17 ms·

Andreessen Horowitz and 'zero interest rate phenomena'

432 points by belltaco 4y ago

cgb223 4y ago
If a16z eventually “collapses” what exactly happens to the billions in equity that the fund currently holds? Do they fire sell major chunks of companies to whomever buys it or how does that game theory out? What impact does it have on the companies themselves?
- moralestapia 4y ago
  >what exactly happens to the billions in equity [...] Same thing that happened with FTX/FTT, they sublimate.
- glenngillen 4y ago
  I can’t speak to the specifics of a16z’s funds so take this a very broad generalisation, not a direct answer to your specific question. When a VC firm says they have a “$500M fund”, what that often means is they have $500M of funds at call. The LPs (investors in the fund) don’t immediately put all that money into a pot that sits there waiting to be deployed. They just agree to make it available as called. In previous downturns those commitments have suddenly become a lot less committed when the fund tries to call them in. So, again generally speaking, there is no pot of cash lying around to be returned. They only called it when it was needed to close a deal at which point it was immediately spent. As for “assets under management”, you’d probably want to try and read some fine print in how it’s calculated. A fund might try a slight of hand to include the previous “committed” number to pad it and make it look larger than it is. If so, see previous point re returning that. The rest is going to be the current valuation of deployed capital. But that’s a questionable number even in the best of times, and we are not in the best of times. It’s mostly tied up in illiquid private companies and so what there is to return depends on if, when, and for how much they can exit those positions.
- lmm 4y ago
  That depends on the details of the "collapse". If they outright went bankrupt then yeah we'd be looking at their equity stakes getting auctioned off by a bankruptcy court. If it was possible for all their investors to pull their money from the fund then they'd have to sell those stakes, or at least sell something, at market rate within perhaps a handful of days, which might be even worse. More likely there are restrictive terms on when people can withdraw from those funds and how much, which ought to limit the possibility of a quick death spiral; more likely you'll see big investors negotiating special terms, and a "lost decade" style stagnation (at least on paper) rather than a plummet. In theory there's no effect on the company until they come to raise more money. (I mean, their stocks are worth less, and that might make it harder to retain talent if their stock options are now worthless, but that's industry-wide at this point). Companies who have enough to make it to IPO are basically fine (although it's also not a great time to IPO). But raising money privately on a "down round" is very difficult (although again, if it's an industry-wide downturn that might change things) and commonly you see companies in that situation using tricks to juice their valuation (e.g. offering a high liquidation preference to the new investor so that their headline valuation stays high).
- mbesto 4y ago
  Depends on what scope of time you're looking at. Let's take a $5B growth fund. Let's say over 7 years they deployed all $5B of that fund into 100 companies. When you say collapse what do you mean? Do you mean all 100 companies are worthless to acquirers? In what time range? In those 7 years, a16z would have earned 2% revenue ($100M) per year to cover operations. If there fund failed to produce ANY return, they just wouldn't get any 20% carry and their investors money would be completely be lost. For example Stanford's endowment fund would have a minor dent in it for those 7 years. PE/VC funds rarely collapse. They usually fail to produce returns, people leave, and then they cease to raise their next fund.
- grey-area 4y ago
  Same as happened to the 3 trillion valuation of bitcoin and its imitators - it melts into air, as if it never was. The valuation on all their equity was speculation, it is not based on earnings.
  - chrisco255 4y ago
    It got marked down to current industry valuation of ~$1.2 trillion. It very much is still a liquid, 24/7 market, and like other drawdowns in the past, there is no indication that a future recovery of prices is out of the question.
- snowmaker 4y ago
  No, one of those dramatic things would happen, even in a worst-case scenario. The worst case scenario for a venture fund (not A16Z specific) is that their future funds would be smaller and as a result they would need to make fewer investments and perhaps reduce the firm's headcount. Existing companies are not very affected.
- dam_skippy 4y ago
  There are also funds (secondary funds) in the business of buying entire portfolios of GPs in case of distress or fraud. Buying cents on the dollar in some instances.
nsoldiac 4y ago
Interesting thread, wonder if that was the internal backdrop for the decision to deploy their biggest deal ever in Adam Newman's new venture (which has several folks scratching their heads).
- kqr2 4y ago
  https://www.vice.com/en/article/4ax3bw/nimby-marc-andreessen-gives-weworks-adam-neumann-dollar350-million-to-uhh-solve-the-housing-crisis https://www.vice.com/en/article/4ax3bw/nimby-marc-andreessen...
jarsin 4y ago
Sure cause this time for the first time in 20 years the federal reserve is actually going to do what they say...not. We'll be back to zero and negative is coming folks.
- silisili 4y ago
  In what time frame?
  - latency-guy2 4y ago
    Good point, maybe the 'inflation is transitory' crowd can chime in as well
  - jarsin 4y ago
    Back to zero by end of year. Negative in response to deflationary bust next year.
    - JumpCrisscross 4y ago
      > zero by end of year This is what the stock market is betting, and being continuously disappointed, on. It’s a hell of a bet, and I think it’s dead wrong.
      - jarsin 4y ago
        Market double bottomed June/Oct at 3600. Now 4100. Not seeing the disappointment. Mr. Market has you right where it wants you, on the sidelines or short.
        JumpCrisscross 4y ago
        > Now 4100. Not seeing the disappointment Yes, when rates are cut valuations go up. This is finance 101. American stocks are rich because a recession and low rates are priced in. If that doesn’t happen, if rates go where the Fed forecasts, the market needs to drop. You’re in good company, by the way. Prominent managers are long equities and quality credit [1] on the hypothesis that rate cuts will keep valuations buoyed. (It’s also why the curve is inverted [2].) This is the dominant financial debate du jour. The market (specifically: professional money managers) are fighting the Fed. (My belief is this is more tied to fees and AUM than a fundamental read on the economy.) [1] https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b950 https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b... [2] https://www.bloomberg.com/news/articles/2023-02-09/treasury-yield-curve-inversion-reaches-deepest-level-since-1980s https://www.bloomberg.com/news/articles/2023-02-09/treasury-...
Nowado 4y ago
This thread would be way, way more interesting with a mention of a single date in the future.
- hn_throwaway_99 4y ago
  I'm actually glad it didn't. Setting a date is near impossible in public markets ("markets can stay irrational longer than you can stay solvent" and all that), and more often than not hitting or missing a date can be attributable to luck. It's not like the other is really giving investment advice (where timing is important), but moreso saying that, directionally, this is where he thinks a16z's bets will end up.
  - Zetice 4y ago
    It’s so immensely easy to predict doom without a timeline, as everything ends. It’s also completely useless, because everyone already knows everything ends. Dates make stakes; without stakes, this prediction is nothing more than, “This to shall pass.”
monero-xmr 4y ago
VCs are salesmen. They are selling to public markets. All of VC is trying to make a product that looks attractive to public markets. VCs are in sales and public relations. The most obvious signal of this is how they continually select a college dropout or 20-something as a “genius founder”. There are rare examples of this happening but a much more logical play is someone who has worked in their industry for 10+ years and made a lot of connections. The invention of the “dropout genius” was because public market investors like that story to mimic Gates and Zuckerberg. In reality 99% of 20 year old CEOs that are handed millions of dollars are fucking idiots and nightmares to work for, lacking any professional and managerial experience, plus the “anointed one” marking giving them unearned authority. While I loved the free-money era as an entrepreneur, honestly the mal-investment is absurd and we need a cleansing of the charlatans in the tech industry. VCs are an area that needs to massively contract.
- photonbeam 4y ago
  As someone in mid-30s with a child, I absolutely could not imagine founding a startup based on hope. We do need the 20-somethings to go out on a limb
  - riku_iki 4y ago
    You would receive compensation from seed round?..
  - monero-xmr 4y ago
    The youngest CEO I ever met who didn't give me WTF vibes was 29 years old. I know because I asked directly. He was raised by a successful CEO dad and I think absorbed a lot of wisdom. I agree the idealistic 20-somethings are important. I don't think they should be handed tens of millions of dollars and trotted out like show ponies.
  - jnsaff2 4y ago
    I think of the VC-unicorn sales pitch to young people as: "look, here are all these nobodys who made it hyper rich by going doing some crazy thing, you go spend your youth on 20hour days of inventing shit and if you are one of the 1000 that has an interesting idea, we fund it and take most of the profits". The other 999 are doing free idea-invalidation.
kepler1 4y ago
I remember a Silicon Valley historian / older generation entrepreneur was speculating whether the entire environment of this area was a product of 2 things: -- low interest rates -- favorable capital gains rates And any ebb/flow to that could dry up what we take as granted about the circumstances that produce the VC, startup, tech landscape we have been accustomed to.
- twblalock 4y ago
  The low interest rates are a recent phenomenon. Rates were high for most of the period during which Silicon Valley grew into what it is now.
  - kevin_thibedeau 4y ago
    A simple fact that deflates any finance wizard's claim that an economy can't succeed on "high" interest rates which are still substantially lower than in an era of significant growth. All it means is that they get a more equitable chunk of the pie rather than most of it.
    - baby-yoda 4y ago
      Previous high interest rate environments were accompanied by population growth and increases in labor productivity. I don't think there is any historical comparison to a high rate, no population/productivity growth scenario. I think at the very least those conditions won't provide for GDP increases but I also think capital re-allocation throughout the economy seems necessary to return to "healthy" growth conditions.
bushbaba 4y ago
Wouldn’t a16z get preferential returns where even if a firm does a down round, a16z still ends up getting a return on invested cash at the cost to employees/founders?
- SilverBirch 4y ago
  It's absolutely true that a16z will have preferential terms to their investments and will screw a lot of the founders they invested in, but that just mitigates downside, it doesn't stop it. Firstly, because VC returns are meant to be dominated by the 100x-er, mitigating downside doesn't really impact their returns too much. Secondly, because it puts firms in a death loop. When a company is in a position where all the founders and early staff are going to be washed out they suddenly have no upside. You've been slaving away at a start up for years hoping for your payday, but you're forced to raise a down round, suddenly there's no upside, even if the business succeeds you don't get the financial returns, it's time to leave. So these companies that would generally survive, suddenly have no staff.
quickthrower2 4y ago
The legal ponzi is the systemic one
Apocryphon 4y ago
What does it say about this entire industry if it seems like all of this supposed disruptive, revolutionary, making-the-world-a-better-place activity seems to be going away with a simple move from the Fed?
- pas 4y ago
  even the most resilient trees can't sprout in winter... blablabla. but of course the truth is that it's not the entire industry, it's not just the Fed, that fucking disruptive book is bullshit (most disruptors end up losing out as incumbents adopt), and the making the world a better place gang has 100000 spreadsheets and infinite amount of malaria bednets, but all they managed to do so far is that everyone and their dog now only associates them with that fallen crypto kid. a bit more importantly, these super amazing "returns" and asset bubbles and stock market to the moons and quarterly make it rain bonanzas can only continue as capital amortization doesn't start eating into it hard. and by capital I mean the culmination of the last however many decades of actual community and infrastructure building, not the nice financial instruments. yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds. the question is what are we going to do with this? the signs point to slowed incremental progress and general incompetent cycles of fake it till you make it cooperation (on all levels, from individuals to don't be evil companies to countries) and xenophobic populist outbursts of untreated change anxiety, dotted with hints of hope of more of the better stuff that's out there, like mRNA vaccines and other biotech magic, small modular nuclear reactors powering walkable cities without burning dead plankton, against a backdrop of war, pandemics, crazy AI and apathy.
  - weatherlite 4y ago
    > yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds. Isn't it also dependent on inflation? Higher inflation = higher bond yields
alxmng 4y ago
Why would bond rates make or break A16Z? A lower interest rate on bonds may mean LPs allocate more money to VC funds, but the bulk of A16Z’s fund is surely not people who will all pull out their money and put it into bonds if rates go up a bit. Correct me if I’m wrong, but the only affect a rise in rates could have is to reduce the amount of funds raised going forward? Is that even significant for VC funds?
- ak_111 4y ago
  you need to think 2nd order effects: VCs need mega exits to make returns, which usually are blockbuster IPOs. Higher rates will crash quite a lot of high-growth stocks making IPOs less appealing for investors, which messes up with A16z business model of exiting via IPOs.
  - antupis 4y ago
    They can also get fabulous deals currently so it is not bleak as it sounds. Also both Andreessen and Horowitz have that cockroach like ability to survive so I would not count them out even whole business model would collapse overnight.
- jxf 4y ago
  VC returns are fiercely skewed: a long tail of stuff that's effectively negative to zero returns and a tiny minority of stuff that does really well. How does it do really well? By having a very profitable in-demand public IPO. How do you get macroeconomically favorable in-demand IPOs? Lots of capital looking for alternative returns. What creates willingness to consider alternative returns? Among other things, reductions in the risk-free return rate obtained by bonds. High bond rates reduce the demand for alternative returns, which reduces the demand for IPO participation, which in turn affects VC returns.
  - alxmng 4y ago
    Sure, maybe the IPO shares sell for lower with higher rates, which may mean a lower total return for the VC. But to what degree? So the VC get $9 billion instead of $10. It seems to me the only thing that would affect is future fund allocation.
hn_throwaway_99 4y ago
I irrationally want this to be true because I have an unreasonable amount of anger for how much a16z put into Adam Neumann's Flow. Neumann destroyed billions in value at WeWork, then used essentially hostage tactics to walk away with about a billion, and he still got a16z to invest $350 million in Flow. I've been following Flow news fairly closely, and it always sounds like tons of fluffy BS to me, same as the new-agey BS that permeated WeWork. If the best example Neumann can come up with about building a sense of "community" is that you get to fix your own toilet, can't wait to see this, and a16z's $350 million, crash and burn. I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.
- recuter 4y ago
  How did he destroy billions in value? He created the company and spun it up very effectively before being done in by run away valuations -- thank Masayoshi Son who is also a bit of a cowboy. The hostage tactics went both ways.. > same as the new-agey BS that permeated WeWork. The thing is, this worked great for WeWork. Neumann successfully hyped it up into a global brand. The company still exists. People still enjoy using it. Some people like new-agey community vibes apparently, why is that bad? Apple wouldn't be Apple without some Steve Jobs mystique to capture the popular imagination either. These are lifestyle brands. You could just work from a crummy McDonalds or your bedroom, nobody really needs a coworking space. Vibes are actually worth something. > I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so. I like how there are lots of stories on HN about founders who assume disproportionate risk getting completely screwed by investors and end up with nothing -- yet a guy who is a little bit more savvy is so easily painted as a villain. Ha.
  - benjaminwootton 4y ago
    If it was Adam’s personality and approach that bought them down, it was the same thing that built a $multi-billion company in the first place. He deserved to be paid rather than it all falling into investors hands.
JamesAdir 4y ago
As much as the thread is interesting, the author is mentioning the most important point in the end - VC's operated are looking for commission. They will get massive commission from the money already committed to them. and some commissions from startups. They can't lose.
blindriver 4y ago
If people are concerned about a16z they should be more concerned about Softbank. Softbank followed the same strategy except they are in serious debt. I think at some point they could be forced into liquidation and it will drive the second leg down for the tech market.
- JumpCrisscross 4y ago
  > they should be more concerned about Softbank I disagree. SoftBank isn’t raising new funds. It doesn’t have a functioning mouthpiece [1]. Andreessen is still taken seriously as an investor and thought leader, despite its abysmal record. [1] https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe517 https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe...
  - geodel 4y ago
    I agree. But still unable to get why tech/media is so craven when it comes to Andreessen. Since we get to see many other tech big shots, CEOs are frequent receivers of media lashing.
    - Tiktaalik 4y ago
      I saw a few reteweeted Andreessen tweets over last week and I hope he's just joking around because he genuinely sounded like a lunatic if he was being sincere.
      - MockObject 4y ago
        What was he saying, in particular?
  - blindriver 4y ago
    I don't know what there is to disagree with. Softbank did exactly what the tweets say a16z did/is doing, except 5 years ago. Except Softbank is 10x larger in size. They have already suffered a huge loss, except they are dripping in debt, and there's still plenty more for Softbank to fall. 5 years ago Softbank was considered a Tier 1 company as well. They are now what the tweets believe a16z will become in a few years. The final stage will be liquidation of their positions to pay off debt, which will critically injure Silicon Valley for years.
recuter 4y ago
So basically, you should build something real, raise less money but keep more shares.
blitzar 4y ago
At the end of the day it was never the VC's money at risk, it was the LP's. If the investments make less, the investors in the VCs get less. Unless there is a series of redemption clauses that trigger fire sales of illiquid investments, there wont be a big bang moment.
college_physics 4y ago
Rates are like inverse temperature. When its cold (high rates) economic reactions slow down or stop. When its lukewarm (an activation threshold rate) interesting stuff might happen [0]. When its too hot (low rates) the primordial soup burns to ashes. [0] its a might not a will happen because invention and adoption of science and technology have an external element that can't be "faked till it is actually made".
paganel 4y ago
> web3 is dead, and now that we've had the super bowl ads phase of the hype cycle, there just isn't another wave of greater fools coming to pump up prices and end the crypto winter. This explains the mania that used to be present on forums like this one about two years ago, billions (and tens of billions) of dollars were on the line if the people involved had managed to pull it off (i.e. to find even greater fouls). Another relevant tweet from the same thread: > a16z was early and all-in on crypto. Their first $300m crypto fund, invested at the start of the bubble, was reported to have generated eye-popping returns, which they parlayed into raising and investing $7B+ more in crypto funds in a giant double-or-nothing bet
m_ke 4y ago
Should have also mentioned how VCs are compensated and that following Softbank into the mad rush for huge rounds got them filthy rich off of fees without having to worry about real returns.
steveBK123 4y ago
Not mentioned in the thread - a lot of VC capital is now going to be tied up in follow-on investments to keep their zombie investments alive a few more years. So a lot of the "dry powder" left in VC is not so dry.
- v8xi 4y ago
  yes - prepare for the era of the normalization of down rounds
  - steveBK123 4y ago
    It still feels like we are far from valuations normalizing back to earth. I have a neighbor who co-founded a startup in a space I know fairly well. It is something of a niche space, with some publicly traded incumbents. The startup is over 10 years old, and has now raised more capital than the entire market cap of the comparable publicly traded incumbent. So presumably someone has their investments in this startup booked at 10-20x the valuation of the public incumbent? They even managed to raise another round of money in the last 6 months, equal to something like 50% of the incumbent total market cap.
    - drno123 4y ago
      Are they profitable? Were they ever profitable since being founded?
rwmj 4y ago
How does it work? Are investors in these funds able to pull their money out at any time? TBH Andreessen Horowitz has been the redest of flags for a long time, spouting all their nonsense about crypto and "web3".
- v8xi 4y ago
  Depends on the firm, but there is usually a "lock-up" period of several years where you cannot divest. Sometimes the firms will return the money early if things are getting bad but once the money is deployed they can't risk a bank run because they'd have to fire sale their investments which would be bad for everyone.
- ghc 4y ago
  Once you commit capital to a VC fund you generally can't pull out. VCs don't take the money immediately, but eventually they will issue capital calls, which require you, as an LP, to wire them money. Your commitment amount is basically the most money, in total, you're willing to wire them over the course of an entire fund (10 years). It's important to note that most of the time when VCs do poorly they still find a way to return most of the original investment to the LP. The downside is not nearly as pronounced as the potential upside. So you can invest in several VC funds and if only one wins the math will still work out in your favor. LPs know what VCs are. LPs have risk spreads and VC is (IIRC) the riskiest legal asset class. They expect to (on average) lose money on VC commitments, but the upside is much higher when a VC hits, meaning a single win can make up for a lot of losses. Picking VCs that win is one way LPs generate outsized returns on their assets.
spaceman_2020 4y ago
A16Z has an awful reputation in crypto circles. They're considered a mercenary VC and there's a dominant assumption that if A16Z has led a round, they'll likely do an "airdrop" or similar token generation event just so they can sell their own tokens and get exit liquidity. Sad to see a name like A16Z reduced to this.
- EMM_386 4y ago
  > Sad to see a name like A16Z reduced to this. It really is. These ICOs were essentially considered "free money". Mint a coin, put some power behind it, profit. This isn't a business, it's a get rich quick scheme.
anonu 4y ago
Yes, I've been preaching the same thing. The era of free money is over (for now). There is going to be a sea change in how investors - and more importantly founders - need to think about business. Founders will need to tighten their belts (age of austerity) and think hard about profitability. Timelines may need to be stretched out to get there. This is ultimately good for founders as it creates a laser focus on building real MVPs that can scale. Finally, one of my favorite exhibits of the excesses of near-ZIRP are right here: https://web.archive.org/web/20221027180943/https://www.sequoiacap.com/article/sam-bankman-fried-spotlight/ https://web.archive.org/web/20221027180943/https://www.sequo... << glorifying SBF article on the Sequoia Cap site. This is the very definition of irrational exuberance.
- deleted 4y ago
  [deleted]
dakial1 4y ago
Well, my question here is, is there any use case of web3 that has a viable business model or is the whole industry a case of "The Emperor's New Clothes" fueled by the VCs looking to lure the excess of cash around?
- specialp 4y ago
  One use case is to make a decentralized form of micropayments. The "Open web" is at huge risk right now (and is declining in usefulness) due to the incentives given to content providers. You can either make money in a walled garden like YouTube or provide affiliate links. Now this is more at threat with things like ChatGPT using your provided content as training data with zero attribution. This will continue to get worse. So as someone with knowledge about a particular area, and with people that need such knowledge (such as those that need training data or someone looking for something) you can be incentivized to provide it. Of course in reality this is super hard to accomplish with bad actors abound but it would be nice.
jrm4 4y ago
I'm out of this loop, but I still struggle to consider: In the world of tech (which scales) what good is VC? As in, what companies/products/services have come about and existed in a healthy way due to this process? Why should I not cheer the death of all of this?
- pavlov 4y ago
  Synthetic insulin was first created in 1978 by Genentech, a VC-funded company with only twelve employees. The inventors had been previously unable to get research funding for the project. Previously all insulin was extracted from animals. The Genentech process brought its price down by 1000x and undoubtedly saved many lives. https://www.gene.com/stories/cloning-insulin https://www.gene.com/stories/cloning-insulin
- fidgewidge 4y ago
  Google was VC funded. They were a classic case where VC makes sense: highly risky, and needed to spend money up front to get usage in order to make money (you can't sell ads if you don't have traffic, can't pay for serving traffic if you don't have ad revenue, VC breaks the circle).
boringg 4y ago
Can someone tell me how Tyler Tringas differentiates him. He is clearly selling his Calm Fund in a round about way - I am unfamiliar with him and his business model. As such it does take a bit out of his argument.
garbagecoder 4y ago
"Zero interest rate phenomena" sounds smart to non-econ people the way "cryptocurrency" sounds smart to non-tech people. The fact that a lot of people were making bad investments (apparently mostly in tech, since job growth is up in other sectors) had very little to do with the interest rate. Failure might come a bit quicker, but this is all just pure, unprocessed copium from a sector that routinely fails to duplicate its own magic. Apple is on its third or fourth life depending on how you slice it. Microsoft is coming back strong. But Facebook and Netflix are getting lame and Amazon is turning into something other than an online market. Google has never had as profitable and revolutionary of a product as search depending on how you rate Android. I doubt Apple gets a fifth life or Microsoft a third. Meanwhile, the rest of the economy continues to do OK even without "zero interest rates." And interest rates didn't trigger the tech stock crash in 2000 or the general recession in 2008. I understand that they're trying to say "people will do anything to get a return." But isn't that always true? Maybe more people will park their money in bonds. But people will look for a return that beats inflation because most people don't borrow money directly from the fed and most of the commercial rates haven't gone up that much. I dunno, these people are chronically full of shit.

432 points by belltaco 4y ago

If a16z eventually “collapses” what exactly happens to the billions in equity that the fund currently holds? Do they fire sell major chunks of companies to whomever buys it or how does that game theory out? What impact does it have on the companies themselves?

moralestapia 4y ago
>what exactly happens to the billions in equity [...] Same thing that happened with FTX/FTT, they sublimate.
glenngillen 4y ago
I can’t speak to the specifics of a16z’s funds so take this a very broad generalisation, not a direct answer to your specific question. When a VC firm says they have a “$500M fund”, what that often means is they have $500M of funds at call. The LPs (investors in the fund) don’t immediately put all that money into a pot that sits there waiting to be deployed. They just agree to make it available as called. In previous downturns those commitments have suddenly become a lot less committed when the fund tries to call them in. So, again generally speaking, there is no pot of cash lying around to be returned. They only called it when it was needed to close a deal at which point it was immediately spent. As for “assets under management”, you’d probably want to try and read some fine print in how it’s calculated. A fund might try a slight of hand to include the previous “committed” number to pad it and make it look larger than it is. If so, see previous point re returning that. The rest is going to be the current valuation of deployed capital. But that’s a questionable number even in the best of times, and we are not in the best of times. It’s mostly tied up in illiquid private companies and so what there is to return depends on if, when, and for how much they can exit those positions.
lmm 4y ago
That depends on the details of the "collapse". If they outright went bankrupt then yeah we'd be looking at their equity stakes getting auctioned off by a bankruptcy court. If it was possible for all their investors to pull their money from the fund then they'd have to sell those stakes, or at least sell something, at market rate within perhaps a handful of days, which might be even worse. More likely there are restrictive terms on when people can withdraw from those funds and how much, which ought to limit the possibility of a quick death spiral; more likely you'll see big investors negotiating special terms, and a "lost decade" style stagnation (at least on paper) rather than a plummet. In theory there's no effect on the company until they come to raise more money. (I mean, their stocks are worth less, and that might make it harder to retain talent if their stock options are now worthless, but that's industry-wide at this point). Companies who have enough to make it to IPO are basically fine (although it's also not a great time to IPO). But raising money privately on a "down round" is very difficult (although again, if it's an industry-wide downturn that might change things) and commonly you see companies in that situation using tricks to juice their valuation (e.g. offering a high liquidation preference to the new investor so that their headline valuation stays high).
mbesto 4y ago
Depends on what scope of time you're looking at. Let's take a $5B growth fund. Let's say over 7 years they deployed all $5B of that fund into 100 companies. When you say collapse what do you mean? Do you mean all 100 companies are worthless to acquirers? In what time range? In those 7 years, a16z would have earned 2% revenue ($100M) per year to cover operations. If there fund failed to produce ANY return, they just wouldn't get any 20% carry and their investors money would be completely be lost. For example Stanford's endowment fund would have a minor dent in it for those 7 years. PE/VC funds rarely collapse. They usually fail to produce returns, people leave, and then they cease to raise their next fund.
grey-area 4y ago
Same as happened to the 3 trillion valuation of bitcoin and its imitators - it melts into air, as if it never was. The valuation on all their equity was speculation, it is not based on earnings.
- chrisco255 4y ago
  It got marked down to current industry valuation of ~$1.2 trillion. It very much is still a liquid, 24/7 market, and like other drawdowns in the past, there is no indication that a future recovery of prices is out of the question.
snowmaker 4y ago
No, one of those dramatic things would happen, even in a worst-case scenario. The worst case scenario for a venture fund (not A16Z specific) is that their future funds would be smaller and as a result they would need to make fewer investments and perhaps reduce the firm's headcount. Existing companies are not very affected.
dam_skippy 4y ago
There are also funds (secondary funds) in the business of buying entire portfolios of GPs in case of distress or fraud. Buying cents on the dollar in some instances.

nsoldiac 4y ago

Interesting thread, wonder if that was the internal backdrop for the decision to deploy their biggest deal ever in Adam Newman's new venture (which has several folks scratching their heads).

kqr2 4y ago
https://www.vice.com/en/article/4ax3bw/nimby-marc-andreessen-gives-weworks-adam-neumann-dollar350-million-to-uhh-solve-the-housing-crisis https://www.vice.com/en/article/4ax3bw/nimby-marc-andreessen...

jarsin 4y ago

Sure cause this time for the first time in 20 years the federal reserve is actually going to do what they say...not. We'll be back to zero and negative is coming folks.

silisili 4y ago
In what time frame?
- latency-guy2 4y ago
  Good point, maybe the 'inflation is transitory' crowd can chime in as well
- jarsin 4y ago
  Back to zero by end of year. Negative in response to deflationary bust next year.
  - JumpCrisscross 4y ago
    > zero by end of year This is what the stock market is betting, and being continuously disappointed, on. It’s a hell of a bet, and I think it’s dead wrong.
    - jarsin 4y ago
      Market double bottomed June/Oct at 3600. Now 4100. Not seeing the disappointment. Mr. Market has you right where it wants you, on the sidelines or short.
      - JumpCrisscross 4y ago
        > Now 4100. Not seeing the disappointment Yes, when rates are cut valuations go up. This is finance 101. American stocks are rich because a recession and low rates are priced in. If that doesn’t happen, if rates go where the Fed forecasts, the market needs to drop. You’re in good company, by the way. Prominent managers are long equities and quality credit [1] on the hypothesis that rate cuts will keep valuations buoyed. (It’s also why the curve is inverted [2].) This is the dominant financial debate du jour. The market (specifically: professional money managers) are fighting the Fed. (My belief is this is more tied to fees and AUM than a fundamental read on the economy.) [1] https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b950 https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b... [2] https://www.bloomberg.com/news/articles/2023-02-09/treasury-yield-curve-inversion-reaches-deepest-level-since-1980s https://www.bloomberg.com/news/articles/2023-02-09/treasury-...

Nowado 4y ago

This thread would be way, way more interesting with a mention of a single date in the future.

hn_throwaway_99 4y ago
I'm actually glad it didn't. Setting a date is near impossible in public markets ("markets can stay irrational longer than you can stay solvent" and all that), and more often than not hitting or missing a date can be attributable to luck. It's not like the other is really giving investment advice (where timing is important), but moreso saying that, directionally, this is where he thinks a16z's bets will end up.
- Zetice 4y ago
  It’s so immensely easy to predict doom without a timeline, as everything ends. It’s also completely useless, because everyone already knows everything ends. Dates make stakes; without stakes, this prediction is nothing more than, “This to shall pass.”

monero-xmr 4y ago

VCs are salesmen. They are selling to public markets. All of VC is trying to make a product that looks attractive to public markets. VCs are in sales and public relations. The most obvious signal of this is how they continually select a college dropout or 20-something as a “genius founder”. There are rare examples of this happening but a much more logical play is someone who has worked in their industry for 10+ years and made a lot of connections. The invention of the “dropout genius” was because public market investors like that story to mimic Gates and Zuckerberg. In reality 99% of 20 year old CEOs that are handed millions of dollars are fucking idiots and nightmares to work for, lacking any professional and managerial experience, plus the “anointed one” marking giving them unearned authority. While I loved the free-money era as an entrepreneur, honestly the mal-investment is absurd and we need a cleansing of the charlatans in the tech industry. VCs are an area that needs to massively contract.

photonbeam 4y ago
As someone in mid-30s with a child, I absolutely could not imagine founding a startup based on hope. We do need the 20-somethings to go out on a limb
- riku_iki 4y ago
  You would receive compensation from seed round?..
- monero-xmr 4y ago
  The youngest CEO I ever met who didn't give me WTF vibes was 29 years old. I know because I asked directly. He was raised by a successful CEO dad and I think absorbed a lot of wisdom. I agree the idealistic 20-somethings are important. I don't think they should be handed tens of millions of dollars and trotted out like show ponies.
- jnsaff2 4y ago
  I think of the VC-unicorn sales pitch to young people as: "look, here are all these nobodys who made it hyper rich by going doing some crazy thing, you go spend your youth on 20hour days of inventing shit and if you are one of the 1000 that has an interesting idea, we fund it and take most of the profits". The other 999 are doing free idea-invalidation.

kepler1 4y ago

I remember a Silicon Valley historian / older generation entrepreneur was speculating whether the entire environment of this area was a product of 2 things: -- low interest rates -- favorable capital gains rates And any ebb/flow to that could dry up what we take as granted about the circumstances that produce the VC, startup, tech landscape we have been accustomed to.

twblalock 4y ago
The low interest rates are a recent phenomenon. Rates were high for most of the period during which Silicon Valley grew into what it is now.
- kevin_thibedeau 4y ago
  A simple fact that deflates any finance wizard's claim that an economy can't succeed on "high" interest rates which are still substantially lower than in an era of significant growth. All it means is that they get a more equitable chunk of the pie rather than most of it.
  - baby-yoda 4y ago
    Previous high interest rate environments were accompanied by population growth and increases in labor productivity. I don't think there is any historical comparison to a high rate, no population/productivity growth scenario. I think at the very least those conditions won't provide for GDP increases but I also think capital re-allocation throughout the economy seems necessary to return to "healthy" growth conditions.

bushbaba 4y ago

Wouldn’t a16z get preferential returns where even if a firm does a down round, a16z still ends up getting a return on invested cash at the cost to employees/founders?

SilverBirch 4y ago
It's absolutely true that a16z will have preferential terms to their investments and will screw a lot of the founders they invested in, but that just mitigates downside, it doesn't stop it. Firstly, because VC returns are meant to be dominated by the 100x-er, mitigating downside doesn't really impact their returns too much. Secondly, because it puts firms in a death loop. When a company is in a position where all the founders and early staff are going to be washed out they suddenly have no upside. You've been slaving away at a start up for years hoping for your payday, but you're forced to raise a down round, suddenly there's no upside, even if the business succeeds you don't get the financial returns, it's time to leave. So these companies that would generally survive, suddenly have no staff.

quickthrower2 4y ago

The legal ponzi is the systemic one

Apocryphon 4y ago

What does it say about this entire industry if it seems like all of this supposed disruptive, revolutionary, making-the-world-a-better-place activity seems to be going away with a simple move from the Fed?

pas 4y ago
even the most resilient trees can't sprout in winter... blablabla. but of course the truth is that it's not the entire industry, it's not just the Fed, that fucking disruptive book is bullshit (most disruptors end up losing out as incumbents adopt), and the making the world a better place gang has 100000 spreadsheets and infinite amount of malaria bednets, but all they managed to do so far is that everyone and their dog now only associates them with that fallen crypto kid. a bit more importantly, these super amazing "returns" and asset bubbles and stock market to the moons and quarterly make it rain bonanzas can only continue as capital amortization doesn't start eating into it hard. and by capital I mean the culmination of the last however many decades of actual community and infrastructure building, not the nice financial instruments. yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds. the question is what are we going to do with this? the signs point to slowed incremental progress and general incompetent cycles of fake it till you make it cooperation (on all levels, from individuals to don't be evil companies to countries) and xenophobic populist outbursts of untreated change anxiety, dotted with hints of hope of more of the better stuff that's out there, like mRNA vaccines and other biotech magic, small modular nuclear reactors powering walkable cities without burning dead plankton, against a backdrop of war, pandemics, crazy AI and apathy.
- weatherlite 4y ago
  > yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds. Isn't it also dependent on inflation? Higher inflation = higher bond yields

alxmng 4y ago

Why would bond rates make or break A16Z? A lower interest rate on bonds may mean LPs allocate more money to VC funds, but the bulk of A16Z’s fund is surely not people who will all pull out their money and put it into bonds if rates go up a bit. Correct me if I’m wrong, but the only affect a rise in rates could have is to reduce the amount of funds raised going forward? Is that even significant for VC funds?

ak_111 4y ago
you need to think 2nd order effects: VCs need mega exits to make returns, which usually are blockbuster IPOs. Higher rates will crash quite a lot of high-growth stocks making IPOs less appealing for investors, which messes up with A16z business model of exiting via IPOs.
- antupis 4y ago
  They can also get fabulous deals currently so it is not bleak as it sounds. Also both Andreessen and Horowitz have that cockroach like ability to survive so I would not count them out even whole business model would collapse overnight.
jxf 4y ago
VC returns are fiercely skewed: a long tail of stuff that's effectively negative to zero returns and a tiny minority of stuff that does really well. How does it do really well? By having a very profitable in-demand public IPO. How do you get macroeconomically favorable in-demand IPOs? Lots of capital looking for alternative returns. What creates willingness to consider alternative returns? Among other things, reductions in the risk-free return rate obtained by bonds. High bond rates reduce the demand for alternative returns, which reduces the demand for IPO participation, which in turn affects VC returns.
- alxmng 4y ago
  Sure, maybe the IPO shares sell for lower with higher rates, which may mean a lower total return for the VC. But to what degree? So the VC get $9 billion instead of $10. It seems to me the only thing that would affect is future fund allocation.

hn_throwaway_99 4y ago

I irrationally want this to be true because I have an unreasonable amount of anger for how much a16z put into Adam Neumann's Flow. Neumann destroyed billions in value at WeWork, then used essentially hostage tactics to walk away with about a billion, and he still got a16z to invest $350 million in Flow. I've been following Flow news fairly closely, and it always sounds like tons of fluffy BS to me, same as the new-agey BS that permeated WeWork. If the best example Neumann can come up with about building a sense of "community" is that you get to fix your own toilet, can't wait to see this, and a16z's $350 million, crash and burn. I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.

recuter 4y ago
How did he destroy billions in value? He created the company and spun it up very effectively before being done in by run away valuations -- thank Masayoshi Son who is also a bit of a cowboy. The hostage tactics went both ways.. > same as the new-agey BS that permeated WeWork. The thing is, this worked great for WeWork. Neumann successfully hyped it up into a global brand. The company still exists. People still enjoy using it. Some people like new-agey community vibes apparently, why is that bad? Apple wouldn't be Apple without some Steve Jobs mystique to capture the popular imagination either. These are lifestyle brands. You could just work from a crummy McDonalds or your bedroom, nobody really needs a coworking space. Vibes are actually worth something. > I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so. I like how there are lots of stories on HN about founders who assume disproportionate risk getting completely screwed by investors and end up with nothing -- yet a guy who is a little bit more savvy is so easily painted as a villain. Ha.
- benjaminwootton 4y ago
  If it was Adam’s personality and approach that bought them down, it was the same thing that built a $multi-billion company in the first place. He deserved to be paid rather than it all falling into investors hands.

JamesAdir 4y ago

As much as the thread is interesting, the author is mentioning the most important point in the end - VC's operated are looking for commission. They will get massive commission from the money already committed to them. and some commissions from startups. They can't lose.

blindriver 4y ago

If people are concerned about a16z they should be more concerned about Softbank. Softbank followed the same strategy except they are in serious debt. I think at some point they could be forced into liquidation and it will drive the second leg down for the tech market.

JumpCrisscross 4y ago
> they should be more concerned about Softbank I disagree. SoftBank isn’t raising new funds. It doesn’t have a functioning mouthpiece [1]. Andreessen is still taken seriously as an investor and thought leader, despite its abysmal record. [1] https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe517 https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe...
- geodel 4y ago
  I agree. But still unable to get why tech/media is so craven when it comes to Andreessen. Since we get to see many other tech big shots, CEOs are frequent receivers of media lashing.
  - Tiktaalik 4y ago
    I saw a few reteweeted Andreessen tweets over last week and I hope he's just joking around because he genuinely sounded like a lunatic if he was being sincere.
    - MockObject 4y ago
      What was he saying, in particular?
- blindriver 4y ago
  I don't know what there is to disagree with. Softbank did exactly what the tweets say a16z did/is doing, except 5 years ago. Except Softbank is 10x larger in size. They have already suffered a huge loss, except they are dripping in debt, and there's still plenty more for Softbank to fall. 5 years ago Softbank was considered a Tier 1 company as well. They are now what the tweets believe a16z will become in a few years. The final stage will be liquidation of their positions to pay off debt, which will critically injure Silicon Valley for years.

recuter 4y ago

So basically, you should build something real, raise less money but keep more shares.

blitzar 4y ago

At the end of the day it was never the VC's money at risk, it was the LP's. If the investments make less, the investors in the VCs get less. Unless there is a series of redemption clauses that trigger fire sales of illiquid investments, there wont be a big bang moment.

college_physics 4y ago

Rates are like inverse temperature. When its cold (high rates) economic reactions slow down or stop. When its lukewarm (an activation threshold rate) interesting stuff might happen [0]. When its too hot (low rates) the primordial soup burns to ashes. [0] its a might not a will happen because invention and adoption of science and technology have an external element that can't be "faked till it is actually made".

paganel 4y ago

> web3 is dead, and now that we've had the super bowl ads phase of the hype cycle, there just isn't another wave of greater fools coming to pump up prices and end the crypto winter. This explains the mania that used to be present on forums like this one about two years ago, billions (and tens of billions) of dollars were on the line if the people involved had managed to pull it off (i.e. to find even greater fouls). Another relevant tweet from the same thread: > a16z was early and all-in on crypto. Their first $300m crypto fund, invested at the start of the bubble, was reported to have generated eye-popping returns, which they parlayed into raising and investing $7B+ more in crypto funds in a giant double-or-nothing bet

m_ke 4y ago

Should have also mentioned how VCs are compensated and that following Softbank into the mad rush for huge rounds got them filthy rich off of fees without having to worry about real returns.

steveBK123 4y ago

Not mentioned in the thread - a lot of VC capital is now going to be tied up in follow-on investments to keep their zombie investments alive a few more years. So a lot of the "dry powder" left in VC is not so dry.

v8xi 4y ago
yes - prepare for the era of the normalization of down rounds
- steveBK123 4y ago
  It still feels like we are far from valuations normalizing back to earth. I have a neighbor who co-founded a startup in a space I know fairly well. It is something of a niche space, with some publicly traded incumbents. The startup is over 10 years old, and has now raised more capital than the entire market cap of the comparable publicly traded incumbent. So presumably someone has their investments in this startup booked at 10-20x the valuation of the public incumbent? They even managed to raise another round of money in the last 6 months, equal to something like 50% of the incumbent total market cap.
  - drno123 4y ago
    Are they profitable? Were they ever profitable since being founded?

rwmj 4y ago

How does it work? Are investors in these funds able to pull their money out at any time? TBH Andreessen Horowitz has been the redest of flags for a long time, spouting all their nonsense about crypto and "web3".

v8xi 4y ago
Depends on the firm, but there is usually a "lock-up" period of several years where you cannot divest. Sometimes the firms will return the money early if things are getting bad but once the money is deployed they can't risk a bank run because they'd have to fire sale their investments which would be bad for everyone.
ghc 4y ago
Once you commit capital to a VC fund you generally can't pull out. VCs don't take the money immediately, but eventually they will issue capital calls, which require you, as an LP, to wire them money. Your commitment amount is basically the most money, in total, you're willing to wire them over the course of an entire fund (10 years). It's important to note that most of the time when VCs do poorly they still find a way to return most of the original investment to the LP. The downside is not nearly as pronounced as the potential upside. So you can invest in several VC funds and if only one wins the math will still work out in your favor. LPs know what VCs are. LPs have risk spreads and VC is (IIRC) the riskiest legal asset class. They expect to (on average) lose money on VC commitments, but the upside is much higher when a VC hits, meaning a single win can make up for a lot of losses. Picking VCs that win is one way LPs generate outsized returns on their assets.

spaceman_2020 4y ago

A16Z has an awful reputation in crypto circles. They're considered a mercenary VC and there's a dominant assumption that if A16Z has led a round, they'll likely do an "airdrop" or similar token generation event just so they can sell their own tokens and get exit liquidity. Sad to see a name like A16Z reduced to this.

EMM_386 4y ago
> Sad to see a name like A16Z reduced to this. It really is. These ICOs were essentially considered "free money". Mint a coin, put some power behind it, profit. This isn't a business, it's a get rich quick scheme.

anonu 4y ago

Yes, I've been preaching the same thing. The era of free money is over (for now). There is going to be a sea change in how investors - and more importantly founders - need to think about business. Founders will need to tighten their belts (age of austerity) and think hard about profitability. Timelines may need to be stretched out to get there. This is ultimately good for founders as it creates a laser focus on building real MVPs that can scale. Finally, one of my favorite exhibits of the excesses of near-ZIRP are right here: https://web.archive.org/web/20221027180943/https://www.sequoiacap.com/article/sam-bankman-fried-spotlight/ https://web.archive.org/web/20221027180943/https://www.sequo... << glorifying SBF article on the Sequoia Cap site. This is the very definition of irrational exuberance.

deleted 4y ago
[deleted]

dakial1 4y ago

Well, my question here is, is there any use case of web3 that has a viable business model or is the whole industry a case of "The Emperor's New Clothes" fueled by the VCs looking to lure the excess of cash around?

specialp 4y ago
One use case is to make a decentralized form of micropayments. The "Open web" is at huge risk right now (and is declining in usefulness) due to the incentives given to content providers. You can either make money in a walled garden like YouTube or provide affiliate links. Now this is more at threat with things like ChatGPT using your provided content as training data with zero attribution. This will continue to get worse. So as someone with knowledge about a particular area, and with people that need such knowledge (such as those that need training data or someone looking for something) you can be incentivized to provide it. Of course in reality this is super hard to accomplish with bad actors abound but it would be nice.

jrm4 4y ago

I'm out of this loop, but I still struggle to consider: In the world of tech (which scales) what good is VC? As in, what companies/products/services have come about and existed in a healthy way due to this process? Why should I not cheer the death of all of this?

pavlov 4y ago
Synthetic insulin was first created in 1978 by Genentech, a VC-funded company with only twelve employees. The inventors had been previously unable to get research funding for the project. Previously all insulin was extracted from animals. The Genentech process brought its price down by 1000x and undoubtedly saved many lives. https://www.gene.com/stories/cloning-insulin https://www.gene.com/stories/cloning-insulin
fidgewidge 4y ago
Google was VC funded. They were a classic case where VC makes sense: highly risky, and needed to spend money up front to get usage in order to make money (you can't sell ads if you don't have traffic, can't pay for serving traffic if you don't have ad revenue, VC breaks the circle).

boringg 4y ago

Can someone tell me how Tyler Tringas differentiates him. He is clearly selling his Calm Fund in a round about way - I am unfamiliar with him and his business model. As such it does take a bit out of his argument.

garbagecoder 4y ago

"Zero interest rate phenomena" sounds smart to non-econ people the way "cryptocurrency" sounds smart to non-tech people. The fact that a lot of people were making bad investments (apparently mostly in tech, since job growth is up in other sectors) had very little to do with the interest rate. Failure might come a bit quicker, but this is all just pure, unprocessed copium from a sector that routinely fails to duplicate its own magic. Apple is on its third or fourth life depending on how you slice it. Microsoft is coming back strong. But Facebook and Netflix are getting lame and Amazon is turning into something other than an online market. Google has never had as profitable and revolutionary of a product as search depending on how you rate Android. I doubt Apple gets a fifth life or Microsoft a third. Meanwhile, the rest of the economy continues to do OK even without "zero interest rates." And interest rates didn't trigger the tech stock crash in 2000 or the general recession in 2008. I understand that they're trying to say "people will do anything to get a return." But isn't that always true? Maybe more people will park their money in bonds. But people will look for a return that beats inflation because most people don't borrow money directly from the fed and most of the commercial rates haven't gone up that much. I dunno, these people are chronically full of shit.