Andreessen Horowitz and 'zero interest rate phenomena'
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All of VC is trying to make a product that looks attractive to public markets. VCs are in sales and public relations.
The most obvious signal of this is how they continually select a college dropout or 20-something as a “genius founder”. There are rare examples of this happening but a much more logical play is someone who has worked in their industry for 10+ years and made a lot of connections. The invention of the “dropout genius” was because public market investors like that story to mimic Gates and Zuckerberg. In reality 99% of 20 year old CEOs that are handed millions of dollars are fucking idiots and nightmares to work for, lacking any professional and managerial experience, plus the “anointed one” marking giving them unearned authority.
While I loved the free-money era as an entrepreneur, honestly the mal-investment is absurd and we need a cleansing of the charlatans in the tech industry. VCs are an area that needs to massively contract.
I agree the idealistic 20-somethings are important. I don't think they should be handed tens of millions of dollars and trotted out like show ponies.
The other 999 are doing free idea-invalidation.
And I mean, Wework is an ok business idea, the problem is the cult around the person (only to show it's not only a matter of age)
Just because you’re not in a place to start a business doesn’t mean other people your age aren’t. So don’t make universal and ageist comments about how 20-somethings are better at starting companies than 30-somethings.
There are more twentysomethings without families, able to burn the candle at both ends, and not take a salary while a vision comes together than thirtysomethings. That isn’t an ageist proposition because it doesn’t imply many people in their fifties don’t do it.
None of the above are necessary for a founder. But they’re selected for, explicitly and implicitly, which means a random pool of start-up founders will tend to bias young.
I have a child and is going to have another one this year. I have this crazy idea that is big if true but 99.9% it would fail. I would totally do it if I was without a family. This idea is VC type idea.
Now I am working on some idea that is 99% going to feed my family but it is boring as hell and no VC would look at it.
My idea is to create a prediction market where people bet on REAL world events under REAL name with FAKE money. All predictions are public and we can rank every user's prediction ability in each category by his ROI.
I have created a MVP where people bet on cryptos: https://rankvestor.com/. I wanted to start with finantial market.
Now I have to stop this project because I am moving my family to Japan because I don't believe in the future of China. I have to work for a Japan company to keep my visa. In my spare time, I work on a Japanese study app that gives me some money every month.
BTW, if anyone likes this idea, feel free to take it and implement it :)
In some cases people are wrong or even crazy, but fundamentally I don't meet many 20 somethings with both the conviction that they are right, the organization skills to do the logistics, and the wisdom to not jump at pointless things.
I certainly didn't do it right when I tried to start a company at 19.
VC provides capital and connections.
Young founders provide ideas and work.
VC can't / doesn't want to have ideas or do the work, but young founders can't access capital and connections.
To speak to up thread, most people who have been working in industry for 20+ years limit their aspirations to what they believe is possible, which is far shy of what's actually possible. Thus, it takes a young/dumb/crazy enough founder to even take the shot.
Furthermore, by scaling and making multiple bets, VC packages risk into more palatable ranges for investors.
We can point at and decry excesses and metastisized business models on both VC and founder sides (e.g. SoftBank Vision Fund and Theranos), but the underlying bargain is fair and effective.
(There's also the financial risk, which for me is easier to absorb now. At 19 I didn't care, at 30 something I did, and now I'm lucky enough to not have to care much).
Even monthlies have a value in the worst case scenario.
It seems a very specific Venn intersection to utilize technology to a high degree, but also to imagine and prepare for its worst case failure.
Maybe the NZ tech-prepper crowd?
The off-site backup storage was required by several of our largest customers due to the critical nature of our software.
The risk from not being able to recover your data because of something wrong with your process (like, you are not backing up all the data you need) dwarfs the risk from backblaze to lose your data
Of course, that risk may be entirely acceptable; it's all about risk mitigation and trade-offs, not perfect security.
The solution is to do both, or all three (or n), where #3 is another backup process. And to test the backups of all processes by trying to read or restore them (onto empty disks) regularly.
I.e., somewhere on a continuum between zero or minimal and the above, depending on how critical your business is.
Because Murphy's Law.
Edited to add:
And how critical your job is (to you).
Of course there is much more to the whole issue, like funds, PHBs, etc.
- Bildert.
Back then I would climb for a couple hours in the morning for fun and then work until 8pm or later. Get beers, go to bed, do it again. Every day, most weekends, most holidays. It didn’t feel hard because it’s what I was meant to be doing. So much fun.
Now I can’t string together 2 focused hours. I’d rather take the kids to the park, or have to take someone to the doctor, or a sport, or whatever. Even if I had to work a “regular” job, the idea that I would work any harder than absolutely necessary, at the expense of time with my family? Not a chance.
I’m not saying you must be 20s or 30s or whatever. You just must care more about the venture than other things.
(In my experience).
Most of them are driven by hype and market trends, leading them to overgeneralize and make inaccurate predictions.
They swayed by the latest buzz in the industry and invest in companies that may not have a sustainable business model.
I'm skeptical if someone understands steamrollers if they choose to stand in front of one.
Time, will tell.
I believe this has more to do with American fondness of exceptional individualism and American dream, as media likes these stories.
You forgot to include Steve Jobs in your examples. But were these guys not actual nightmares to work for? Apparently this is not a red flag at all.
Of course there are many examples of billionaires who founded companies in their 20s as well (Box, Dropbox, Airbnb, Stripe)… intuitively, I think there are a lot of factors (familial obligations being near the top, ahead of American “genius” bias) that tilt the scales towards younger founders.
As we were clearly made aware of in the last year, many unicorns of the last 5-10 years were little more than good marketing and a Tier 1 VC footing the bill.
And if you’re a VC, weighing by market share makes sense.
- They are willing to work long hours and sacrifice the life they mostly don't have yet for a 1% chance of success.
- They haven't figured out that the risk preference of someone diversified across 100 startups is incompatible with theirs, and they won't push back as much against moon-or-bust strategies.
- They have the highest fluid to crystalized intelligence ratios of their life, giving them an advantage competing in novel areas where there is no preexisting knowledge, like enterprise sales. ;)
They also can be more easily convinced their idea will contribute to a more utopian future, rather than the mundane reality of the bait, switch and get rich tactics of those they’re indebted to.
This. 100% this.
Most founders are utterly ferrets having seizures and unfathomably out of their depth. The VCs are populated by former founders at the long tail of the Peter Principle.
I've been following Flow news fairly closely, and it always sounds like tons of fluffy BS to me, same as the new-agey BS that permeated WeWork. If the best example Neumann can come up with about building a sense of "community" is that you get to fix your own toilet, can't wait to see this, and a16z's $350 million, crash and burn. I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.
> same as the new-agey BS that permeated WeWork.
The thing is, this worked great for WeWork. Neumann successfully hyped it up into a global brand. The company still exists. People still enjoy using it. Some people like new-agey community vibes apparently, why is that bad? Apple wouldn't be Apple without some Steve Jobs mystique to capture the popular imagination either. These are lifestyle brands.
You could just work from a crummy McDonalds or your bedroom, nobody really needs a coworking space. Vibes are actually worth something.
> I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.
I like how there are lots of stories on HN about founders who assume disproportionate risk getting completely screwed by investors and end up with nothing -- yet a guy who is a little bit more savvy is so easily painted as a villain. Ha.
He turned around $25bn in cash into a company worth about $4bn, how else would you describe this?
The greater fool theory seems to apply. Masayoshi knew all the numbers, he thought Neumann was a good hype man to unload WeWork unto less sophisticated investors -- when that didn't pan out he tried to make him the fall guy and ended up holding the hot potato.
Uber and WeWork are real companies, still around, providing actual services to actual customers. Both of their founders walked away billionaires, so what?
SoftBank might have to write down their imaginary valuations as the public markets didn't bite into their attempted flip.
The companies might survive long into the future as viable businesses with more realistic market caps.
Secondly, you know that phrase "don't break the law while breaking the law", Adam wasn't just building this massive ponzi, he was self-dealing left and right, buying artificial surf beaches, selling his own trade mark back to himself, getting wework to rent offices that he owned, getting Softbanks other entities to rent huge amounts of Wework space to massively juice the numbers in Japan.
The only reason WeWork was kind of acceptable is because he was mainly burning Saudi billionaire money, but make no mistake, the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
Sadly that is the entire premise of the Softbank Vision Fund and many others like it.
Masayoshi Son is now personally on the hook for about $5.1 billion on side deals he set up at SoftBank Group Corp.
..As SoftBank grew into a global investor, Son argued the company couldn’t keep talent unless executives were allowed to cut side deals that tied compensation to the company’s performance. That’s exposed him further to the current market downturn.
> the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
Is that so? When do you imagine Adam Neumann hatched this scheme? At the very conception of WeWork in 2010 when nobody would invest? Truly a supervillain.
Or perhaps four years later when WeWork was "the fastest-growing lessee of new office space in New York" and was on track to become "the fastest-growing lessee of new space in America." By which point everybody was calling him a genius visionary? I don't recall anybody complaining at that point that this company is doomed to fail or anything like that. It appeared to be on an upwards trajectory.
Perhaps he turned to the dark side when SoftBank showed up and demanded they grow the company even faster by throwing money at them? And what was Masayoshi's plan when he invested?
> and even having failed he walks away a billionaire.
What did he fail at specifically? Masayoshi tried to squeeze him out of his own company and Adam called his bluff. So Masayoshi got the press to drag him through the mud and trashed the valuation further in the process. Then covid happened. Had Masayoshi succeeded nothing would change except SoftBank owning a larger percentage. I don't see why you favor one party over the other.
My pension was never invested in any of this and neither was yours. This is as you noted, Saudis, Chinese, Koreans, and JPMorgan attempting to simply buy their way into what seemed at the time a very promising market with their overwhelming cash firepower.
Why you should feel sorry for them is beyond my comprehension.
Any company can grow very quickly if they give away dollars for fifty cents and have a shitload of dollars.
It's wild that you seem to be giving Neumann a free pass here. He was the founder and CEO of a company that lost 10s of billions of dollars and was eventually forced out for non-performance (and borderline fraudulent activity) so the adults could step in and salvage what was left of the company.
I don't feel sorry for his investors either. You are needlessly painting this situation as one side "good" one side "bad" when "all sides bad" is much more honest.
I recall quite a bit of skepticism at the value add of a middleman leasing and then subletting commercial office space, something with zero network benefits and no barrier to entry. Especially on HN, I would even go so far as to say it was widely expected to fail.
At running the god damn company. Honestly, are we going insane here? He took tens of billions of dollars and created a company that was worth maybe $5Bn. Yes! It grew incredibly quickly, it's amazing how many customers you can acquire and deals you can sign when you're overpaying for leases and renting out space at a loss. He created a terrible business that was burning through cash, desperately hoped he could dump it on unsuspecting pension funds and when he couldn't the whole thing blew up in his face. But not before lining his own pockets every step of the way. Even, once the company was going bankrupt, he insisted on a generous payout to walk away from the company he mismanaged into failure. He wasn't rewarded for success, he was paid out because he had controlling shares, and once again, he had those shares because he was running the business more as a scam than an ongoing concern.
* Uber is a valuable company, but I think it is safe to say it will never be profitable enough to justify an $82b valuation in 2019. Some day it will make FASBY profits purely from operations without having to sell a subsidiary that they built or invested in with the huge amount of capital they received.
WeWork received just over $22 billion in funding, and has a market cap of just over $1 billion.
Please tell me how these are in any way equivalent again.
I am not talking about WeWork going from a large valuation to a small one, where you might argue, not that value was destroyed (by WeWork management or whoever), but simply that the large valuation was erroneous, and the later, smaller valuation reflected the true value all along, and so no value was destroyed.
Rather, the actual money paid into the company by investors in cash, was much larger than the later valuation of the whole company.
If investors, including Son, paid WeWork large amounts of money, for good or bad reasons, it was always 100% within the CEO's control what that money was spent on. Neumann could have hoarded that money as a war chest, or could have spent it buying something valuable or building something which could be sold profitably. Instead it was wasted (much of it before Softbank's involvement). There is literally no way of blaming investors for this.
I can see how you might think that if it was some normal functioning tech company. As a matter of fact here it is simply not true. This was a real estate play and everybody involved who invested knew exactly what he is going to do with the money -- which is to expand further and faster -- in fact they demanded this and conditioned their investments on it.
No "war chest" was possible here, ha. All of these people though the same as with Uber: grow as quickly as possible even if it means bleeding money, corner the market, IPO as the winner, hope retail investors prop it up long enough for the company to start eeking out profits and pay down the accumulated debts.
From the founders perspective it was like taking money from a loan shark essentially. The only surprising thing about it all is that he made a deal with the devil knowing he was getting played and managed to end up with anything.
Decades of industry centered around killing other baby animals have shown this.
If anything, it's likely that the lack of a profit motive for "puppy-crushing" has shaped society's general distaste for "companion animal" abuse, while accepting other types of animal abuse as just a way of life.
Let's crush some puppies m'boy.
Them bills, they keep coming.
[1] https://nypost.com/2023/02/19/doctor-insurance-companies-wan...
The US medical system is so fucked it's almost hard to narrow it down to specific reasons: essentially it's at the nexus of the symptoms of virtually every crisis-of-capitalism that the US has allowed to fester over the last 70 years. Patents, education, insurance/financialization, employer-labor relations, federalism-induced complexity from state-level rulemaking (and racing to the bottom when that doesn't happen), racial bias to outcomes... I'm sure there's tons that I'm forgetting offhand.
Basically name a high-level problem/trend in american society and you can almost 100% certainly come up with a reasonable thesis for how that problem is making the american medical system worse.
similarly, name a group of powerful stakeholders and you can be sure that reform of the system will probably impact them negatively on a personal/financial level. Seniors? Investors? Doctors? Universities? etc etc.
to me it is without a doubt the single most politically-complex and personally-charged issue in the entire US system and that's really saying something.
I doubt that's the reason for high doctor wages. They will keep making a huge buck even if tuition is cut by 80% imo. The reason I'm saying this is that the market doesn't care how much debt you have from school: you can pay Harvard 240K to get an art degree, that's not going to make anyone pay you what doctors are earning. You can become unemployed with big debt as you graduate.
I think the startup scene is mostly a huge grift. Companies that don't make any sense being propped up by VC money until they find and exit (typically an IPO) and are left to crash and burn. I avoid working for startups like I avoid the plague.
But I like that the grift exists. They inject money into the industry, being indirectly responsible for my salary being much higher than I ever expected.
I hope the startup grift and the advertisement fueled maelstrom keeps going until it's time for me to retire, god bless them.
Objectively, Adam Neumann does not have the track record to support that kind of investment. He does not have a track record of building sustainable enterprises. In fact, there's not even evidence he's more capable than the median technology entrepreneur. a16z could probably generate equivalent returns throwing $10million at the next 35 entrepreneurs who pitch them.
It would only be irrational if Neumann had a track record of actually building sustainable businesses. But he couldn't even do it in a 0% interest rate environment!
This stayed in my head for a day. I finally have a response.
If you're salary is dependent on turning $1.00 into $0.20 as in the case for Adam Neumann and his ilk and those who fund them, then eventually your salary and skill and job is going to crash because it "will run out of other people's money". If your trade is taking in 1 dollar from a VC to acquire 20 cents of customer revenue, your trade is going to end. All the myth making and loose monetary policy in the world will merely delay that end.
Why so angry? I'm interested in the idea behind flow because it is nontraditional in the American building sense. If I understand the idea, I think providing community is a really good one. There is a lot of loneliness and we know that when seniors move into senior housing they love it. Most young adults love college dorms. So why not have that for everyone else? You do have to contrast this with the "projects" which also tried to develop community but failed I guess, maybe because economic opportunities were not included.
Is Flow based on the idea of a Kibbutz?
https://www.fastcompany.com/90847220/adam-neumann-a16z-flow-...
Maybe based on the 1980s Kibbutz Crisis:
> Investments made without economic justification: due to the ease of credit gain, the kibbutzim invested large sums of money in industry and agriculture, often when the investment did not have an economic justification, and often without sufficient examination of the investment in terms of financial risk management.
I joined in Poland and now use it when traveling around the USA.
It's great. I used to work at Microsoft and I loved that I could travel around the world and work from offices all over. That was awesome for creativity. Now our startup can do that, thanks to WeWork.
I don't know Adam Neumann's story. I do know my own though, and know that when you have success, watch your back, people will come with daggers.
I wouldn't judge someone who built something great, for making a billion dollars. You never know what kind of daggers in the back he took. I for one look forward to seeing what he builds next.
This is such a BS false equivalence. There are plenty of people who built really successful companies who are billionaires whom I greatly admire, e.g. Stripe's founders, Google's founders, etc. I was a huge fan of Musk before he went off the deep-end and became more interested in just being a grade A asshole, liar and bully. Neumann likes to wrap his bargain variety avarice and greed in "changing the world" bullshit, and not all founders do that. For example, Neumann's self-dealing with the "We" trademark took a special level of sociopathic hutzpah.
I'm also a client of WeWork, and I like its services. That still doesn't mean it's particularly difficult to build a company with a market cap of $1.10 billion when you are given a total funding of over $22 billion to start with. Neumann literally destroyed $20 billion in value, and for that incredible feat was given a billion dollar payday. I agree most of that blame goes to Softbank, but doesn't mean I can't have incredible distain for Neumann for conning his way the whole time.
Sad to see a name like A16Z reduced to this.
It really is.
These ICOs were essentially considered "free money". Mint a coin, put some power behind it, profit.
This isn't a business, it's a get rich quick scheme.
Finally, one of my favorite exhibits of the excesses of near-ZIRP are right here: https://web.archive.org/web/20221027180943/https://www.sequo... << glorifying SBF article on the Sequoia Cap site. This is the very definition of irrational exuberance.
blablabla.
but of course the truth is that it's not the entire industry, it's not just the Fed, that fucking disruptive book is bullshit (most disruptors end up losing out as incumbents adopt), and the making the world a better place gang has 100000 spreadsheets and infinite amount of malaria bednets, but all they managed to do so far is that everyone and their dog now only associates them with that fallen crypto kid.
a bit more importantly, these super amazing "returns" and asset bubbles and stock market to the moons and quarterly make it rain bonanzas can only continue as capital amortization doesn't start eating into it hard.
and by capital I mean the culmination of the last however many decades of actual community and infrastructure building, not the nice financial instruments.
yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds.
the question is what are we going to do with this? the signs point to slowed incremental progress and general incompetent cycles of fake it till you make it cooperation (on all levels, from individuals to don't be evil companies to countries) and xenophobic populist outbursts of untreated change anxiety, dotted with hints of hope of more of the better stuff that's out there, like mRNA vaccines and other biotech magic, small modular nuclear reactors powering walkable cities without burning dead plankton, against a backdrop of war, pandemics, crazy AI and apathy.
Isn't it also dependent on inflation? Higher inflation = higher bond yields
general price level increase accelerates (inflation overshoots the target) -> central banks act to cool the economy (they conduct open market operations to remove liquidity, increase various knobs like interest-paid-on-reserves, basically the opposite of "quantitative easing") -> this has a knock on effect on corporate and governmental bond auctions -> bond interest rates go up
but this is a "closed loop" because the end result is that "inflation creeps back down to/below target level", and then bond yields go back to where they were and it seems that's mostly a function of the appetite for safe assets.
of course this might all be irrelevant if central banks basically switch to "nominal GDP targeting"
and one more small but very interesting piece in this puzzle (the jargon is not important, the "bonds stay on the balance sheet, so they are inconvenient" part is): https://libertystreeteconomics.newyorkfed.org/2023/02/unders...
Its negative.
You can put massive amounts into TIPS
Being the responsible person at a company is some weird mix between being a painter, a father, a helmsman and the leader of a battalion/cult.
Investing in treasuries on the other hand is very depressing considering that it doesnt give you any authority or ability to call the shots in the organization you are investing in (except for voting of course, but everybody can do that)
In places which are up enough on the Maslow pyramid startups and sports teams will always get equity financing regardless of interest rates, because they aren’t just a business, it’s something people do to find purpose.
And actually the real reason for Fed lowering interest rates is to allow people to finance their dreams via debt in order to get the best of both worlds: cheap financing and not having to part ways with equity and not having to share the helm of the company with anybody else.
It’s an anomaly that all that resulted in the explosion of VC/PE. Mostly because both people and banks were scared AF by debt post 2008 even though with low rates it was the moment to be bold not scared. Those who weren’t financed their dream very cheaply and retained control of it.
DoorDash is nice, but restaurants delivered food before that too. Uber is nice, but it's barely better than the taxis it replaced - at least in my city. Airbnb is a good option, but if it were to disappear, I'll just do what I always did - get a hotel room.
Considering that it tooks tens of billions of dollars to create businesses that were at best "nice to have", I have to wonder what's "disruptive" about any of this stuff.
I have zero sympathy for this godawful exploitative company. If the world didn't see them with the rose-tinted tech shades, they would have the same reputation something like Nestle has - a greedy, reckless, and exploitative corporation.
where my girlfriend lives, in the suburbs, taxis don't exist, so uber/didi/cabify is the only option other than taking the bus (which doesn't run at night) or walking (which is dangerous, especially at night)
'disruptive' innovations are worse in important ways than the incumbents they challenge, but much cheaper; from the perspective of the consumer, this isn't true of rides from uber or lodging with airbnb, but from the perspective of the provider, this is extremely true of uber and airbnb, which are 'competing' with the taxi medallion mafia and the regulatory regime established to protect established hotel chains
getting a taxi medallion or getting licensed to open a hotel are enormously more expensive than signing up with uber or airbnb
Now that's in my home city. I cannot be the only one who got scammed by a taxi driver in an unfamiliar city when they took a deliberately circuitous route to the destination. Lesson learned: never tell the driver its your first time in <city>. If asked "is it your first time in <city>" tell them, "no, I come to <city> monthly for business".
I am not justifying Uber's sleazy behavior, both internally and with their poor vetting of drivers early on. But the taxi industry in the mid 2000's was just asking for disruption.
TBH Andreessen Horowitz has been the redest of flags for a long time, spouting all their nonsense about crypto and "web3".
It's important to note that most of the time when VCs do poorly they still find a way to return most of the original investment to the LP. The downside is not nearly as pronounced as the potential upside. So you can invest in several VC funds and if only one wins the math will still work out in your favor.
LPs know what VCs are. LPs have risk spreads and VC is (IIRC) the riskiest legal asset class. They expect to (on average) lose money on VC commitments, but the upside is much higher when a VC hits, meaning a single win can make up for a lot of losses. Picking VCs that win is one way LPs generate outsized returns on their assets.
Softbank followed the same strategy except they are in serious debt. I think at some point they could be forced into liquidation and it will drive the second leg down for the tech market.
I disagree. SoftBank isn’t raising new funds. It doesn’t have a functioning mouthpiece [1]. Andreessen is still taken seriously as an investor and thought leader, despite its abysmal record.
[1] https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe...
So a lot of the "dry powder" left in VC is not so dry.
I have a neighbor who co-founded a startup in a space I know fairly well. It is something of a niche space, with some publicly traded incumbents.
The startup is over 10 years old, and has now raised more capital than the entire market cap of the comparable publicly traded incumbent.
So presumably someone has their investments in this startup booked at 10-20x the valuation of the public incumbent?
They even managed to raise another round of money in the last 6 months, equal to something like 50% of the incumbent total market cap.
This explains the mania that used to be present on forums like this one about two years ago, billions (and tens of billions) of dollars were on the line if the people involved had managed to pull it off (i.e. to find even greater fouls).
Another relevant tweet from the same thread:
> a16z was early and all-in on crypto. Their first $300m crypto fund, invested at the start of the bubble, was reported to have generated eye-popping returns, which they parlayed into raising and investing $7B+ more in crypto funds in a giant double-or-nothing bet
Do they fire sell major chunks of companies to whomever buys it or how does that game theory out?
What impact does it have on the companies themselves?
Same thing that happened with FTX/FTT, they sublimate.
When a VC firm says they have a “$500M fund”, what that often means is they have $500M of funds at call. The LPs (investors in the fund) don’t immediately put all that money into a pot that sits there waiting to be deployed. They just agree to make it available as called. In previous downturns those commitments have suddenly become a lot less committed when the fund tries to call them in. So, again generally speaking, there is no pot of cash lying around to be returned. They only called it when it was needed to close a deal at which point it was immediately spent.
As for “assets under management”, you’d probably want to try and read some fine print in how it’s calculated. A fund might try a slight of hand to include the previous “committed” number to pad it and make it look larger than it is. If so, see previous point re returning that. The rest is going to be the current valuation of deployed capital. But that’s a questionable number even in the best of times, and we are not in the best of times. It’s mostly tied up in illiquid private companies and so what there is to return depends on if, when, and for how much they can exit those positions.
In theory there's no effect on the company until they come to raise more money. (I mean, their stocks are worth less, and that might make it harder to retain talent if their stock options are now worthless, but that's industry-wide at this point). Companies who have enough to make it to IPO are basically fine (although it's also not a great time to IPO). But raising money privately on a "down round" is very difficult (although again, if it's an industry-wide downturn that might change things) and commonly you see companies in that situation using tricks to juice their valuation (e.g. offering a high liquidation preference to the new investor so that their headline valuation stays high).
Let's take a $5B growth fund. Let's say over 7 years they deployed all $5B of that fund into 100 companies. When you say collapse what do you mean? Do you mean all 100 companies are worthless to acquirers? In what time range? In those 7 years, a16z would have earned 2% revenue ($100M) per year to cover operations. If there fund failed to produce ANY return, they just wouldn't get any 20% carry and their investors money would be completely be lost. For example Stanford's endowment fund would have a minor dent in it for those 7 years.
PE/VC funds rarely collapse. They usually fail to produce returns, people leave, and then they cease to raise their next fund.
The valuation on all their equity was speculation, it is not based on earnings.
The worst case scenario for a venture fund (not A16Z specific) is that their future funds would be smaller and as a result they would need to make fewer investments and perhaps reduce the firm's headcount. Existing companies are not very affected.
So as someone with knowledge about a particular area, and with people that need such knowledge (such as those that need training data or someone looking for something) you can be incentivized to provide it.
Of course in reality this is super hard to accomplish with bad actors abound but it would be nice.
Apple is on its third or fourth life depending on how you slice it. Microsoft is coming back strong. But Facebook and Netflix are getting lame and Amazon is turning into something other than an online market. Google has never had as profitable and revolutionary of a product as search depending on how you rate Android. I doubt Apple gets a fifth life or Microsoft a third.
Meanwhile, the rest of the economy continues to do OK even without "zero interest rates." And interest rates didn't trigger the tech stock crash in 2000 or the general recession in 2008.
I understand that they're trying to say "people will do anything to get a return." But isn't that always true? Maybe more people will park their money in bonds. But people will look for a return that beats inflation because most people don't borrow money directly from the fed and most of the commercial rates haven't gone up that much.
I dunno, these people are chronically full of shit.
A lower interest rate on bonds may mean LPs allocate more money to VC funds, but the bulk of A16Z’s fund is surely not people who will all pull out their money and put it into bonds if rates go up a bit.
Correct me if I’m wrong, but the only affect a rise in rates could have is to reduce the amount of funds raised going forward? Is that even significant for VC funds?
How does it do really well? By having a very profitable in-demand public IPO.
How do you get macroeconomically favorable in-demand IPOs? Lots of capital looking for alternative returns.
What creates willingness to consider alternative returns? Among other things, reductions in the risk-free return rate obtained by bonds.
High bond rates reduce the demand for alternative returns, which reduces the demand for IPO participation, which in turn affects VC returns.
Andreessen has been raising massive funds (because they can since investors were flush due to low interest rates) which need to write large cheques.
They aren’t doing traditional venture capital as much as late-stage growth equity. Since no quality company will sell half of itself to Andreessen, this almost necessitates writing a big cheque into a multibillion-dollar round at $30bn valuations, or medium-sized cheques into terrible ones. The former go public at $10bn, the latter go bust.
Not as large as previously. And critically, smaller than where they invested. Going public at $10bn when you bought for $30bn isn’t a good deal.
Additionally, higher risk-free rates of return mean that investors demand results _today_. If the risk-free rate is ~0%, the market is content to wait; capital today is about as valuable as capital ten years from now. But if it's, say, 6%, then investors need bigger returns and sooner from your VC funds to beat the market at large. But the cost of building the company hasn't changed, so this makes VCs have a harder time.
This study finds that low rates were correlated with less IPOs, not more: https://www.researchgate.net/publication/5184917_Interest_Ra...
Even A16Z lists a bunch reasons IPOs are declining (in a period of low rates), none of which seem related to bond rates: https://a16z.com/2017/06/19/ipos/
That is the expected result. Firms can take longer to pay off because the cost of capital is lower, and VCs are under less pressure to deliver. What you'd want to see research on is IPO returns accrued to investors.
I don't follow. The gains are realized when the company is acquired or goes public. If bond yields are 0%, the VC invests $9 and gets $10 after 10 years, the returns are $1. If bond yields are 5%, the VC returns are still $1. If they had instead invested in bonds, their return would have been $0.45. Even if bonds yield better returns, that doesn't change the VC's returns.
What is the variance on the VC return (and is $9 a realistic mean of the distribution to begin with?).
The risk free return is an opportunity cost. If I invest $10 and get back $11, the net is $1 regardless of whether bonds yielded 0% or 100%.
If bonds yield 100% p/a then an investment with even a decent potential payout in 10 years time will be seen as worthless.
But one that is likely to pay out a dividend tomorrow may not be.
That’s the whole premise behind discounted cashflow analysis: mechanistically taking into account the opportunity cost of the risk-free interest rate to derive a valuation.
The broader point is that the current need to provide higher returns than before is more acute for a company that isn’t going to produce big profits for 10 years because of all of the compounding over that time.
It's not like the other is really giving investment advice (where timing is important), but moreso saying that, directionally, this is where he thinks a16z's bets will end up.
It’s also completely useless, because everyone already knows everything ends.
Dates make stakes; without stakes, this prediction is nothing more than, “This to shall pass.”
-- low interest rates
-- favorable capital gains rates
And any ebb/flow to that could dry up what we take as granted about the circumstances that produce the VC, startup, tech landscape we have been accustomed to.
If the investments make less, the investors in the VCs get less. Unless there is a series of redemption clauses that trigger fire sales of illiquid investments, there wont be a big bang moment.
[0] its a might not a will happen because invention and adoption of science and technology have an external element that can't be "faked till it is actually made".
Previously all insulin was extracted from animals. The Genentech process brought its price down by 1000x and undoubtedly saved many lives.
We'll be back to zero and negative is coming folks.
This is what the stock market is betting, and being continuously disappointed, on. It’s a hell of a bet, and I think it’s dead wrong.
Yes, when rates are cut valuations go up. This is finance 101.
American stocks are rich because a recession and low rates are priced in. If that doesn’t happen, if rates go where the Fed forecasts, the market needs to drop.
You’re in good company, by the way. Prominent managers are long equities and quality credit [1] on the hypothesis that rate cuts will keep valuations buoyed. (It’s also why the curve is inverted [2].) This is the dominant financial debate du jour. The market (specifically: professional money managers) are fighting the Fed. (My belief is this is more tied to fees and AUM than a fundamental read on the economy.)
[1] https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b...
[2] https://www.bloomberg.com/news/articles/2023-02-09/treasury-...
I'm asking because I used to read the FT on and off for 15 years going on 20 now, but the last couple of years have been really dire in terms of their biases and their lack of impartiality (especially in the politics and the international sections). At the same time your links made me miss their finance pieces, which I agree most of the times might have looked very "dry" but for a person outside finance (like I am) they were illuminating nonetheless. I'd go back to reading the FT again just for those.
Most British coverage of American politics is abysmal. For international, the FT has biases, but they tend to get the facts straight. (Definitely Eurocentric.)
The market has been undershooting the whole time the fed has been raising rates. It’s a little strange frankly.
5% and 0% are already world apart given the last two decades.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
Or do you(and they) think a recession is coming, and that in turn will drive rates down?
It's hard to me to imagine it all, with inflation having been so bad the last two years. But I'm not versed enough I feel to propose any kind of argument either way.
The rates will come down at first because inflation has been beat. Then it will come down more when it becomes clear that the fed screwed up both ways and now has to try to fix the economy.
Then the consumer will stop buying things because prices are going the other way fast. AKA a deflationary bust which can be much worse than anything we have seen in our lifetimes.
It will be the single biggest fight ever of every central bank to stop the death spiral that shows up on the back of their forced recession in the name of fighting inflation.
They will go negative and QE much larger than pandemic.
What?
If you think these morons can't cause a bust much worse than 2008 then pray to god Siegel is wrong for once.
https://fred.stlouisfed.org/series/fedfunds
The latter half of the 90s was >5%.
The idea that inflation and unemployment move inversely and (broadly speaking) represent a policy trade-off is literally the first chapter of Macro 101. With all respect, I see it as very difficult to discuss economics on any serious level with someone who is not aware of this notion, or who believes the opposite is true (as opposed to someone who has a critique or a nuanced view of it).
1) Inflation (high, not the good kind of 2%) hurts the poor more than the rich https://www.dallasfed.org/research/economics/2023/0110#:~:te....
2) To tame high inflation central banks need to raise interest rates, thus creating unemployment and economic slowdown in general https://rsmus.com/insights/economics/how-high-must-unemploym.... That's also much worse for the poor than the rich (who can afford not to work a few years without being thrown to the streets)
But honestly, you're right, we are talking past each other here there is nothing to be gained.