7 ms·

Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

69 points by boskonyc 11y ago

jtzhou 11y ago
There is definitely a lack of transparency in venture funding, and studies show overall how VC's have been barely breaking even. Most of the big name investors were successful entrepreneurs (e.g. Andreessen and Netscape, e.g. Khosla and Sun, etc) who are assumed to be good investors. In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. Also, the quote attributed to Andreeseen at the end was originally from Warren Buffet's 2001 letter to shareholders. "After all, you only find out who is swimming naked when the tide goes out." http://en.wikiquote.org/wiki/Warren_Buffett http://en.wikiquote.org/wiki/Warren_Buffett
- michaelochurch 11y ago
  Venture capital does a great job when it comes to the VCs' real objective function, which is to maximize for their own careers and those of their buddies. It's a mediocre investment vehicle, but it's a great gig for a 21st-century job seller. Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies. Chasing "unicorns" doesn't actually work out well because the failure rate is so high, but if you're optimizing for your own career, it makes sense because it creates an aura of social access to "have been in on" a brand-name company, and because people will cling to you in the hope of getting thrown an executive appointment.
  - foobarqux 11y ago
    I don't think job placement is a primary motivator for a VC. Instead, it's a prestigious, well-paid, low-risk (for the VC) position, and on top of that you own a lot of high-volatility, and therefore valuable, options in the form of carried interest, for free.
  - SamReidHughes 11y ago
    > Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies. If what you're saying has any connection to actual reality, how much do these executive positions cost?
    - michaelochurch 11y ago
      They don't sell them in an explicit jobs-for-cash trade, so much as they use them to curry favor with counter parties. It's about information and favorable future action (e.g. I'll make your kid VP/Eng if you agree to make your employer buy us at $2B no matter what.)
      - SamReidHughes 11y ago
        What are some examples of this? Or more generally, why do you believe this happens?
      - tptacek 11y ago
        "I'll make your kid VP/Engineering if you agree to make your employer buy as at $2B" does not sound like something that has ever happened. Has it?
        throwawaymaroon 11y ago
        True, it isn't the hard justification for his post that Church was being asked for. But it seems to me to be an acceptable rhetorical exaggeration of the many mechanisms of unspoken negotiation, plausible deniability, and favor bartering that happen in a network. We know nepotism exists, we know cronyism exists. We don't have to speculate about the existence of these mechanisms, and in some ways it's very odd that we're trying to build evidence for them. It's not unfair in and of itself, but it does reveal an asymmetry, I think.
        michaelochurch 11y ago
        I don't know that it's ever been put so explicitly, but I have seen startups and ex-startups give out very highly compensated positions (over $300k) to people who were spouses, proteges, and children of people on purchasing boards at other companies. Usually the explicit quid pro quo isn't needed because self-interest is enough to keep the parties in step. In that example, once the kid is given the job, the guy on the purchasing board has an obvious desire to buy at as high a price as possible, since it's not his money. These are the sorts of issues that would be considered conflicts of interest, and require the decision-makers to recuse themselves, anywhere but Silicon Valley.
- vonklaus 11y ago
  Just like in a venture portfolio, the venture industry is characterized by a few big winners. While the industry in general may lose money, a few firms consolidate most of the profits of the entire industry. AH is one of the smartest firms, and one of the first to push the philosophy that "it is easier to train a technical founder to be ceo, than a ceo to be a technical founder". This was one of the firms that lead the founder first philosophy, and is run (obviously) by well known entrepreneurs. They atrract top talent (founders) like the article says, and gain great positioning in rounds, and in the ecosystem. > if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. The market typically delivers ~10% on average[0], while you are correct that their isn't a lot of transparency, AH almost certainly beats 10% annually. Another top VC/Angel is Chris Sacca. I have heard that his initial fund which was heavily in twitter, was single or double digit millions and is now worth over 1 billion dollars. So key firms do have outsize gains. As to the MA tweet > "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE."[1] This is not about a bubble, but individual companies not focusing on business fundamentals. In a climate where raising money is easy, he is pointing out these companies grow without underlying businesses. The grow big enough to sell advertising/information is not sustainable, as everyone was made painfully aware of in the 90's and 00's. Vanity metrics and valuations mean nothing if you are not profitable (or even generating revenue), and it will be apparent if there is a funding freeze. [0]http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX http://quicktake.morningstar.com/index/IndexCharts.aspx?Symb... * This has the 10 year around 8.3 [1]http://www.businessinsider.com/marc-andreessen-on-startup-burn-rates-worry-2014-9#ixzz3Yv4aRdMN http://www.businessinsider.com/marc-andreessen-on-startup-bu...
  - jtzhou 11y ago
    > AH almost certainly beats 10% annually. AH was started in July 2009, at the start of a bull market. Since that period, the S&P 500 has had an annualized return, with dividends reinvested, of 17.2%. http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/ This is significantly better than AH which has much greater single-sector risk (early stage/small cap, Bay Area, technology companies with little to no earnings). And AH at least by many sources is a "best-of-the-best" VC, so woe to the less successful VC's. Whether they are good at intangibles, such as training future CEO's, providing jobs to highly-networked individuals, and encouragement to founders, is less relevant from an investor's standpoint.
- joshu 11y ago
  The statistical distribution of fund performance means that average doesn't make sense as a centrality measure. The top few funds take the lion's share of returns.
- garry 11y ago
  > In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. This demonstrates a lack of understanding of venture returns. Actually Khosla, Andreessen, Benchmark and the rest of the top tier account for the vast majority of the outsize returns. The "average" VC you haven't heard of, and those are the ones who can't even get introduced to the startups that account for the majority of the return. The power law distribution for startup returns is widely acknowledged, and the top VC phenomenon is that power law at work. "Adjusted for risk." Actually this particular part of what you say is particularly untrue. When people talk about risk, they also talk about reward. Typical public companies may only yield a few percentage points increase, or 2X at extreme best over a year, but startups can yield 100X to 1000X return. So even after adjusting for risk, VC at its best (given a: good deal flow and b: good ability to help / pick companies) absolutely can outperform the S&P500 / index funds. The asset class as a whole is terrible (understandably professional LPs have difficulty picking the right general partners to back) but the best VCs do just fine. Professional VC's aren't throwing darts at a board. The best ones see great founders and great new businesses far in advance of the rest of Wall Street or mainstream business press.
  - foobarqux 11y ago
    I guess the entire professional investment community is incompetent then for investing so little of their money in VC.
    - Brushfire 11y ago
      There are a limited number of great, breakout startups, and they can only really utilize so much capital. Reallocating your pension fund doesn't magically create more amazing startups.
      - foobarqux 11y ago
        Scarcity should drive up the price and push net returns towards those of the broad market.
pasta_2 11y ago
That part about Andreessen warning about "risks" was really just a response to Bill Gurley sounding the alarm in a WSJ story. Until that time if you followed Andreessen on Twitter, you'd see him talking down the idea of a tech bubble, mocking Janet Yellen for her warning about valuations in social media, etc. It was basically that or go against another prominent VC in a fight about valuations. And this is not like the rest of Wall Street, there's not going to be any Icahn vs. Ackman style fights in the VC world. Relationships matter too much. But at least 10 years from now once the current cycle has come to an end Andreessen can point to that one time he was on the record as warning about "risks" when really his M.O until then was to talk up valuations.
foobarqux 11y ago
Mr. Andreessen and his partners have invested so much in so many start-ups that it would take a remarkable string of successes to make the approach pay off. For all their skill — the firm bought into the likes of Airbnb, Instagram and Pinterest relatively early — their track record suggests it’s unlikely. Already, they’ve suffered a few impressive flameouts, including Fab, on which they are likely to lose tens of millions of dollars.
- api 11y ago
  How do you get the successes without the risk? If that were possible there would be no angel or VC and investment banks would just fund winners according to some formula.
- onewaystreet 11y ago
  That's probably a short-sided opinion. There's a lot of companies in a16z'a portfolio that I could see going public or having a big acquisition in the next 5 years: http://a16z.com/portfolio/ http://a16z.com/portfolio/
deleted 11y ago
[deleted]
as27 11y ago
Inflating a valuation by 50% to 100% over "fair market value" means that the company will have to grow by 50% to 100% to grow into it's own shoes/expectations. Holding all else equal, if future investors value the company at fair market value A16Z will have over-paid to get into the round. If this is true then what is A16Z's angle? Do they believe that overpaying is a cost they are willing to incur to get the best deals and concentrate talent in their portfolio? Does this concentration of talent make up for a company's overvaluation? Ie: does a 100% overvaluation with A16Z lead to a greater than 100% company growth compared with other investors?
- nedwin 11y ago
  Overvaluation is fine if they have put in place protections for their capital, like liquidation preferences and anti-dilution clauses for down rounds. In that case by pumping up a companies valuation in a financing event they're able to win the deal and put a stake in the ground for any acquisition offers. If the company is acquired for less than the last valuation they still get all their capital returned to them under the liquidation preference as well as a percentage of the proceeds.
  - as27 11y ago
    What about up rounds?
    - nedwin 11y ago
      Well in an up round they would probably participate and the value of their stock goes up either way so they're winning.
- ForHackernews 11y ago
  Doesn't overpaying help pump up the company and solidify the idea that it's "worth" whatever that inflated valuation is? In other words, it's a signaling game as much as an honest appraisal?
  - 11y ago
georgeglue1 11y ago
Going beyond the article, it feels like a16z gets in on a lot of the "hottest" startups of the moment. This makes sense given some people think a16z is the best VC in business, but it givens them a really weird slice of sv/hype-market risk that I don't think anyone really understands.

69 points by boskonyc 11y ago

There is definitely a lack of transparency in venture funding, and studies show overall how VC's have been barely breaking even. Most of the big name investors were successful entrepreneurs (e.g. Andreessen and Netscape, e.g. Khosla and Sun, etc) who are assumed to be good investors. In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. Also, the quote attributed to Andreeseen at the end was originally from Warren Buffet's 2001 letter to shareholders. "After all, you only find out who is swimming naked when the tide goes out." http://en.wikiquote.org/wiki/Warren_Buffett http://en.wikiquote.org/wiki/Warren_Buffett

michaelochurch 11y ago
Venture capital does a great job when it comes to the VCs' real objective function, which is to maximize for their own careers and those of their buddies. It's a mediocre investment vehicle, but it's a great gig for a 21st-century job seller. Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies. Chasing "unicorns" doesn't actually work out well because the failure rate is so high, but if you're optimizing for your own career, it makes sense because it creates an aura of social access to "have been in on" a brand-name company, and because people will cling to you in the hope of getting thrown an executive appointment.
- foobarqux 11y ago
  I don't think job placement is a primary motivator for a VC. Instead, it's a prestigious, well-paid, low-risk (for the VC) position, and on top of that you own a lot of high-volatility, and therefore valuable, options in the form of carried interest, for free.
- SamReidHughes 11y ago
  > Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies. If what you're saying has any connection to actual reality, how much do these executive positions cost?
  - michaelochurch 11y ago
    They don't sell them in an explicit jobs-for-cash trade, so much as they use them to curry favor with counter parties. It's about information and favorable future action (e.g. I'll make your kid VP/Eng if you agree to make your employer buy us at $2B no matter what.)
    - SamReidHughes 11y ago
      What are some examples of this? Or more generally, why do you believe this happens?
    - tptacek 11y ago
      "I'll make your kid VP/Engineering if you agree to make your employer buy as at $2B" does not sound like something that has ever happened. Has it?
      - throwawaymaroon 11y ago
        True, it isn't the hard justification for his post that Church was being asked for. But it seems to me to be an acceptable rhetorical exaggeration of the many mechanisms of unspoken negotiation, plausible deniability, and favor bartering that happen in a network. We know nepotism exists, we know cronyism exists. We don't have to speculate about the existence of these mechanisms, and in some ways it's very odd that we're trying to build evidence for them. It's not unfair in and of itself, but it does reveal an asymmetry, I think.
      - michaelochurch 11y ago
        I don't know that it's ever been put so explicitly, but I have seen startups and ex-startups give out very highly compensated positions (over $300k) to people who were spouses, proteges, and children of people on purchasing boards at other companies. Usually the explicit quid pro quo isn't needed because self-interest is enough to keep the parties in step. In that example, once the kid is given the job, the guy on the purchasing board has an obvious desire to buy at as high a price as possible, since it's not his money. These are the sorts of issues that would be considered conflicts of interest, and require the decision-makers to recuse themselves, anywhere but Silicon Valley.
vonklaus 11y ago
Just like in a venture portfolio, the venture industry is characterized by a few big winners. While the industry in general may lose money, a few firms consolidate most of the profits of the entire industry. AH is one of the smartest firms, and one of the first to push the philosophy that "it is easier to train a technical founder to be ceo, than a ceo to be a technical founder". This was one of the firms that lead the founder first philosophy, and is run (obviously) by well known entrepreneurs. They atrract top talent (founders) like the article says, and gain great positioning in rounds, and in the ecosystem. > if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. The market typically delivers ~10% on average[0], while you are correct that their isn't a lot of transparency, AH almost certainly beats 10% annually. Another top VC/Angel is Chris Sacca. I have heard that his initial fund which was heavily in twitter, was single or double digit millions and is now worth over 1 billion dollars. So key firms do have outsize gains. As to the MA tweet > "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE."[1] This is not about a bubble, but individual companies not focusing on business fundamentals. In a climate where raising money is easy, he is pointing out these companies grow without underlying businesses. The grow big enough to sell advertising/information is not sustainable, as everyone was made painfully aware of in the 90's and 00's. Vanity metrics and valuations mean nothing if you are not profitable (or even generating revenue), and it will be apparent if there is a funding freeze. [0]http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX http://quicktake.morningstar.com/index/IndexCharts.aspx?Symb... * This has the 10 year around 8.3 [1]http://www.businessinsider.com/marc-andreessen-on-startup-burn-rates-worry-2014-9#ixzz3Yv4aRdMN http://www.businessinsider.com/marc-andreessen-on-startup-bu...
- jtzhou 11y ago
  > AH almost certainly beats 10% annually. AH was started in July 2009, at the start of a bull market. Since that period, the S&P 500 has had an annualized return, with dividends reinvested, of 17.2%. http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/ This is significantly better than AH which has much greater single-sector risk (early stage/small cap, Bay Area, technology companies with little to no earnings). And AH at least by many sources is a "best-of-the-best" VC, so woe to the less successful VC's. Whether they are good at intangibles, such as training future CEO's, providing jobs to highly-networked individuals, and encouragement to founders, is less relevant from an investor's standpoint.
joshu 11y ago
The statistical distribution of fund performance means that average doesn't make sense as a centrality measure. The top few funds take the lion's share of returns.
garry 11y ago
> In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave. This demonstrates a lack of understanding of venture returns. Actually Khosla, Andreessen, Benchmark and the rest of the top tier account for the vast majority of the outsize returns. The "average" VC you haven't heard of, and those are the ones who can't even get introduced to the startups that account for the majority of the return. The power law distribution for startup returns is widely acknowledged, and the top VC phenomenon is that power law at work. "Adjusted for risk." Actually this particular part of what you say is particularly untrue. When people talk about risk, they also talk about reward. Typical public companies may only yield a few percentage points increase, or 2X at extreme best over a year, but startups can yield 100X to 1000X return. So even after adjusting for risk, VC at its best (given a: good deal flow and b: good ability to help / pick companies) absolutely can outperform the S&P500 / index funds. The asset class as a whole is terrible (understandably professional LPs have difficulty picking the right general partners to back) but the best VCs do just fine. Professional VC's aren't throwing darts at a board. The best ones see great founders and great new businesses far in advance of the rest of Wall Street or mainstream business press.
- foobarqux 11y ago
  I guess the entire professional investment community is incompetent then for investing so little of their money in VC.
  - Brushfire 11y ago
    There are a limited number of great, breakout startups, and they can only really utilize so much capital. Reallocating your pension fund doesn't magically create more amazing startups.
    - foobarqux 11y ago
      Scarcity should drive up the price and push net returns towards those of the broad market.

pasta_2 11y ago

That part about Andreessen warning about "risks" was really just a response to Bill Gurley sounding the alarm in a WSJ story. Until that time if you followed Andreessen on Twitter, you'd see him talking down the idea of a tech bubble, mocking Janet Yellen for her warning about valuations in social media, etc. It was basically that or go against another prominent VC in a fight about valuations. And this is not like the rest of Wall Street, there's not going to be any Icahn vs. Ackman style fights in the VC world. Relationships matter too much. But at least 10 years from now once the current cycle has come to an end Andreessen can point to that one time he was on the record as warning about "risks" when really his M.O until then was to talk up valuations.

foobarqux 11y ago

Mr. Andreessen and his partners have invested so much in so many start-ups that it would take a remarkable string of successes to make the approach pay off. For all their skill — the firm bought into the likes of Airbnb, Instagram and Pinterest relatively early — their track record suggests it’s unlikely. Already, they’ve suffered a few impressive flameouts, including Fab, on which they are likely to lose tens of millions of dollars.

api 11y ago
How do you get the successes without the risk? If that were possible there would be no angel or VC and investment banks would just fund winners according to some formula.
onewaystreet 11y ago
That's probably a short-sided opinion. There's a lot of companies in a16z'a portfolio that I could see going public or having a big acquisition in the next 5 years: http://a16z.com/portfolio/ http://a16z.com/portfolio/

deleted 11y ago

[deleted]

as27 11y ago

Inflating a valuation by 50% to 100% over "fair market value" means that the company will have to grow by 50% to 100% to grow into it's own shoes/expectations. Holding all else equal, if future investors value the company at fair market value A16Z will have over-paid to get into the round. If this is true then what is A16Z's angle? Do they believe that overpaying is a cost they are willing to incur to get the best deals and concentrate talent in their portfolio? Does this concentration of talent make up for a company's overvaluation? Ie: does a 100% overvaluation with A16Z lead to a greater than 100% company growth compared with other investors?

nedwin 11y ago
Overvaluation is fine if they have put in place protections for their capital, like liquidation preferences and anti-dilution clauses for down rounds. In that case by pumping up a companies valuation in a financing event they're able to win the deal and put a stake in the ground for any acquisition offers. If the company is acquired for less than the last valuation they still get all their capital returned to them under the liquidation preference as well as a percentage of the proceeds.
- as27 11y ago
  What about up rounds?
  - nedwin 11y ago
    Well in an up round they would probably participate and the value of their stock goes up either way so they're winning.
ForHackernews 11y ago
Doesn't overpaying help pump up the company and solidify the idea that it's "worth" whatever that inflated valuation is? In other words, it's a signaling game as much as an honest appraisal?
- 11y ago

georgeglue1 11y ago

Going beyond the article, it feels like a16z gets in on a lot of the "hottest" startups of the moment. This makes sense given some people think a16z is the best VC in business, but it givens them a really weird slice of sv/hype-market risk that I don't think anyone really understands.