Defending A16Z | Hacker News Reader

Defending A16Z

blog.garrytan.com

49 pointsrgbrgb48 comments

A16Z isn't doing $500k checks in the next Facebook. They're waiting for the "15 important companies" to emerge every year and trying to snatch them up on the basis of their superior brand and checkbook. Exactly what the old guard of VCs used to do.

They used to claim their partners were all successful founders. They gave that up a long time ago. Now they hire pedigreed market analysts to be partners. Their primary job seems to be to judge startups and tweet wisdom about them, even though they've never done it themselves.

They passed on investing in Oculus because they thought Microsoft would crush them. Probably because they underestimated the creator of Oculus, Palmer Luckey, because he didn't go to any of the fancy schools.

Then, later, when they realized what millions of Carmack fans had already realized (Carmack was involved long before any investor) they bought their way in to a later round and flipped the company to their friends at Facebook for a cool $2 billion.

And of course, when it came to funding RapGenius.com, they had tens of millions to spare. They weren't worried Microsoft would beat them at the lyrics SEO game.

The ultimate test of a Silicon Valley investor is whether they help bring about great new stuff that would otherwise not exist. Most VCs do not pass this test with a very high grade.

Well, to be fair, Andreessen's first company was crushed by Microsoft.

Yes, it was bought by AOL for $4.2 Billion. Wish someone would crush my company that way.

Yes, I'll have the $4+ Billion disappointment please.

Yes, they mostly invest in later stages than the seed round. They do some seed but it's not their bread and butter. Does that make them a shitty VC? They're still making big bets and hoping for a few winners to return the fund. That's what VC has always been and will always be.

"They used to claim their partners were all real founders. They gave that up a long time ago."

no all the general partners are still founders who seem to have an overwhelming stake in who they actually fund, granted they hide who the general partners are on their site, they use the term partner loosely as another word for associate

No one is an associate anymore in VC, because founders learned that if you're an associate you're just a gatekeeper. So now everyone is a "partner."

a16z invested $250k in the Instagram seed round before it was even called Instagram.

Actually, the ultimate test of a Silicon Valley investor is their return on capital. Your test is projecting your desire onto investors.

well said

I was obviously not making a claim about how LPs judge VCs, just stating my own opinion about how I think VCs should be judged.

Try to imagine every sentence in a comment is prefixed with "I think..." to test if you're just being snarky or not. In this case, you're just being snarky.

(And like most snarky comments, it's not even correct. There is in fact no official test for VCs. Some LPs are socially motivated and would rather lose money than invest in evil companies. Your test is not the one they use.)

The bulk of your comment is an highly speculative attack on A16Z. Chris Dixon publicly stated they passed on investing initially because of technical obstacles.[1] Their investment in RapGenius was in part because Marc Andreessen tried to build it himself as part of Netscape.[2]

A VCs job is to make an ROI for the LPs. "Socially motivated" is just window dressing to attract capital that might otherwise go to a different fund.[3] The significant LPs are primarily restricted by asset allocations. You are projecting your desires onto VC to hope that it is anything different.

[1] http://www.wired.com/2013/12/oculus-vr-funding/

[2] http://genius.com/1107425

[3] Pessimistic? Sure. Better to be honest about the underlying motivations and surprised by the outcomes than not.

A16Z's thesis is that companies require less and less capital to get started but more and more capital to scale these days. That's why the fund bifurcates into small seed rounds like Instagram and then large growth rounds like AirBnB. This is still "bringing into existence great new stuff that would not otherwise exist", but it's "bringing it into existence" in the sense of making sure great new products that are beloved by a small core group can get exposure in front of billions of people.

There's a line of investors out the door waiting to give successful startups growth funding. It's an easy way to extract wealth with very little risk, if you're positioned well. No one needs another firm doing this and it doesn't count as adding value.

Has Oculus made any real money (apart from the pure luck money involved in being acquired by Facebook)? Maybe they were right to pass over Oculus.

The consumer Rift is coming out next year. So far they have only released development kits.

| Noam doesn't make a data-based argument. He uses an anecdote.

And that argument is then countered with another anecdote. The only way to really win this argument is by releasing all the data. Not thinking that's likely to happen.

Definitely agree. This reminds me of Nick Ciubotariu's attempt at a "data"-driven rebuttal to the NY Times article on Amazon working conditions: "The NY Times said so-and-so happened at Amazon, but I have never seen it with my own eyes!"

You can probably find IRR figures. But there's a wise saying in private equity, "You can't eat IRR."

The first fund's were around 50% if I recall (as they included Skype and Nicira which were both _great_ returns).

It's also a very strange anecdote since the NYT articles primary point is that A16Z are pushing up valuations so deals like the one Peter Thiel made are no longer possible.

Quoted in this blog post from the NYT article: "It’s easier to triple or quadruple your money when you’ve invested $10 million in a $100 million company than when you’ve invested nearly $100 million in a $1 billion company [...]"

Peter Thiel invested $500,000 for 10.2% i.e. in a $5 million company.

Unless there's something I'm missing here?

The point is that A16Z is paying high prices (and you correctly note that everyone is). Tan's point is that there are still power laws at play, and that choosing one random investment to disprove portfolio theory is incongruent.

"Tan's point is that there are still power laws at play, choosing one random investment to disprove portfolio theory is incongruent."

Except that he made no such point and just countered the anecdote with his own anecdotes. The original NYT article comes across as a well-researched, sensible piece of writing compared to this lazy, ill thought out blogpost.

> Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart — and when you have the potential for 100X to 4000X returns, it's not about avoiding loss or minimizing downside. A proper venture portfolio is not like your 401K. The only way startup investors truly lose is if they miss the Uber.

That's a silly comparison. Avatar was made by James Cameron, someone as established as it's possible to be in Hollywood. If Mark Zuckerberg or Larry Page or Jeff Bezos started a new company, then that company would be a good analogue because you aren't going to get the terms that you'd get out of a long-shot like Facebook. A better comparison would be something like Paranormal Activity (12,893x ROI) or the Blair Witch Project (11,111x ROI). Avatar is a good proxy for how much revenue-generation Hollywood is capable of, not its profitability measured by ROI.

The point is that the ceiling for the multiple a Hollywood film can return is way lower than the ceiling for the multiple VC can return. The discussion is around paying high prices and still getting a huge return, which makes Avatar a more apt analogy than the Blair Witch Project.

That having been said, perhaps the analogy is a bit flawed, but at the going market cap Thiel has a 60,000x return on Facebook (on a large sum of money), and that will likely continue to go up.

Even if the analogy is Twitter, started by the already successful Ev, or Slack, started by the already successful Stewart, both are likely to return a greater multiple.

I was thinking the same thing, quora has a list of highest ROI films of all times. Most are low budget break away global success's.

https://www.quora.com/Which-movies-have-the-highest-Return-o...

I have great respect for Garry Tan. However, I find the key quote on "how profitable Hollywood can be at best" a bit strange, and want to correct his statement below based on specific data. Here's the quote "...11X return on capital. That's the highest grossing film ever made, and a good proxy for how profitable Hollywood can be at best." Since 3,800X return on capital for Peter Thiel's FB investment is an obvious outlier/best case scenario, let's compare apples to apples and take the best case for Hollywood-type investments: "Paranormal Activity With just $15,000, the visionaries behind this project created a movie that took in a worldwide gross of almost $197 million." That sounds like 13133X return to me, which is even greater than 3800X... See http://www.businesspundit.com/10-most-profitable-low-budget-...

The real point here isn't really Hollywood vs SV but rather that VC portfolios can outperform on just one stellar investment despite the rest being losers bc the ROIs can get so high. So paying a premium to get into a contested round of a high growth startup is worth it if you think the company can be one of these outliers. For example: a "mere" 20x return on one of ten companies will more than pay for the other 9 companies that lost you money on.

I just don't see how that invalidates the anecdote. Because if you're investing "$100 million in a $1 billion company" you're probably aren't expecting a 20x return, not to mention a greater one. So that would suggest that there is something else going on, which is the greater point of the NYT article.

If you are investing at that late of stage you'll likely negotiate downside protection like liquidation preferences which significantly de risk the deal. In which case a 2-10x return is actually really good b/c you are not expecting to lose all your money in your individual investments. So in a late stage portfolio you would break even on a few and hopefully make returns on one or two.

Sure. I'm not saying it's a bad deal, just that it supports what the NYT article is saying and that the anecdote would therefor be relevant.

> Within Silicon Valley, Andreessen Horowitz is famous for bidding valuations to heights that make rivals uncomfortable. To offset the dilution of ownership that comes from such prices, Andreessen Horowitz [...] increases the amount of money it invests. The firm often kicks in more than the entrepreneur asks for, according to rival V.C.s who have been involved in these deals. “They want to basically change the table stakes in a poker game,” said Greg Kidd, an angel investor in several companies Andreessen later funded. “There are some other folks who can cut checks like that, but there aren’t that many.”

> More than is the case with other firms, the fate of Andreessen Horowitz may be closely tied to that of the overall tech market. If prices remain buoyant, the eye-popping valuations of the firm’s top-performing companies will keep it profitable and losses will be containable. But if the market turns, Andreessen Horowitz could have serious trouble.

> Worse, Andreessen Horowitz isn’t just a beneficiary of behavior that’s driving up valuations. If a bubble is forming, it is ultimately because too much money is chasing too few companies. But the firm’s own aggressive bidding may be partly responsible. “Because there is competition for deals, when you have actors in the market showing no price discipline, it drives up the cost for everyone,” said one investor.

And by the way, for completeness, the company in question sold for $2.6 billion three months after the article and post was written.

That is not a good comparison because the absolute return is 1-2 orders of magnitude below what Peter Thiel and Accel made from their Facebook investments.

Given the amount of funds VCs and big Hollywood firms control, an occasional $100-200M absolute return does not significantly change their portfolio success.

The OP starts off with: "Noam doesn't make a data-based argument. He uses an anecdote"

And then goes right on to the rest of the post with zero data and a couple of anecdotes to make his case.

I suspect that due to the well known creative accounting in Hollywood, Avatar returned significantly more than 11x. Top line costs are inflated.

That's interesting, could you elaborate on "creative accounting"?

https://en.m.wikipedia.org/wiki/Hollywood_accounting

According to Hollywood accounting, Return of the Jedi has never been profitable.

http://www.slashfilm.com/lucasfilm-tells-darth-vader-that-re...

The only fact I'd point to is that if A16Z were to raise a new fund, it would be wildly oversubscribed as with most other top VC firms. If I'm Andreesen, that's the only thing I'd point to.

So the nytimes article goes like "maybe, just maybe if we are in a bubble then it is going to hurt. and here are some signs that it is indeed a bubble". And the response is like "don't worry there is no bubble because you know, facebook is huge and software is eating the world". Not very convincing if you ask me.

I'm not sure why this even needs a rebuttal. If venture capital wasn't profitable, Sandhill Road wouldn't exist.

Well, it's profitable for the general partners. Whether it's a good deal for the LPs is another issue entirely.

That's not strictly true. As long as interest rates are kept so low, there will be vast amounts of capital looking for any kind of return possible. The guys running the VC firms always make money as they get their 2/20 cut and people too rich to care will always invest in new funds. The sector as a whole is almost certainly not more profitable than a simple index tracker for the FTSE100 or similar.

Because when you're A16Z and take a 3% management fee, regardless of profits, you don't need venture capital to be strictly speaking profitable.

You need your particular brand of venture capital to be perceived to be profitable. If you have $4.2 billion under management during a year, you took $126 million in non-performance based fees that year. A16Z could make a ton of risky investments, collect fees, and die out in 7 years (2009 + 7 = 2016)—it really doesn't matter to its partners. They banked their fees.

Mutual funds aren't necessarily more performant than buying index funds. Many forms of investment aren't. You're not appreciating how a smart manager can use time and a fee structure to enrich himself handsomely without actually delivering results for investors.

Venture capital wouldn't exist if it wasn't profitable, sure, but Sandhill Road? That's an artifact of how venture capital is done and taken advantage of by real human beings, not of how profitable it is.

But A16Z isn't doing that.

The people who started A16Z have had multiple billion dollar exits, and are investing their management fee in services for their founders. They only make money from carry (if the fund is successful).

LPs decide whether to invest based on the information available. This is useful information.

You'd be surprised at what people continue to invest in because it's fashionable, "other people's money," or because they're so thirsty for appearance of yield after an unprecedented era of rock-bottom interest rates. Despite the evidence that some alternative asset classes may not be worth the considerable fees. Most hedge funds fall squarely into this category [1]. There's also the ongoing scandal involving the U.S.'s biggest pension funds and their inability to figure out what fees they are actually paying to private equity, and hence whether the returns are worth it.

[1] http://fortune.com/2015/05/19/hedge-funds-mediocrity/ [2] http://www.nakedcapitalism.com/2015/08/calpers-private-equit...

> Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart...

It's kind of funny to see some of these companies uses as examples of "perfect execution." Two of Dropbox's latest late-stage investors have already reportedly written down their investments by ~20%[1], and Uber and Instacart are facing class action lawsuits that, in worst-case outcomes that are not entirely improbable, could upend their business models.

> ...it's not about avoiding loss or minimizing downside.

This is silly. Good fund managers are always concerned about downside. That doesn't mean they don't take on risk, but they try to understand and mitigate risk as approprite for the kind of fund they're managing. In the world of VC, there's a reason liquidation preferences, ratchets, etc. exist.

Just because FOMO in this market has made it difficult for VCs to get terms they'd normally like doesn't mean they aren't exposed to downside risk. As Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." When the cycle turns, we'll learn which VCs didn't have their speedos on.

[1] https://www.theinformation.com/mutual-funds-mark-down-dropbo...

Reply on news.ycombinator.com