Andreessen Horowitz’s Returns Trail Venture-Capital Elite
wsj.com
wsj.com
Like, this is as good as it gets, guys. This is it. Even with these returns being kinda so-so (relative to the lack of liquidity, ten year return cycle, et cetera), these guys are easily in the top five percent of VC firms.
Dumb old index funds are going to roughly double your money in ten years with reinvestment of dividends. If a VC can't hit 3x, the numbers don't really add up to make it worth your while to write a big check and just park it for a decade.
The point of the article is that even the best of the best can miss those numbers and still be in the top fifth percentile.
Yikes.
Pretty sure they reference both Sequoia and Benchmarks as having 8x and 11x returns. So not sure this is really as good as it gets. I think it more points to the over hype of certain firms vs the ones who can actually deliver on investor money.
All stocks in the US: FSTVX, VTSAX
All bonds in the US: FTBFX, VBTLX
Step 1: Put {your_age}% in one of the bond funds, and the rest in the stock fund.
Step 2: Religiously invest a portion of your salary every month.
Step 3: Don't look at your savings more than once every quarter or so.
Step 3.5: Don't let your spending grow out of control as your career progresses and your salary grows.
Step 4: Retire a multi-millionaire in inflation adjusted dollars after 20-30 years or so.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
My wife and I did 50% of our nominal takehome every month in a high COL area. It was fine.
The more you save, the faster you get to Stage 4.
The top Index ETFs that I would recommend (index in parens):
SPY (US S&P 500)
DIA (US DJIA)
BRK-B (Berkshire Hathaway*)
EFA (MSCI EAFE, aka developed countries in Europe and Asia)
EEM (MSCI Emerging Markets, aka China, Korea, Brazil, India, etc)
* While BRK-B is not an index ETF, it's actually the first stock I would recommend for new investors to buy. BRK-B is Warren Buffet's company and has broad exposure to the US market.
It's also important to note that over-investment in index funds will lead to economic distortions for the same reason that the housing bubble happened. "Mortgages are incredibly safe as an asset class, so let's put all money into broadly diversified pools of mortgages!" (Six years later...) "Who could have predicted that the entire housing sector would over-inflate and all mortgages would suddenly default?" When you inflate a sector you change the odds via feedback loops.
The thing about the Valley is that they've kinda scorched the earth with the capital carpetbombing, negative profit margin style of tech development. So much so that's it's coming back to bite even them-- those IPOs didn't burn themselves out, but they're stuck in this prisoner's dilemma trap where they can't quit the juice.
Are redemptions (getting your money back) possible throughout the life of the fund? Various conditions on commitments? etc
Ten years ago the DJI was about 12k. Today it's 18k. That's not doubling every ten years. Over the long term upward trend it's a double since 1998...though if a person had had a pile of money to throw at the DJI in 2009, yes they could have doubled their money in seven years. In 2009, most people did not have a pile of money to throw at the Dow...or rather whatever pile they had was much smaller than it had been two years earlier.
AH seems to invest huge amounts in much later stage companies. The idea is that some of these companies would be public in the old days and all the growth is happening on the private side. (This is based on things @pmarca has said many times in many different forums).
One could argue that the relevant comparison would be very volatile tech stocks.
Comparing it with the few VC funds (the one VC fund?) that hit the great firms two funds in a row is not really fair.
Edit: To put it yet another way, the volatility of the returns should be lower so we should be happier with a lower expected return.
Seems fine and dandy to sprinkle 5,6,7 figure investments here and there if you have a lot of cash to play with, but those startups don't operate in a vacuum. They will need support from time to time, they will require work-hours from your firm that could be allocated elsewhere.
Of course there's no one-size-fits-all, but every startup investment will in some way or another cost more than the check you write.
It also can take a fund or two more to really tell. The strength of places like KPCB is their performance over time. One of the few asset classes where the best persist over long periods.
But that funding at later stages may have been happenstance rather than deliberate strategy.
For example, a16z looked at AirBnb during the Series A fundraising. But they decided to pass on it, partly because Marc Andreesen didn't believe AirBnb's trust model for strangers in personal homes would work. When a16z looked at AirBnb again during their Series B fundraising, they invested. Marc has been on record saying they regret missing the earlier Series A round because it would have made them a lot more money.
a16z also made a late 2010 investment in Facebook but some observers thought they did it for "logo shopping". In other words, observers said it wasn't a late investment timing on purpose -- it was because they were a new firm (2009) and they wanted to add immediate credibility to their portfolio.
It seems they do want to catch companies early if they can.[1] On the other hand, I remember Ben Horowitz saying they deliberately held back on an Oculus Rift and let another VC take the lead (the risk). They later invested in the subsequent round.
It doesn't seem like there's any rigid single strategy there with regards to timing.
[1] scan for their "Seed" and "Series A" investments: https://www.crunchbase.com/organization/andreessen-horowitz/...
Firstly, I think you should count the "majority" of their investments as where the majority of their money goes. If they had one fund with a billion dollars, and $400 million went into Uber and $400 million went into a Facebook, but $200 million went into 90 tiny companies, I would argue that they are 80% (800/1000) late stage and not 2.2% (2/90) late stage.
Secondly, what they call the round is kind of arbitrary. Consider that many (most? traditionally?) VC funds earmark around $5 million for all rounds in a company.
They may put in $100k pre-product, $1 million after market fit and so on.
AH put $25 million in Clinkle's "seed" round. Imagine how valuable Clinkle must have been at that point.
Nonetheless, I think this shows that they are making much larger, much later investments than the "traditional" VC, and for reasons that Marc has talked about in public.
Of course he wishes he had got into successful companies even earlier. Everyone wishes that. I wish I had got into AirBnB in the Series A. So do you, presumably.
He fully concedes he is not as good as Peter Thiel (a, who is?, and b, this is his example) at going for the really early stage company and prefers to go in later. Its just really hard to tell which of 1500 companies is going to make it big, but it is much easier to guess that most of 20 big companies are going to get bigger.
Unfortunately, I made it sound like MA's thoughts about Airbnb was a generic "invest earlier means more money" cliche. I intended to show how AirBnb contrasted with Oculus VR. They passed on the early rounds for those 2 companies for different reasons.
For AirBnb Series A, Andreesen didn't understand the value. It was a gap in knowledge/imagination about what AirBnb could be. It was not because of a "we're a late-stage not Series A investor so come back when others have already invested in you".
For Oculus Rift Series A, a16z got the value of it, but they weren't sure about it gaining traction while the company was trying to solve the motion sickness issues. They let the other VCs take on that risk and they knew ahead of time they'd pay more to get in on the next fundraising round.
Based on their actions and interviews, it's possible that AH's primary investment thesis is Series B or later but I'm not sure you can beat Sequoia and Benchmark with wait-&-see late-round investing at sky high valuations. Those other VCs hunt aggressively to get in on Series A. Part of the prestige for a VC firm is to be seen as a leader and not a follower.
I accept that they passed on the two different Series A rounds for two different reasons, although I am not sure what lesson I can draw from that.
In terms of your last comment, yes they absolutely cannot beat the returns of the early stage investors (whatever Series that may be), but presumably they're compensated by lower risk, which is the main point I was trying to make.
If you are a VC the only way to differentiate yourself is to take on risk that you perceive to be less risky than the herd does, and to build your portfolio on the basis of such decisions.
Since there is no reason to believe all VC firms share the same time horizon for realizing their investment returns, it does not make sense to compare firms on the basis of returns published this way.
A more sensible approach would be to remove the outliers (good and bad) from their portfolios and evaluate how well they picked on average.
Or, if you only care about highly successful outliers, the way to compare firms is to look at how much and how early they invested in the same unicorn.
Also, not what's better for founders.
You're better off with a %50 chance of being worth $200M after 7 years than a %1 chance of being worth $1B after 3.
VCs place many bets, you only get to place one.
At this point if I were to ever take VC again, I might take it from A16Z. They would be top of my list. All those "top tier" guys would have to give me terms I believe they are not inclined to give me.
Fortunately things are radically different than they were even 10 years ago, and VCs have a lot less power.
Unless you're building another Uber. Don't build another Uber. Build a github.
Any novel business that appears to have those characteristics is ripe for such a speculative investment, but most of the valuations are based on the assumption of massive growth.
As soon as the growth trajectory turns out to be less impressive, the valuation goes through the floor, and usually results in a loss for investors (even if the company can be sold).
But this is by design, since the investment was highly leveraged on the upside, it is also leveraged on the downside and the firm will often simply fail.
Doing a typical startup (less than two years from seed round to massive growth or failure) is a lot more like flipping a house than like starting a business with a proven business model.
This is why there is so much trendiness and so many me-too companies... They are like real estate developers who saw that McMansions sold for 2x investment a mile away and decide to rapidly build nearly identical ones hoping for the quick profit. The goal is entirely in the short term and the long term is irrelevant.
Google found a very powerful way to sell ads, and once it built the infrastructure to do so it was able to massively broaden its product offering and appear to be almost a modern conglomerate. But the fact remains that ad revenue is the vast majority of Google's income, and most of the rest of its businesses are (in comparison) failures that would never have continued to be funded by VC-style investors. Alphabet reflects the investors' realization of this and is a compromise resulting from Sergey and Larry having a lot more control than typical founders.
Github is interesting. I wish I could see its financials! I had hoped for a lot more in the product arena from Github, but who knows, maybe they still have most of the $100M.
It's hard to 3X a billion. That makes Sequoia and Benchmark even more impressive, but doesn't reflect badly on A16Z. Michael Jordan once came in 3rd in the MVP voting—does that diminish his legacy? http://www.basketball-reference.com/awards/awards_1993.html
It's a good reminder that press attention doesn't equal results, but A16Z still seems like they're a force to be reckoned with.
Also, comparing Sequioa's 50x return on WhatsApp to anything is going to look bad ;). The percentile data is more revealing and does suggest that the A16Z fund from 2010 is currently middle-of-the-road. Unfortunately, the article doesn't cite sources for this percentile data.
When you have a public market price reference it's pretty much irrelevant, but with the majority of the portfolio in non-listed assets, mark-to-market policies could have a large impact on your paper returns.
Personally I don't place much value in comparing short term returns as it applies to saying who's a better manager. The same thing happens with hedge funds. A firm can have a great year but the real test is how they perform over years or even decades. How many hedge funds can outperform someone like a Warren Buffet over the long term? Not many. In fact sadly many fail to even beat index funds. One great year makes a headline, consistent great years makes a great investor.
the only way to get your liquidity ponzi scheme funds frozen by regulators is to:
a) lose money
b) not know any regulators
If you got a) and b) covered, then you can start as many funds as you want, issue or rollover as many bonds as you want, dilute as much equity as you want
keep the gravy train rolling
However, it's still far from a done deal as each transaction has its own minuscule details, and in commercial property, e.g., one party might value such things as location, quantity/quality of parking spots, proximity to traffic flows, quality of neighbors, recently incurred maintenance, etc. differently from the other.
With that said, a 409a valuation firm (or potential acquirer) is likely to look at the peers, current and historic ones, to at least start at some ballpark figure.
Sequoia’s 2010 fund is up 5.5 times and, unlike other venture funds that are mostly sitting on paper gains
It's very hard to value equity when there are funky things (preferences, participation, etc) in the cap tables. Any given "valuation" is higher for some and lower for others, and in a hard to quantify way. And a "valuation" based on selling 3% of a company is very different than 50%. But... The values are non-zero. And the company needs to provide something that's better than no information to investors in the interim.
It's analogous to GAAP accounting. GAAP accrual based earnings are good, but until you see the cash, it's just a best guess.
Their LPs are likely smart enough to realize this.
damn....and had Instagram not sold to facebook it would probably be worth $1-1.5 billion