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Andreessen Horowitz Returns Slip, According to Internal Data
- ballmers_peak 7y agoSaw there was some interest around this piece on HN last week so I went ahead and unlocked it.
- bcx 7y agothanks.
- dang 7y agoThe previous thread was https://news.ycombinator.com/item?id=20985687 https://news.ycombinator.com/item?id=20985687, but since the article is readable now, we won't mark this one a dupe.
- itcrowd 7y agoHere are the totals, based on the figures in the post: 10.8% gross for A16Z 14.5% for S&P 500. Calculation: https://imgur.com/a/jeFN8fL https://imgur.com/a/jeFN8fL
- ransom1538 7y agoOk. Picking on a firm because it didn't beat the 500 is harsh. Beating the 500 is damn hard. An 500index fund is basically a collection of large monopolies that extract cash.
- storgendibal 7y agoYes, but then why invest in an actively managed fund at all, as an LP? whole premise is that fund managers can beat an index such as the S&P500 or total market etc.
- pxue 7y ago*over a certain time period. That's why diversification is important
- ramphastidae 7y agoLPs don’t invest in funds to beat the market. By the time they are investing in VC they have already have millions in traditional investments like index funds, real estate, etc. VC investments are a high-risk, high-reward play.
- hendzen 7y agoIndividual VC investments are a high-risk, high reward play, but for an LP, investments in large baskets of VC investments via VC funds are ideally intended to collect an uncorrelated risk premium. The idea isn't to simply to beat the SP500, its to diversify, and thus improve risk adjusted returns, of their broader investment portfolio. For large institutional LP's like pension funds, endowments, charities, etc, they need steady smooth returns that they can draw upon year after year to fund their beneficiaries. In particular a down year really hurts them since they will have to draw down on their principal. This is a very different risk calculus to an individual saving for retirement who can stomach 30-40 years of stock market volatility with a good probability of having enough money at the end of their career. So rather than chucking the bulk of their fund in to the asset with the highest expected returns as an individual might, these institutional investors buy a big basket of very different return streams (i.e. as uncorrelated as possible) to smooth out the bumps in each one.
- api 7y agoShh... if all people do is invest in funds made up of existing blue chips, nothing new will ever be funded again and we'll end up with an economy of nothing but stale old Soviet bureaus.
- deleted 7y ago[deleted]
- outside1234 7y agoWhy anyone invests in any VC fund, when you can do better in the stock market with an index fund, at much less risk, is beyond me...
- opportune 7y agoWith VC you are actually investing in new businesses whereas with stocks, unless you are buying at IPO, you are just buying a piece of a pie. And the upside is much greater. What these results show is that a16z maybe needs to be more discerning but not that the business model is unsound
- rongenre 7y agoAt a certain level, having the returns be uncorrelated is a lot more valuable than total returns.
- esmi 7y agohttps://www.vox.com/platform/amp/recode/2019/5/1/18511540/silicon-valley-foreign-money-china-saudi-arabia-cfius-firrma-geopolitics-venture-capital https://www.vox.com/platform/amp/recode/2019/5/1/18511540/si... Anyone may not be who you think it is and their needs are likely different than the typical retail investor.
- nradov 7y agoPerhaps, but we don't really know how much risk many of those VC funds are actually taking. With liquid, publicly-traded stocks we can sort of use variability of returns as a proxy for risk. But there's no equivalent good way to really quantify VC fund risk. Sure you can do risk modeling but it's just an educated guess.
- JumpCrisscross 7y ago> there's no equivalent good way to really quantify VC fund risk Distribution of returns. Longitudinal volatility is a (good) proxy for this.
- 7y ago
- samfisher83 7y agoOver the long-term it's hard to beat mr market. That's why buffet made a bet with the hedge fund manager.
- EGreg 7y agoWhat kind of slip did they return?
- xjoins 7y agoI, too, read this headline quite literally. It sounds like they could have returned something they bought on Amazon.
- boulos 7y agoYes, because they failed to use a possessive here. The headline should have been “Andreessen Horowitz’s Returns Slip”. Then we’d parse Returns as a noun rather than a possible verb.
- aaavl2821 7y agoCompare that to the returns from the top-performing funds from 2007-2015: https://mobile.twitter.com/zavaindar/status/1159660549615116294 https://mobile.twitter.com/zavaindar/status/1159660549615116... Note that this data is from preqin and doesn't include all funds, just those that self report or have LPs who publish returns of funds they invested in
- boulos 7y agoSo, I keep seeing articles comparing S&P 500 return versus the IRR of a VC fund, but none seem to compute "IRR" for the S&P 500. That is, they all seem to assume $1 invested at t=0 in S&P 500 (and I assume total return, so reinvested dividends), and then compare that to venture investing. Except an $100M fund isn't $100M instantly deployed. The investors are putting probably $20M/yr into it via capital calls. That makes a huge difference in IRR. This isn't to defend the particular investments or performance of any firm, but it does seem like the reporting is quite poor. Even taking the time to compute a "what if each year you invested 1/5th into the S&P 500" would be a marked improvement. But you definitely don't get to say "The 2010 Andreessen Horowitz fund performed slightly better than investments made in the S&P 500 in the same year" (as the article does).
- Areading314 7y agoIf the fund manager leaves your money sitting around in cash for a few years, that impacts your returns, since you could have put that money to work elsewhere. Including the gradual investment as part of IRR is the correct thing to do.
- boulos 7y agoSorry for not making it clear: they don’t ask for the money, until it’s “needed”. The term of art is “capital call” and while it’s possible to call at any time (perhaps you want to make a huge investment and you don’t have the cash currently), it’s usually somewhat spread out. The “default” behavior is an even-ish set of calls over say a 5-year period for a (nominally) 10-year fund.
- 609venezia 7y agoIsn't the money in some sense tied up if it has to be ready for a capital call? At minimum it should be in some relatively low risk liquid investment. So there is opportunity cost regardless of whether the investor or the fund holds it until it is deployed?
- 7y ago
- iambateman 7y agoThis article is absurd. It says the 2011 fund return rate is 12%, which isn’t spectacular. That’s the whole point of the article. Except the 2011 fund includes stakes in Airbnb and Stripe, two massive companies that have yet to go public. So, sure, at the moment the returns aren’t awe inspiring. But give I can’t imagine anyone at AH is losing sleep over the long-term success of that fund.
- 609venezia 7y agoThose positions are still being valued according to some internal measure at AH, I think. So they should be factored in already.
- dpandya 7y agoPlease correct me if wrong, but these are likely measured via the book value of the investments which reflects the private market valuations of the companies you mentioned.
- irq11 7y agoIRR takes into account the investor valuations of the unicorn investments. It would be absurd to do otherwise.
- vadym909 7y agoSo when the economy is booming they do as good as S&P. I wonder how they'd compare in a recession. S&P:4% and VCs:?
- georgewsinger 7y agoAndreessen Horowitz has a very strong spray and pray feel to it relative to other funds in its class (much like YC). Look at how enormous its portfolio page is: https://a16z.com/portfolio/ https://a16z.com/portfolio/. I bet this list isn't all inclusive, either. For comparison: Founders Fund has an IRR of ~55%, at ~$1B AUM scale. It tends to invest in fewer companies -- with much higher bar and conviction -- and its portfolio has a much lower failure rate than competing funds (of course failure rate doesn't matter as much for VC returns, but it's still an interesting fact). I have no connection to FF whatsoever, but have learned a lot from the way they invest and much prefer their model to the spray and pray style (YC, Ron Conway, A16Z, etc).
- lquist 7y agoYC (and probably Ron Conway) are apples to oranges with a16z. Spray and pray works when you are looking at 10000x multiples on your best investments. It doesn't when you are deploying billions and don't come near that order of magnitude for your best bets.
- georgewsinger 7y agoAs far as I know YC doesn't have a single 10,000x investment (i.e., $100B+ exit). Not one. Yet I once listened to a YC video where Michael Seibel (President of YC) discussed some of their stats. He said they've funded over 2,000 companies, and of those have 17 unicorns that are worth ~$100B in aggregate valuation. So that means their hit rate is generously 17/2,000 = 0.85% Compare to i.e. Jason Calacanis who on his own has a hit rate of better than 1 in 20. Now assuming YC paid $100K per company and gets to keep a blended 1% of the $100B (is that too small?), they've put in about $200M in funding to get back $100B*1% = $1B to net roughly $800M in profit for their stakeholders. So they're a 5x fund. But that's really...not that good...(at least it's not world class). But am I missing something? They've definitely gotten a lot better at picking companies during the Sam Altman era (by, IMO, funding deep tech companies that actually have the chance of 10,000xing), but it'll still take another 5-10 years to really prove that. Now YC might argue that they're not purely a profit-driven fund. And that's true. But isn't it a bit worrying that after thousands of investments they haven't funded a single $100B+ company? YC has an enormous influence on the startup ecosystem. Is an institution with a 0.85% hit rate really sending us the right lessons?
- thesausageking 7y agoWhat are the "Parallel" funds? And why do they much better returns than the main funds?
- anxman 7y agoParallel funds tend to be funds that are used to double down into winners.
- thesausageking 7y agoThose are "opportunity funds". "Parallel Funds" normally are funds that invest at the same time and in the same fund percentage as the main fund. These are often setup as a way to group together LPs; for example you may have a main US fund and one in the Caymans that's for foreign investors. They function as a "Fund Family" and because they make the same investments at the same percentages, they normally have the same returns. Looking at the SEC filing for Pinterest, you can see this is the case for a16z. Fund III and Parallel Fund III invested in the same rounds, always at the same proportion: https://www.sec.gov/Archives/edgar/data/1503674/000114420419020119/xslF345X02/tv519076_3.xml https://www.sec.gov/Archives/edgar/data/1503674/000114420419... What's not clear given this, is why the parallel fund has much better returns. It may have to do with how the fees are structured.
- anxman 7y agoThanks for the clarification
- mattmaroon 7y ago"Poor investments can contribute to a fund’s weak performance, but so can decisions to put too little money into startups that ultimately turn into smashes." I'd guess the problem is the opposite. Too much money into startups that fail. VC is hard now because there's so much money chasing startups. The valuations they're getting are absurd. When you pay twice as much, your hit gives you have the return and your failure twice the loss. VC has been a pretty poor investment historically, and the high valuations now are really hurting.
- deleted 7y ago[deleted]