their overall returns.
- bing_dai 10y ago
  "And how much of that money is eaten up by the "services" that a16z provides..." As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc. Therefore a16z's management fee from this specific fund is about $30M a year ($1.5B * 0.02). However, please note that this is just the management fee of ONE fund. A VC firm often raises additional funds before a previous one ends its cycle (that's why you see fund names such as a16z fund I, a16z fund II, etc). a16z therefore has additional annual management fee from the previous, unfinished fund as well. I would not be surprised if a16z has $50M management fee per year across its multiple funds. Source: I used to work for a VC.
  - w1ntermute 10y ago
    > As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc. a16z spends much more than most VC firms on providing all kinds of services (such as recruiting) to their portfolio companies, and hires a ton of people for that purpose. It's not clear whether those expenses come out of the management fee or not.
    - bing_dai 10y ago
      That's interesting to know. My guess is that, other than the management fee, there are two potential sources of money that can pay for those additional services: 1. A portion of the profit that a16z made from previous exits. 2. This is a less likely option - asking portfolio companies to pay for those services. I know VCs that bill their portfolio companies for certain professional services.
      - foobarqux 10y ago
        Which services? Charging for services is common in private equity, but I was not aware that VCs also did so. Are these top-tier VC funds?
        justinv 10y ago
deleted 10y ago
[deleted]
nl 10y ago
Pretty sure Instagram was in the second fund (although they didn't actually make huge money off it). Second fund also had Nicira ($1.2B), and possibly the Zynga and GroupOn IPOs. Seems decent results to me.
- forgetsusername 10y ago
  It's interesting that Zynga and Groupon could be considered as part of a basket of "decent results". I mean, I'm sure a16z made out quite well, but both companies are worth a fraction of what they were sold to he public for. A less generous interpretation is that the early investors in these companies pulled a fast one on the public. "Getting to IPO" shouldn't be a measure of success, but that's just me.
  - SkyMarshal 10y ago
    Keep in mind that IPO investors are not John Q Public, but sophisticated Wall St. types. They knew the game on those investments - stock market musical chairs.
cloudjacker 10y ago
Startups, startups everywhere!
jondubois 10y ago
Nooooooooo! They're going to spam the economy with more startups to compete with my side project... For the next 10 years or so :(
- waddabadoo 10y ago
  Not sure why you get downvoted. Its true, with all this VC casino "startups", you as a hobbyist, not living in the us or be part of the bubble stand no chance.
rdlecler1 10y ago
Unlike most VC firms which may be paying MPs millions in cash comp, a16z takes their management fee and plows it back into the platform (marketing, HR, research, etc). a16z's core team would never half to towel again in their life, so they don't care much about a couple hundred k here or there. They're looking for the next G/FB/TW/AirBnB/Uber.
n72 10y ago
Is there any evidence that VC firms are any better at predicting the future than hedge funds? I understand a few years ago that perhaps there were some inefficiencies in the startup market which could be exploited, but now that everyone focused on SV (and elsewhere) startups, is there really a reason to pay 2% of AUM for someone to make guesses on your behalf?

77 points by brianchu 10y ago

There was a discussion on HN about a week ago on a16z and its performance[0]. Does anyone know how a16z's funds' IRRs compare to those of other top-tier VC firms (Accel, Benchmark, Greylock, Sequoia)? And are these "top-tier" firms actually providing the best returns for their LPs, or have they just created that perception? With so few IPOs or acquisitions, how are the LPs actually getting their cash back? And how much of that money is eaten up by the "services" that a16z provides to its portfolio companies, not to mention the insane amount of content marketing they've done over the last few years (blogs, podcasts, books, etc.)? 0: https://news.ycombinator.com/item?id=11836341 https://news.ycombinator.com/item?id=11836341

jsprogrammer 10y ago
1/3 of the raise can be used to pump cash to those who came on earlier funds.
- deleted 10y ago
  [deleted]
- mathattack 10y ago
  I interpreted it as additional cash for the same fund.
  - jsprogrammer 10y ago
    The cash is for "late-stage opportunities" in "portfolio companies".
    - bing_dai 10y ago
      Yup. It's called "reserve". VCs often reserve a minor portion of the fund (~30%) for investing in future rounds of the fund's existing portfolio companies.
    - mathattack 10y ago
      It's to avoid negative signaling that may occur if a VC firm doesn't invest in subsequent rounds.
- gumby 10y ago
  Most fund agreements prohibit cross-fund investment, mainly because it's an incentive for fund n+1 to be used to prop up losing investments from fund n, deferring the day of reckoning.
  - jsprogrammer 10y ago
    Maybe. AH doesn't appear to roll that way.
    - gumby 10y ago
      Really? That's interesting, though not unheard of. I haven't seen their LP agreement of course. There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis. The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree. So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments. Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align. So: quite uncommon but not unheard of.
ironchef 10y ago
The only original IRR which was semi-published was the first fund (300 mil). If I recall it was a 200 ish % because of Nicira, Skype, Instagram, and FusionIO. You can get somewhat of an idea of the IPOs and acquisitions here: https://www.crunchbase.com/organization/andreessen-horowitz/exits https://www.crunchbase.com/organization/andreessen-horowitz/... I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs. As to the expenses...the marketing is quite inexpensive and has more than paid for itself. No idea on the costs around the services to the portfolio companies. Full disclosure: I've worked for quite a few of their portfolio companies.
- w1ntermute 10y ago
  > I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs. If the IRRs for the follow-on funds are counting portfolio companies that haven't exited (according to their latest valuation), then it might be quite deceptive. If those companies can't IPO or be acquired without a significant drop in the valuation, then the paper IRR won't hold up.
  - deleted 10y ago
    [deleted]
dharmon 10y ago
So the big wins claimed were all early in the first round: Instagram, Twitter, Skype, etc. They made about $100M off Skype, and probably comparable or less from the others, but if they proceeded to raise $3B and invested it in companies like Jawbone, that completely kills their IRR. That's what I was getting at when I posed the question in the original thread. A few small wins do not undo many large losses. It will take at least a full cycle to see. In another 5-10 years we can compare to the firms you mentioned. Obviously in the meantime a16z don't mind being compared to Sequoia et. al. a16z charges 2 and 25. 2% of AUM each year, 25% of the profits. (2&20 is standard in hedge funds.)
- caseyallen 10y ago
  Except you need to factor in a 30% carry, not 25%. This was stated in a 2015 New Yorker interview covering Marc and the firm. 2 and 30. Source: http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...
  - ohazi 10y ago
    I thought it was 3 and 30 (which seemed pretty arrogant at the time). Have they backpedaled? https://erickschonfeld.com/2012/08/28/3-and-30/ https://erickschonfeld.com/2012/08/28/3-and-30/
  - dharmon 10y ago
    Oh wow. You're right. I remembered that it was higher than the usual, but not that much higher. Thanks.
- hkmurakami 10y ago
  Yeah the problem is that their instagram investment made great returns on a small investment, which just didn't make a big enough impact on their overall returns.
bing_dai 10y ago
"And how much of that money is eaten up by the "services" that a16z provides..." As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc. Therefore a16z's management fee from this specific fund is about $30M a year ($1.5B * 0.02). However, please note that this is just the management fee of ONE fund. A VC firm often raises additional funds before a previous one ends its cycle (that's why you see fund names such as a16z fund I, a16z fund II, etc). a16z therefore has additional annual management fee from the previous, unfinished fund as well. I would not be surprised if a16z has $50M management fee per year across its multiple funds. Source: I used to work for a VC.
- w1ntermute 10y ago
  > As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc. a16z spends much more than most VC firms on providing all kinds of services (such as recruiting) to their portfolio companies, and hires a ton of people for that purpose. It's not clear whether those expenses come out of the management fee or not.
  - bing_dai 10y ago
    That's interesting to know. My guess is that, other than the management fee, there are two potential sources of money that can pay for those additional services: 1. A portion of the profit that a16z made from previous exits. 2. This is a less likely option - asking portfolio companies to pay for those services. I know VCs that bill their portfolio companies for certain professional services.
    - foobarqux 10y ago
      Which services? Charging for services is common in private equity, but I was not aware that VCs also did so. Are these top-tier VC funds?
      - justinv 10y ago

deleted 10y ago

[deleted]

nl 10y ago

Pretty sure Instagram was in the second fund (although they didn't actually make huge money off it). Second fund also had Nicira ($1.2B), and possibly the Zynga and GroupOn IPOs. Seems decent results to me.

forgetsusername 10y ago
It's interesting that Zynga and Groupon could be considered as part of a basket of "decent results". I mean, I'm sure a16z made out quite well, but both companies are worth a fraction of what they were sold to he public for. A less generous interpretation is that the early investors in these companies pulled a fast one on the public. "Getting to IPO" shouldn't be a measure of success, but that's just me.
- SkyMarshal 10y ago
  Keep in mind that IPO investors are not John Q Public, but sophisticated Wall St. types. They knew the game on those investments - stock market musical chairs.

cloudjacker 10y ago

Startups, startups everywhere!

jondubois 10y ago

Nooooooooo! They're going to spam the economy with more startups to compete with my side project... For the next 10 years or so :(

waddabadoo 10y ago
Not sure why you get downvoted. Its true, with all this VC casino "startups", you as a hobbyist, not living in the us or be part of the bubble stand no chance.

rdlecler1 10y ago

Unlike most VC firms which may be paying MPs millions in cash comp, a16z takes their management fee and plows it back into the platform (marketing, HR, research, etc). a16z's core team would never half to towel again in their life, so they don't care much about a couple hundred k here or there. They're looking for the next G/FB/TW/AirBnB/Uber.

n72 10y ago

Is there any evidence that VC firms are any better at predicting the future than hedge funds? I understand a few years ago that perhaps there were some inefficiencies in the startup market which could be exploited, but now that everyone focused on SV (and elsewhere) startups, is there really a reason to pay 2% of AUM for someone to make guesses on your behalf?