Andreessen: Beware Non-Silicon Valley Investors Bearing High Valuations
blogs.wsj.com
blogs.wsj.com
This is true in many other situations as well, and indeed I personally have been in the same situation. Often the nuances of some business are best understood by those competing for that business. And let's be honest, for most of us the nuances of the VC world are poorly understood outside of actual VC companies. Sure, the basics are understood, but as with any business the specialists know more than the generalist.
So let's hypothesize that Marc understands this nuance, and wants to alert people to the issue. Clearly the warning benefits him at the same time as benefiting those being warned. Does he then speak out, or keep quiet?
To frame the question in a general sense, in situations where you have a credibility problem, do you go ahead anyway, or keep quiet and let others take the fall? What would you do? As far as i can tell it's a no-win situation.
I was in a similar position last year, and chose to write the warning anyway. I disclosed the conflict of interest - even though, like in this case the connection was obvious. To those being warned. Predictably I got a fair bit of negative response, but I like to think, if nothing else, it helped people at least take a bit more time to evaluate the situation.(I got some positive responses as well.)
So hats off to Marc. He'll get pilloried here, and elsewhere, but maybe one day if I go looking for VC funding, this is one more tidbit of knowledge that I'll have, which I probably wouldn't get anywhere else unless I learned it the hard way.
Full disclosure: I have no connection to Marc or any other VC. I don't know what his motive is, suffice to say that it could be either, and assuming the worst is not necessarily valid.
Suppose someone working at a travel website writes a post about the problems with the existing travel industry. A large percentage of commenters will then pipe in with, "of course she'd say that, she works at a rival firm!"
But is that the causation? Suppose an "independent" person writes the same blog post. The reactions to the blogpost would have been different in that case, even if that person later goes on to start a travel firm.
In other words, is the causation:
1. start/work at travel firm -> try to encourage people to switch to them -> write blog post
2. dissatisfaction with travel firms -> write blog post -> decide to start competitor
(And of course there are many other possible causation chains.)
Yet most commenters seem to assume that (1) is not only the most likely option, but often the only possible explanation.
If you personally profit from something, then it becomes very hard not to fall victim to massive confirmation bias, where you want something to be true, and any evidence that supports it is viewed favorably while anything to the contrary is held to impossible standards.
The easiest person for you to fool is yourself.
Marc's "heads up and watch out" falls short in one key respect: it doesn't give any color. It doesn't let the newbie startup CEO understand what bed he might actually get stuck with before it's too late. It doesn't provide any detail about what to really look for or the types of terms and conditions that get discussed 'in more detail' when the offer and final paperwork start getting hashed out.
And from that perspective, it is a bit of a disservice to a newbie because if such a CEO starts to immediately take Marc's words at full value (and it's hard not to, given the legend that he is), that creates a negative bias and an air of skepticism if that newbie CEO is approached in the future by big money and overly large valuations.....
and that, would be a clear negative to the startups, and a clear positive to the VCs.
We're not talking about newbie CEOs here. The big-money "outsiders" are not coming in and wooing inexperienced entrepreneurs so that they can invest in their seed or Series A rounds. We're talking about CEOs of growth-stage companies. These are folks who, even if they're relatively young, have been running their companies for years and have the counsel of experienced advisers. The notion that they're haphazardly and naively choosing to negotiate exclusively with a single investor is laughable.
Andreessen Horowitz's latest $1.5 billion fund is big by venture capital standards. You can't manage a fund of that size by doing tons of small deals. My read on Marc's comments is that he's very concerned about players with bigger money using their leverage to push firms like his out of the type of deals that his firm needs.
In essence, he sees that bigger capital has the potential to disrupt his business in big bank take little bank fashion. For anyone who doesn't know what big bank take little bank is, I'm sure you can find the definition on Rap Genius. The irony.
After all if what he's saying here is not true, then he is a liar and the investors he's talking about know it.
"People in SV generally consider this unethical and abusive."
But this comment stood out to me. In my interpretation, this translates to Marc saying the civility and integrity of the benevolent overlords of Sili Valley are the true standard bearers of how to operate in the technology capital business. Further, anyone who doesn't follow that protocol is out of bounds.
Marc even calls out how the market will take care of this problem and that tech companies will need to do their own due diligence on investors. The implication: tech companies are obviously not smart enough to do that on their own, so I better let them know. Really...if any company taking on significant investment doesn't execute their own due diligence on their investors, well you get what you get.
Is this a suggestion that due diligence is a futile exercise?
If my company is taking hundreds of millions of dollars in investment, I will be damn sure proper due diligence is executed on all participants -- including Goldman, Stanley, etc. Because they are such high flyers, it should technically be easier to execute said due diligence.
Because otherwise this sounds like the sort of fault-finding, monday-morning-quarterback activity where the apparent goal is for the speaker to feel superior.
"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."
I have a relative who works inside one of these large institutions and he has advised me multiple times: if we cannot verify what they're saying, you don't accept their investment -- it's as simple as that. The onus is on the investor to present themselves, and then the responsibility of accepting that investor in the group lies with management/ownership/board as designated by the corporation. Basically, you accept it or you don't.
A complex environment simply doesn't absolve me of my duties to my board.
If his claim is true that non-Silicon-Valley investors are applying unethical leverage, why are the valuations still sky high?
This claim would make more sense if there were a bunch of companies taking non-SV investments at strangely low valuations. Or are there hidden unfavorable terms that Andreessen is hinting at? Is there any evidence of that? Exempt evidence I would assume the default position that this is advice calculated to reduce competition with Silicon Valley VCs.
It's a tactic to get the company into the 'no-shop' stage of a deal, where they've agreed (and probably signed legal paperwork) to say that they won't talk to other investors. Once in that stage, the investor is free to begin renegotiation of key terms. Valuation is rarely the only item on the table. Consider, board seats, liquidation prefs, change of control, etc. there are myriad ways that a company can end up (inadvertently) screwing itself.
i'm having some trouble believing the entire Andreessen rant. if companies get screwed during the no-shop period because major pre-agreed terms are broken, the company/founders are free to go to other investors. something doesn't add up, I wished Andreessen was a bit more explicit in his complaint.
The whole point of Andreessen's comment is that companies would have little choice. It doesn't follow that valuation, the biggest term, would be magically exempt from this renegotiation tactic.
No, it's really not. If someone offered me a sky-high valuation but demanded 15 board seats I would be pretty foolish to blindly accept. I'd have just given up control of the company. Or what about the specifics of any anti-dilution provisions?
> "The whole point of Andreessen's comment is that companies would have little choice. It doesn't follow that valuation, the biggest term, would be magically exempt from this renegotiation tactic."
If valuation is not the most important term to the investor, then it's it's not the one they have to play hardball with. It's possible that the companies are simply blinkered by the vanity around huge numbers and not paying attention to the other factors.
In any case, if I want to later on assume more control of the company I can offer a ridiculous (and unsupportable) valuation and then exploit other mechanisms via a subsequent down-round to attain a larger share for myself. Some people might call this unethical, others might call it business-as-usual.
One journalistic function is ingesting a tremendous amount of information, then filter it -- so people reading the WSJ's venture capital blog can bookmark it and read only articles that are relevant. A generation ago it might have been highlighting the best news stories in the trade press. Today it's subscribing to the Twitter feeds of dozens or hundreds of VCs (including Marc A.). Highlighting the best ones provides a valuable service.
Of course the HN-relevant question then becomes: can this be better done, or equally well done for less $$$, algorithmically. :)
Why 2024? I've already seen this happening for the last few years, where the established press takes original content/reporting/etc. from online sources (blogs/etc.) with scant attribution.
[1] for certain values of "love"
What he's getting at in (imho) a rather roundabout way is that deals with these other firms are likely to be 'non-standard' as compared to those with 'SV' firms. You don't have to go very far back to see that people can get caught by surprise in such arrangements. Just look at the Skype options scandal of a few years ago, which was a Private Equity deal (they just have a different view of 'normal' regarding options). I've no idea what hedge funds are doing by investing in companies but I'd be wary of the terms.
http://www.businessinsider.com/skype-scandal-silver-lake-201...
The lead sets the price/terms and has significant control over who else gets access...
Lure a startup into accepting a term sheet at a crazy high valuation and get them into a no-shop clause. Once they break off with other investors, renegotiate the terms on the term sheets to a lower valuation. Since you're in a no-shop clause, you have no leverage over the VC and you have 2 options: Accept the lower valuation because there are no competition or reject the term sheet and start over. I bet lot of companies go with option A.
In the valley this is unacceptable and I am sure if someone would do that thing, companies wouldn't deal with that VC.
a16z sets price on the key deals but they don't renegotiate the terms later on as a tactic. This is the _key_ difference.
Two I can think of off the top are Github and Rapgenius. There are more.
From publicly available sources it's very clear that one of the two companies you listed has many more investors than a16z.
If the endgame is great company, or a high long term valuation, going with the wrong short term financing just to get a higher sounding valuation is foolish.
my 2c
However, what has happened over the last several years to the credit of PG/YC [1], Naval/Nivi @AngelList/Venture Hacks et al is to create a much more transparent and founder friendly fundraising environment here in SV. With transparency comes accountability and reputations can quickly spread both for the good and bad.
The "culture" of fundraising in SV is one with more open communication of how investors behave. Word spreads quickly in the valley and kudos to Marc for raising the flag on what have most likely been firsthand experiences with such issues. Not many individual founders/companies are in positions to see broad market behavior over a broad data set like a16z portfolio companies.
So what's the downside of taking a "sky-high valuation" and then getting re-traded after you've told other, potentially better firms w/lower valuations, that you're going into exclusive negotiations? I see the options as follows: 1) non-SV investor holds their word, does confirmatory DD and company ends up executing a great deal at terms better than other firms or; 2) said investor comes back and re-trades any number of terms (valuation, control, preferences, board seats etc) and company feels stuck thereby having to take the now worse deal or; 3) investor re-trades and company walks. Result #1 is potentially great, #2 could be a pretty bad deal but in the end company has the capital, and #3 could be a killer - company is now damaged goods and has to come back to other firms, tail between the legs asking for another shot.
This happens all the time in the investment real estate world where I came from and I see a ton of parallels here. Oftentimes there is a full marketing process that ends in a best and final bidding process. A buyer is selected based on the terms/price/timing of their offer and they begin their DD process. Buyers that behave and honor the terms with only material changes coming due to material issues uncovered in DD earn great reputations and their offers are usually considered first from the seller's perspective. Buyers that go into contract and come back with ridiculous re-trades very quickly reach the bottom of the pack going forward on all future deals. So as a seller, you either take the now far inferior deal, or walk from the lesser deal and chance going back out to market as damaged goods. Not a good situation.
Again, sure there are some self-serving motives in Marc bringing this issue up, but as a founder of a company leading our fundraising, I certainly appreciate being aware of all the issues currently in the market. As fickle and at times irrational fundraising can be for startups, the more knowledge we can arm ourselves with the better.