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Andreessen Horowitz’s Returns Trail Venture-Capital Elite

115 points by forgingahead 10y ago

grandalf 10y ago
The most promising (low risk) startups get their pick of investors, so most who can choose will prefer a top-tier VC. If you are a VC the only way to differentiate yourself is to take on risk that you perceive to be less risky than the herd does, and to build your portfolio on the basis of such decisions. Since there is no reason to believe all VC firms share the same time horizon for realizing their investment returns, it does not make sense to compare firms on the basis of returns published this way. A more sensible approach would be to remove the outliers (good and bad) from their portfolios and evaluate how well they picked on average. Or, if you only care about highly successful outliers, the way to compare firms is to look at how much and how early they invested in the same unicorn.
- nradov 10y ago
  The outliers are the whole point of VC.
  - grandalf 10y ago
    True, which is why I suggested an outlier-focused approach as well. My point is that blending the two metrics does not really tell us much other than that a particular VC happened to pick slightly better outliers in the time period under analysis.
  - 20yrs_no_equity 10y ago
    But not the point of startups. Also, not what's better for founders. You're better off with a %50 chance of being worth $200M after 7 years than a %1 chance of being worth $1B after 3. VCs place many bets, you only get to place one. At this point if I were to ever take VC again, I might take it from A16Z. They would be top of my list. All those "top tier" guys would have to give me terms I believe they are not inclined to give me. Fortunately things are radically different than they were even 10 years ago, and VCs have a lot less power. Unless you're building another Uber. Don't build another Uber. Build a github.
    - grandalf 10y ago
      This is a good point. I think it's fair to say that the tiny subset of businesses VCs are interested in investing in are the ones where a well-timed influx of capital has a chance of allowing massive growth. Any novel business that appears to have those characteristics is ripe for such a speculative investment, but most of the valuations are based on the assumption of massive growth. As soon as the growth trajectory turns out to be less impressive, the valuation goes through the floor, and usually results in a loss for investors (even if the company can be sold). But this is by design, since the investment was highly leveraged on the upside, it is also leveraged on the downside and the firm will often simply fail. Doing a typical startup (less than two years from seed round to massive growth or failure) is a lot more like flipping a house than like starting a business with a proven business model. This is why there is so much trendiness and so many me-too companies... They are like real estate developers who saw that McMansions sold for 2x investment a mile away and decide to rapidly build nearly identical ones hoping for the quick profit. The goal is entirely in the short term and the long term is irrelevant. Google found a very powerful way to sell ads, and once it built the infrastructure to do so it was able to massively broaden its product offering and appear to be almost a modern conglomerate. But the fact remains that ad revenue is the vast majority of Google's income, and most of the rest of its businesses are (in comparison) failures that would never have continued to be funded by VC-style investors. Alphabet reflects the investors' realization of this and is a compromise resulting from Sergey and Larry having a lot more control than typical founders. Github is interesting. I wish I could see its financials! I had hoped for a lot more in the product arena from Github, but who knows, maybe they still have most of the $100M.
- elmar 10y ago
  Black Swan Farming - Paul Graham http://www.paulgraham.com/swan.html http://www.paulgraham.com/swan.html
swingbridge 10y ago
They're still doing quite well all things considered--really well in fact relative to most people trying to manage other people's money. Personally I don't place much value in comparing short term returns as it applies to saying who's a better manager. The same thing happens with hedge funds. A firm can have a great year but the real test is how they perform over years or even decades. How many hedge funds can outperform someone like a Warren Buffet over the long term? Not many. In fact sadly many fail to even beat index funds. One great year makes a headline, consistent great years makes a great investor.
Kaedon 10y ago
It feels a little unfair to compare fund groups from 2003 and 2006 to those that must be after 2009, when A16Z was founded. Give it a few years and we can have an article like this...
- boulos 10y ago
  I thought so too, but the article then compares to funds started in the same years (like 2010). That said, not having lots of exits within 6 years of starting a fund doesn't seem strange (anymore). Also, comparing Sequioa's 50x return on WhatsApp to anything is going to look bad ;). The percentile data is more revealing and does suggest that the A16Z fund from 2010 is currently middle-of-the-road. Unfortunately, the article doesn't cite sources for this percentile data.
- matco11 10y ago
  Good point. Also, I wonder if the mark-to-market policies of the various funds are really comparable. When you have a public market price reference it's pretty much irrelevant, but with the majority of the portfolio in non-listed assets, mark-to-market policies could have a large impact on your paper returns.
  - matco11 10y ago
    Official response from AH: http://a16z.com/2016/09/01/marks-offmark/ http://a16z.com/2016/09/01/marks-offmark/
inputcoffee 10y ago
The AH model isn't venture in the sense of betting on very early stage companies. AH seems to invest huge amounts in much later stage companies. The idea is that some of these companies would be public in the old days and all the growth is happening on the private side. (This is based on things @pmarca has said many times in many different forums). One could argue that the relevant comparison would be very volatile tech stocks. Comparing it with the few VC funds (the one VC fund?) that hit the great firms two funds in a row is not really fair. Edit: To put it yet another way, the volatility of the returns should be lower so we should be happier with a lower expected return.
- rm_-rf_slash 10y ago
  That's a good point, and it's reasonable to invest more in a few later stage (money-making) companies than a lot of little maybes. Seems fine and dandy to sprinkle 5,6,7 figure investments here and there if you have a lot of cash to play with, but those startups don't operate in a vacuum. They will need support from time to time, they will require work-hours from your firm that could be allocated elsewhere. Of course there's no one-size-fits-all, but every startup investment will in some way or another cost more than the check you write.
- mathattack 10y ago
  Very true. Seed versus growth versus pre-IPO versus PE have very different goals and volatility profiles. It may be more accurate to compare a16z to a moderately leveraged bet on an S&P, NASDAQ or tech index. It also can take a fund or two more to really tell. The strength of places like KPCB is their performance over time. One of the few asset classes where the best persist over long periods.
- jasode 10y ago
  >The AH model isn't venture in the sense of betting on very early stage companies. AH seems to invest huge amounts in much later stage companies. But that funding at later stages may have been happenstance rather than deliberate strategy. For example, a16z looked at AirBnb during the Series A fundraising. But they decided to pass on it, partly because Marc Andreesen didn't believe AirBnb's trust model for strangers in personal homes would work. When a16z looked at AirBnb again during their Series B fundraising, they invested. Marc has been on record saying they regret missing the earlier Series A round because it would have made them a lot more money. a16z also made a late 2010 investment in Facebook but some observers thought they did it for "logo shopping". In other words, observers said it wasn't a late investment timing on purpose -- it was because they were a new firm (2009) and they wanted to add immediate credibility to their portfolio. It seems they do want to catch companies early if they can.[1] On the other hand, I remember Ben Horowitz saying they deliberately held back on an Oculus Rift and let another VC take the lead (the risk). They later invested in the subsequent round. It doesn't seem like there's any rigid single strategy there with regards to timing. [1] scan for their "Seed" and "Series A" investments: https://www.crunchbase.com/organization/andreessen-horowitz/investments https://www.crunchbase.com/organization/andreessen-horowitz/...
replicatorblog 10y ago
So basically their 2 earliest funds are just over half way to maturity and already closing in on the 3X benchmark Andreessen promised to his LPs? It's hard to 3X a billion. That makes Sequoia and Benchmark even more impressive, but doesn't reflect badly on A16Z. Michael Jordan once came in 3rd in the MVP voting—does that diminish his legacy? http://www.basketball-reference.com/awards/awards_1993.html http://www.basketball-reference.com/awards/awards_1993.html It's a good reminder that press attention doesn't equal results, but A16Z still seems like they're a force to be reckoned with.
staticautomatic 10y ago
Am I misunderstanding or am I the only one calling bullshit on all these firms for talking about making money where there's no liquidity event. These are mostly paper gains. Shenanigans.
- Kinnard 10y ago
  There seems to be a growing amount of "liquidity" outside of IPOs . . . almost a transition from "liquidity events" to simple . . . "liquidity" . . .
  - staticautomatic 10y ago
    "simple liquidity" - whatever that even is - does not turn paper gains for the likes of Uber into real gains.
- hugs 10y ago
  Yes, it's bullshit, but when their LPs ask "How's it going?", reporting paper gains is how they get off the hot seat and/or raise the next fund.
  - __derek__ 10y ago
    That sounds curiously similar to a certain geometric scheme.
    - cloudjacker 10y ago
      nobody with connections gets their funds frozen in an SEC emergency asset injucture, or FTC investigation the only way to get your liquidity ponzi scheme funds frozen by regulators is to: a) lose money b) not know any regulators If you got a) and b) covered, then you can start as many funds as you want, issue or rollover as many bonds as you want, dilute as much equity as you want keep the gravy train rolling
- prostoalex 10y ago
  Most of the world's investable assets (real estate, oil wells, corner ice cream parlor, a Taco Bell franchise) have not had a liquidity event but are valued nonetheless.
not_that_noob 10y ago
Almost a hit piece on AH. Their returns are definitely top-tier, but WSJ presents it a failure that returns are not the very best. Seriously? It's statistical noise at that tier.
deleted 10y ago
[deleted]
warcher 10y ago
To my eye, the story here is how awful VC is as an asset class. Like, this is as good as it gets, guys. This is it. Even with these returns being kinda so-so (relative to the lack of liquidity, ten year return cycle, et cetera), these guys are easily in the top five percent of VC firms. Dumb old index funds are going to roughly double your money in ten years with reinvestment of dividends. If a VC can't hit 3x, the numbers don't really add up to make it worth your while to write a big check and just park it for a decade. The point of the article is that even the best of the best can miss those numbers and still be in the top fifth percentile. Yikes.
- deleted 10y ago
  [deleted]
- up_and_up 10y ago
  > Like, this is as good as it gets, guys. This is it. Pretty sure they reference both Sequoia and Benchmarks as having 8x and 11x returns. So not sure this is really as good as it gets. I think it more points to the over hype of certain firms vs the ones who can actually deliver on investor money.
  - iaw 10y ago
    They also emphasize that those returns are largely on paper excluding the WhatsApp purchase... So still illiquid and able to move down.
    - the_watcher 10y ago
      That's also how VC works. Gains are on paper until liquidity.
  - kchoudhu 10y ago
    Sure, and investing with Goldman Sachs special situations will occasionally get your 10x returns too. It's not repeatable though, so it doesn't make sense to bet your or anyone else's retirement on it, which is what a lot of LPs seem to be doing.
paulpauper 10y ago
Facebook bought the photo-sharing app for $1 billion in 2012, the firm said it made $78 million on a $250,000 investment. damn....and had Instagram not sold to facebook it would probably be worth $1-1.5 billion

115 points by forgingahead 10y ago

The most promising (low risk) startups get their pick of investors, so most who can choose will prefer a top-tier VC. If you are a VC the only way to differentiate yourself is to take on risk that you perceive to be less risky than the herd does, and to build your portfolio on the basis of such decisions. Since there is no reason to believe all VC firms share the same time horizon for realizing their investment returns, it does not make sense to compare firms on the basis of returns published this way. A more sensible approach would be to remove the outliers (good and bad) from their portfolios and evaluate how well they picked on average. Or, if you only care about highly successful outliers, the way to compare firms is to look at how much and how early they invested in the same unicorn.

nradov 10y ago
The outliers are the whole point of VC.
- grandalf 10y ago
  True, which is why I suggested an outlier-focused approach as well. My point is that blending the two metrics does not really tell us much other than that a particular VC happened to pick slightly better outliers in the time period under analysis.
- 20yrs_no_equity 10y ago
  But not the point of startups. Also, not what's better for founders. You're better off with a %50 chance of being worth $200M after 7 years than a %1 chance of being worth $1B after 3. VCs place many bets, you only get to place one. At this point if I were to ever take VC again, I might take it from A16Z. They would be top of my list. All those "top tier" guys would have to give me terms I believe they are not inclined to give me. Fortunately things are radically different than they were even 10 years ago, and VCs have a lot less power. Unless you're building another Uber. Don't build another Uber. Build a github.
  - grandalf 10y ago
    This is a good point. I think it's fair to say that the tiny subset of businesses VCs are interested in investing in are the ones where a well-timed influx of capital has a chance of allowing massive growth. Any novel business that appears to have those characteristics is ripe for such a speculative investment, but most of the valuations are based on the assumption of massive growth. As soon as the growth trajectory turns out to be less impressive, the valuation goes through the floor, and usually results in a loss for investors (even if the company can be sold). But this is by design, since the investment was highly leveraged on the upside, it is also leveraged on the downside and the firm will often simply fail. Doing a typical startup (less than two years from seed round to massive growth or failure) is a lot more like flipping a house than like starting a business with a proven business model. This is why there is so much trendiness and so many me-too companies... They are like real estate developers who saw that McMansions sold for 2x investment a mile away and decide to rapidly build nearly identical ones hoping for the quick profit. The goal is entirely in the short term and the long term is irrelevant. Google found a very powerful way to sell ads, and once it built the infrastructure to do so it was able to massively broaden its product offering and appear to be almost a modern conglomerate. But the fact remains that ad revenue is the vast majority of Google's income, and most of the rest of its businesses are (in comparison) failures that would never have continued to be funded by VC-style investors. Alphabet reflects the investors' realization of this and is a compromise resulting from Sergey and Larry having a lot more control than typical founders. Github is interesting. I wish I could see its financials! I had hoped for a lot more in the product arena from Github, but who knows, maybe they still have most of the $100M.
elmar 10y ago
Black Swan Farming - Paul Graham http://www.paulgraham.com/swan.html http://www.paulgraham.com/swan.html

swingbridge 10y ago

They're still doing quite well all things considered--really well in fact relative to most people trying to manage other people's money. Personally I don't place much value in comparing short term returns as it applies to saying who's a better manager. The same thing happens with hedge funds. A firm can have a great year but the real test is how they perform over years or even decades. How many hedge funds can outperform someone like a Warren Buffet over the long term? Not many. In fact sadly many fail to even beat index funds. One great year makes a headline, consistent great years makes a great investor.

Kaedon 10y ago

It feels a little unfair to compare fund groups from 2003 and 2006 to those that must be after 2009, when A16Z was founded. Give it a few years and we can have an article like this...

boulos 10y ago
I thought so too, but the article then compares to funds started in the same years (like 2010). That said, not having lots of exits within 6 years of starting a fund doesn't seem strange (anymore). Also, comparing Sequioa's 50x return on WhatsApp to anything is going to look bad ;). The percentile data is more revealing and does suggest that the A16Z fund from 2010 is currently middle-of-the-road. Unfortunately, the article doesn't cite sources for this percentile data.
matco11 10y ago
Good point. Also, I wonder if the mark-to-market policies of the various funds are really comparable. When you have a public market price reference it's pretty much irrelevant, but with the majority of the portfolio in non-listed assets, mark-to-market policies could have a large impact on your paper returns.
- matco11 10y ago
  Official response from AH: http://a16z.com/2016/09/01/marks-offmark/ http://a16z.com/2016/09/01/marks-offmark/

inputcoffee 10y ago

The AH model isn't venture in the sense of betting on very early stage companies. AH seems to invest huge amounts in much later stage companies. The idea is that some of these companies would be public in the old days and all the growth is happening on the private side. (This is based on things @pmarca has said many times in many different forums). One could argue that the relevant comparison would be very volatile tech stocks. Comparing it with the few VC funds (the one VC fund?) that hit the great firms two funds in a row is not really fair. Edit: To put it yet another way, the volatility of the returns should be lower so we should be happier with a lower expected return.

rm_-rf_slash 10y ago
That's a good point, and it's reasonable to invest more in a few later stage (money-making) companies than a lot of little maybes. Seems fine and dandy to sprinkle 5,6,7 figure investments here and there if you have a lot of cash to play with, but those startups don't operate in a vacuum. They will need support from time to time, they will require work-hours from your firm that could be allocated elsewhere. Of course there's no one-size-fits-all, but every startup investment will in some way or another cost more than the check you write.
mathattack 10y ago
Very true. Seed versus growth versus pre-IPO versus PE have very different goals and volatility profiles. It may be more accurate to compare a16z to a moderately leveraged bet on an S&P, NASDAQ or tech index. It also can take a fund or two more to really tell. The strength of places like KPCB is their performance over time. One of the few asset classes where the best persist over long periods.
jasode 10y ago
>The AH model isn't venture in the sense of betting on very early stage companies. AH seems to invest huge amounts in much later stage companies. But that funding at later stages may have been happenstance rather than deliberate strategy. For example, a16z looked at AirBnb during the Series A fundraising. But they decided to pass on it, partly because Marc Andreesen didn't believe AirBnb's trust model for strangers in personal homes would work. When a16z looked at AirBnb again during their Series B fundraising, they invested. Marc has been on record saying they regret missing the earlier Series A round because it would have made them a lot more money. a16z also made a late 2010 investment in Facebook but some observers thought they did it for "logo shopping". In other words, observers said it wasn't a late investment timing on purpose -- it was because they were a new firm (2009) and they wanted to add immediate credibility to their portfolio. It seems they do want to catch companies early if they can.[1] On the other hand, I remember Ben Horowitz saying they deliberately held back on an Oculus Rift and let another VC take the lead (the risk). They later invested in the subsequent round. It doesn't seem like there's any rigid single strategy there with regards to timing. [1] scan for their "Seed" and "Series A" investments: https://www.crunchbase.com/organization/andreessen-horowitz/investments https://www.crunchbase.com/organization/andreessen-horowitz/...

replicatorblog 10y ago

So basically their 2 earliest funds are just over half way to maturity and already closing in on the 3X benchmark Andreessen promised to his LPs? It's hard to 3X a billion. That makes Sequoia and Benchmark even more impressive, but doesn't reflect badly on A16Z. Michael Jordan once came in 3rd in the MVP voting—does that diminish his legacy? http://www.basketball-reference.com/awards/awards_1993.html http://www.basketball-reference.com/awards/awards_1993.html It's a good reminder that press attention doesn't equal results, but A16Z still seems like they're a force to be reckoned with.

staticautomatic 10y ago

Am I misunderstanding or am I the only one calling bullshit on all these firms for talking about making money where there's no liquidity event. These are mostly paper gains. Shenanigans.

Kinnard 10y ago
There seems to be a growing amount of "liquidity" outside of IPOs . . . almost a transition from "liquidity events" to simple . . . "liquidity" . . .
- staticautomatic 10y ago
  "simple liquidity" - whatever that even is - does not turn paper gains for the likes of Uber into real gains.
hugs 10y ago
Yes, it's bullshit, but when their LPs ask "How's it going?", reporting paper gains is how they get off the hot seat and/or raise the next fund.
- __derek__ 10y ago
  That sounds curiously similar to a certain geometric scheme.
  - cloudjacker 10y ago
    nobody with connections gets their funds frozen in an SEC emergency asset injucture, or FTC investigation the only way to get your liquidity ponzi scheme funds frozen by regulators is to: a) lose money b) not know any regulators If you got a) and b) covered, then you can start as many funds as you want, issue or rollover as many bonds as you want, dilute as much equity as you want keep the gravy train rolling
prostoalex 10y ago
Most of the world's investable assets (real estate, oil wells, corner ice cream parlor, a Taco Bell franchise) have not had a liquidity event but are valued nonetheless.

not_that_noob 10y ago

Almost a hit piece on AH. Their returns are definitely top-tier, but WSJ presents it a failure that returns are not the very best. Seriously? It's statistical noise at that tier.

deleted 10y ago

[deleted]

warcher 10y ago

To my eye, the story here is how awful VC is as an asset class. Like, this is as good as it gets, guys. This is it. Even with these returns being kinda so-so (relative to the lack of liquidity, ten year return cycle, et cetera), these guys are easily in the top five percent of VC firms. Dumb old index funds are going to roughly double your money in ten years with reinvestment of dividends. If a VC can't hit 3x, the numbers don't really add up to make it worth your while to write a big check and just park it for a decade. The point of the article is that even the best of the best can miss those numbers and still be in the top fifth percentile. Yikes.

deleted 10y ago
[deleted]
up_and_up 10y ago
> Like, this is as good as it gets, guys. This is it. Pretty sure they reference both Sequoia and Benchmarks as having 8x and 11x returns. So not sure this is really as good as it gets. I think it more points to the over hype of certain firms vs the ones who can actually deliver on investor money.
- iaw 10y ago
  They also emphasize that those returns are largely on paper excluding the WhatsApp purchase... So still illiquid and able to move down.
  - the_watcher 10y ago
    That's also how VC works. Gains are on paper until liquidity.
- kchoudhu 10y ago
  Sure, and investing with Goldman Sachs special situations will occasionally get your 10x returns too. It's not repeatable though, so it doesn't make sense to bet your or anyone else's retirement on it, which is what a lot of LPs seem to be doing.

paulpauper 10y ago

Facebook bought the photo-sharing app for $1 billion in 2012, the firm said it made $78 million on a $250,000 investment. damn....and had Instagram not sold to facebook it would probably be worth $1-1.5 billion