Andreessen Horowitz Returns Slip, According to Internal Data
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For comparison: Founders Fund has an IRR of ~55%, at ~$1B AUM scale. It tends to invest in fewer companies -- with much higher bar and conviction -- and its portfolio has a much lower failure rate than competing funds (of course failure rate doesn't matter as much for VC returns, but it's still an interesting fact).
I have no connection to FF whatsoever, but have learned a lot from the way they invest and much prefer their model to the spray and pray style (YC, Ron Conway, A16Z, etc).
17/2,000 = 0.85%
Compare to i.e. Jason Calacanis who on his own has a hit rate of better than 1 in 20. Now assuming YC paid $100K per company and gets to keep a blended 1% of the $100B (is that too small?), they've put in about $200M in funding to get back
$100B*1% = $1B
to net roughly $800M in profit for their stakeholders. So they're a 5x fund. But that's really...not that good...(at least it's not world class).
But am I missing something? They've definitely gotten a lot better at picking companies during the Sam Altman era (by, IMO, funding deep tech companies that actually have the chance of 10,000xing), but it'll still take another 5-10 years to really prove that.
Now YC might argue that they're not purely a profit-driven fund. And that's true. But isn't it a bit worrying that after thousands of investments they haven't funded a single $100B+ company? YC has an enormous influence on the startup ecosystem. Is an institution with a 0.85% hit rate really sending us the right lessons?
Take all these together and you are looking at a much higher fund multiple than 5x. My estimate would be at least an order of magnitude higher.
In my opinion it's enormously unusual to find a product market where 100B in future profits are up for grabs and a testament to mans inventiveness that we are even having this discussion. In a competitive market I'd expect the chance of a unicorn to approach zero. And it doesn't! It's awesome and takes a whole lot of failure.
On the side of the investors I'd be in the boat thinking it's more of a lottery than a skill, but these funds seem to prove otherwise so while I wouldn't invest in them and caution my company to be careful, I hope my pension fund is in them, a little.
a 5x return on an _investment_ isn't that good but a 5x return on a _fund_ is very good.
FF's Bold bet: - Space X: Invest 10% of its fund in 2008. - Stemcentrx: Invest $300 million on Stemcentrx. AbbVie acquired Stemcentrx for up to $10.2 billion. Founders Fund owned about 16%.
> ...with much higher bar and conviction.
Agree. Here is a quote for it.
“The key to the strategy once we have conviction we are willing to invest a lot. So with Stemcentrx, over the multiple rounds of this company, we invested something like $300 million. It’s not enough to think something is going to be one of the most important companies on the planet you have to back it up. So, to me, venture capital is about having conviction and putting a lot of money behind it.” - Brian Singerman(GP of FF)
I created two theories[1] to explain the difference in investing perspectives between Marc Andreessen and Peter Thiel:
(a16z ≠ Andreessen, Founders Fund ≠ Thiel)
Run Faster vs. Jump Higher
Higher: Investing for Control
You can term Peter’s approach to entrepreneurial strategy: investing for control.
You achieve it by patiently building your business at the same time as ensuring that you will be insulated from future competition. It takes time and it takes investment dollars as resources. Put out some crappy minimum viable product and you lose some options to control because you have shown your hand to others. Instead, what you want to do is put out a complete product with a strategy to acquire the complementary resources to insulate it from future competition.
There is, however, another sort of monopoly — a path that gets you 100 percent of a real market. This is done by having the capabilities to beat all rivals on either quality or cost. To see how this arises consider a very structurally price-competitive market (in economics, Bertrand competition). Now suppose that you develop an innovation that allows having lower marginal costs than everyone else. In this situation, you will be able to capture 100 percent of the market and so you will be a technical monopoly.
Faster: Focusing on finding the timing
You can term Marc’s approach to entrepreneurial strategy: focusing on execution(finding the timing).
It is not so obvious that one path to monopoly is more profitable than the other. If you focus on execution you can get to market quicker and with fewer resources. You can learn as you go and actually invest for the capabilities that will give you a competitive advantage in the future. In other words, while it takes on-going work — no resting on your monopoly laurels here — you can still ‘own’ a market. The difference is that your pricing is constrained by potential competition from other firms.
Finding the timing is the most important part of the execution. You need to execute your idea fast and good enough within the critical window to succeed. Most importantly, you may need to survive long enough to find the right window.
[1] Marc Andreessen vs. Peter Thiel https://allenleein.github.io/games/1930/01/02/narratives.htm...
Not only they will copy your product, they would also offer it for free.
Besides, in the game of creation, I believe the outperformers are startups, not incumbents.
If you are interested, I wrote an article about this:
The Odds of Creating Your Own Game (https://allenleein.github.io/games/1930/01/01/avoid-competit...)
Except an $100M fund isn't $100M instantly deployed. The investors are putting probably $20M/yr into it via capital calls. That makes a huge difference in IRR.
This isn't to defend the particular investments or performance of any firm, but it does seem like the reporting is quite poor. Even taking the time to compute a "what if each year you invested 1/5th into the S&P 500" would be a marked improvement. But you definitely don't get to say "The 2010 Andreessen Horowitz fund performed slightly better than investments made in the S&P 500 in the same year" (as the article does).
In any case, the $X in S&P 500 at t=0 versus the IRR of a venture fund is not an apples-to-apples comparison. There are many ways to meet your capital calls, and I suspect that sophisticated investors aren’t keeping the cash in their checking account waiting for an email.
If I have a lump of cash I need to deploy, I can buy lump sum SPX at t=0. I can't call a VC and say "here's X money, invest it all immediately."
The fairest comparison probably would be lump sum SPX against a blend of VC IRR and money market, converted from one to the other at a typical capital call rate, but as the number of variables increases so do the number of assumptions, and given the low returns on money market funds I don't see how the extra complexity adds much to the story.
Am I missing something?
If you've got 50% committed, then you need to do even more careful cashflow planning.
This is fairly little known, but large fund managers like A16z have access to "capital call lines of credit," provided by specialty lending arms of banks. These are loans secured by the commitments from highly-creditworthy institutional investors that allow the fund manager to fund expenses and investments by drawing down on the LOC instead of making a capital call. This allows the fund manager to push out the IRR clock even longer, and effectively levers their returns.
A more effective comparison might take into account both your comment regarding deployment period, and also the effect of investing on margin with the CCLOC.
Edit: an article on the phenomenon and how it is a bit tilted towards the fund manager: https://www.pionline.com/article/20180402/PRINT/180409992/ri...
For example, as a hedge fund, I got 5%, and the s&p did 13%. Howver my stddev is 0.1% while the s&p is 20%.
10.8% gross for A16Z
14.5% for S&P 500.
Calculation: https://imgur.com/a/jeFN8fL
That's why diversification is important
For large institutional LP's like pension funds, endowments, charities, etc, they need steady smooth returns that they can draw upon year after year to fund their beneficiaries. In particular a down year really hurts them since they will have to draw down on their principal. This is a very different risk calculus to an individual saving for retirement who can stomach 30-40 years of stock market volatility with a good probability of having enough money at the end of their career.
So rather than chucking the bulk of their fund in to the asset with the highest expected returns as an individual might, these institutional investors buy a big basket of very different return streams (i.e. as uncorrelated as possible) to smooth out the bumps in each one.
Except the 2011 fund includes stakes in Airbnb and Stripe, two massive companies that have yet to go public.
So, sure, at the moment the returns aren’t awe inspiring. But give I can’t imagine anyone at AH is losing sleep over the long-term success of that fund.
Looking at the SEC filing for Pinterest, you can see this is the case for a16z. Fund III and Parallel Fund III invested in the same rounds, always at the same proportion:
https://www.sec.gov/Archives/edgar/data/1503674/000114420419...
What's not clear given this, is why the parallel fund has much better returns. It may have to do with how the fees are structured.
I'd guess the problem is the opposite. Too much money into startups that fail.
VC is hard now because there's so much money chasing startups. The valuations they're getting are absurd. When you pay twice as much, your hit gives you have the return and your failure twice the loss. VC has been a pretty poor investment historically, and the high valuations now are really hurting.
Note that this data is from preqin and doesn't include all funds, just those that self report or have LPs who publish returns of funds they invested in
Anyone may not be who you think it is and their needs are likely different than the typical retail investor.
Distribution of returns. Longitudinal volatility is a (good) proxy for this.
The index will pay you beta, which is the market return - no more, no less. If you build a portfolio where you combine an investment in the index fund with other, different investments, you can build many different portfolios which all have different risk profiles. This is useful, as people have different needs.
For example, if you're happy for your money to be locked away for a long period of time (say you're running a university endowment fund), you may be better suited to these longer term, illiquid type of in investments.