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Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

nytimes.com

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Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#11

Post by ForHackernews »

as27 wrote: post #5

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 de…

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?

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#12

Post by michaelochurch »

jtzhou wrote: post #10

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 wi…

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.

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#13

Post by vonklaus »

jtzhou wrote: post #10

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 wi…

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?Symb... * This has the 10 year around 8.3

[1]http://www.businessinsider.com/marc-andreessen-on-startup-bu...

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#14

Post by jtzhou »

vonklaus wrote: post #13
jtzhou wrote: post #10

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 wi…

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 t…

> 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/ 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.

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#15

Post by joshu »

jtzhou wrote: post #10

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 wi…

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.

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#16

Post by joshu »

vonklaus wrote: post #13
jtzhou wrote: post #10

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 wi…

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 t…

It's hard to know what the return is on any fund that is immature. Companies that exit early tend to return far, far less than companies that exit later. Check back around the 7 year mark.

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#17

Post by as27 »

nedwin wrote: post #9
as27 wrote: post #5

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 de…

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 un…

What about up rounds?

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#18

Post by as27 »

ForHackernews wrote: post #11
as27 wrote: post #5

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 de…

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?

Yes its a signaling game in the short run. But is there a point when people realize the company has been overvalued?

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#19

Post by bsbechtel »

vonklaus wrote: post #13
jtzhou wrote: post #10

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 wi…

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 t…

There is also no guarantee that top firms such as A16Z and Chris Sacca will continue to achieve the returns they've gotten over the past several years. Have the top venture funds of the 90s and early 00s continued to achieve the returns they got then?

Re: Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley

#20

Post by garry »

jtzhou wrote: post #10

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 wi…

> 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.

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