Andreessen Horowitz Raises $1.5B for New Fund
fortune.com
fortune.com
With so few IPOs or acquisitions, how are the LPs actually getting their cash back? And how much of that money is eaten up by the "services" that a16z provides to its portfolio companies, not to mention the insane amount of content marketing they've done over the last few years (blogs, podcasts, books, etc.)?
They made about $100M off Skype, and probably comparable or less from the others, but if they proceeded to raise $3B and invested it in companies like Jawbone, that completely kills their IRR. That's what I was getting at when I posed the question in the original thread. A few small wins do not undo many large losses.
It will take at least a full cycle to see. In another 5-10 years we can compare to the firms you mentioned. Obviously in the meantime a16z don't mind being compared to Sequoia et. al.
a16z charges 2 and 25. 2% of AUM each year, 25% of the profits. (2&20 is standard in hedge funds.)
2 and 30.
Source: http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...
As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc.
Therefore a16z's management fee from this specific fund is about $30M a year ($1.5B * 0.02).
However, please note that this is just the management fee of ONE fund. A VC firm often raises additional funds before a previous one ends its cycle (that's why you see fund names such as a16z fund I, a16z fund II, etc). a16z therefore has additional annual management fee from the previous, unfinished fund as well. I would not be surprised if a16z has $50M management fee per year across its multiple funds.
Source: I used to work for a VC.
a16z spends much more than most VC firms on providing all kinds of services (such as recruiting) to their portfolio companies, and hires a ton of people for that purpose. It's not clear whether those expenses come out of the management fee or not.
1. A portion of the profit that a16z made from previous exits.
2. This is a less likely option - asking portfolio companies to pay for those services. I know VCs that bill their portfolio companies for certain professional services.
None of these firms that charge their portfolio companies are the typical valley top-tier funds, but I do not think it means that charging portfolio companies for professional services is a bad thing.
A16Z has a lot of in house partners that focus on things other than just investments.
Edit: Just want to say that the top funds do not charge for these services. Some funds do - they invest and then you pay them back a bunch of money for services.
You can get somewhat of an idea of the IPOs and acquisitions here: https://www.crunchbase.com/organization/andreessen-horowitz/...
I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs.
As to the expenses...the marketing is quite inexpensive and has more than paid for itself. No idea on the costs around the services to the portfolio companies.
Full disclosure: I've worked for quite a few of their portfolio companies.
If the IRRs for the follow-on funds are counting portfolio companies that haven't exited (according to their latest valuation), then it might be quite deceptive. If those companies can't IPO or be acquired without a significant drop in the valuation, then the paper IRR won't hold up.
There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis.
The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree.
So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments.
Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align.
So: quite uncommon but not unheard of.
I don't think it requires corruption, or malevolence; only a source of cash, and a desire to get cash to prior investors.
This is the same size as Andreessen Horowitz’s past two funds and, like each of those efforts,
includes a primary pool (which can do both early and late-stage deals), plus an overflow pool
for portfolio companies that require significantly more capital.
The breakdown this time is $1 billion for the main fund and $500 million for the parallel
fund―the latter of which only collects management fees once capital is committed.
> Andreessen Horowitz’s still-private portfolio companies include Airbnb, Buzzfeed, Cyanogen, Lyft, Instacart, Jawbone, Magic Leap, Okta, Product Hunt, Slack, and Zenefits.
If we believe the Fortune magazine, AH may have raised the side pool for any number of those companies.
VCs often reserve a minor portion of the fund (~30%) for investing in future rounds of the fund's existing portfolio companies.
Second fund also had Nicira ($1.2B), and possibly the Zynga and GroupOn IPOs.
Seems decent results to me.