Andreessen Horowitz, Dealmaker to the Stars of Silicon Valley
nytimes.com
nytimes.com
But at least 10 years from now once the current cycle has come to an end Andreessen can point to that one time he was on the record as warning about "risks" when really his M.O until then was to talk up valuations.
Also, the quote attributed to Andreeseen at the end was originally from Warren Buffet's 2001 letter to shareholders. "After all, you only find out who is swimming naked when the tide goes out." http://en.wikiquote.org/wiki/Warren_Buffett
This demonstrates a lack of understanding of venture returns. Actually Khosla, Andreessen, Benchmark and the rest of the top tier account for the vast majority of the outsize returns. The "average" VC you haven't heard of, and those are the ones who can't even get introduced to the startups that account for the majority of the return. The power law distribution for startup returns is widely acknowledged, and the top VC phenomenon is that power law at work.
"Adjusted for risk." Actually this particular part of what you say is particularly untrue. When people talk about risk, they also talk about reward. Typical public companies may only yield a few percentage points increase, or 2X at extreme best over a year, but startups can yield 100X to 1000X return. So even after adjusting for risk, VC at its best (given a: good deal flow and b: good ability to help / pick companies) absolutely can outperform the S&P500 / index funds. The asset class as a whole is terrible (understandably professional LPs have difficulty picking the right general partners to back) but the best VCs do just fine.
Professional VC's aren't throwing darts at a board. The best ones see great founders and great new businesses far in advance of the rest of Wall Street or mainstream business press.
Then you use that to contrast how a public company may only yield 2X at an extreme over a year.
First, VC investors are rarely looking at a one year horizon on a new investment, so I have no idea why you chose a year as a reference point. Why would you compare an elite outcome of 1000X in VC to a typical public company?
Second, just like the best VC investments, some of the best public companies have returned 100X and 1000X. Dell, Microsoft, Oracle, Cisco, Walmart, Berkshire Hathaway, AOL, and numerous others.
Berkshire is closing in on a 1,000X return. Walmart has produced a 1000X return.
Cisco pulled off a nearly 100X return in the first seven years as a public company (it took Facebook eight years to IPO, and Google six years).
Apple recently did it as well, with a 100X return since 2003. Las Vegas Sands managed an 85X return over five years recently.
The only valid hit against public companies like these, is the time frame it took.
This was one of the firms that lead the founder first philosophy, and is run (obviously) by well known entrepreneurs. They atrract top talent (founders) like the article says, and gain great positioning in rounds, and in the ecosystem.
> if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave.
The market typically delivers ~10% on average[0], while you are correct that their isn't a lot of transparency, AH almost certainly beats 10% annually. Another top VC/Angel is Chris Sacca. I have heard that his initial fund which was heavily in twitter, was single or double digit millions and is now worth over 1 billion dollars. So key firms do have outsize gains.
As to the MA tweet
> "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE."[1]
This is not about a bubble, but individual companies not focusing on business fundamentals. In a climate where raising money is easy, he is pointing out these companies grow without underlying businesses. The grow big enough to sell advertising/information is not sustainable, as everyone was made painfully aware of in the 90's and 00's. Vanity metrics and valuations mean nothing if you are not profitable (or even generating revenue), and it will be apparent if there is a funding freeze.
[0]http://quicktake.morningstar.com/index/IndexCharts.aspx?Symb... * This has the 10 year around 8.3
[1]http://www.businessinsider.com/marc-andreessen-on-startup-bu...
AH was started in July 2009, at the start of a bull market. Since that period, the S&P 500 has had an annualized return, with dividends reinvested, of 17.2%. http://dqydj.net/sp-500-return-calculator/ This is significantly better than AH which has much greater single-sector risk (early stage/small cap, Bay Area, technology companies with little to no earnings). And AH at least by many sources is a "best-of-the-best" VC, so woe to the less successful VC's.
Whether they are good at intangibles, such as training future CEO's, providing jobs to highly-networked individuals, and encouragement to founders, is less relevant from an investor's standpoint.
Are you saying a16z will make less than 17.2% per year in average returns on the years 2009-2015? Want to bet?
If so, why don't they publicize their annual returns?
The problem is you don't know which ones beforehand.
Chasing "unicorns" doesn't actually work out well because the failure rate is so high, but if you're optimizing for your own career, it makes sense because it creates an aura of social access to "have been in on" a brand-name company, and because people will cling to you in the hope of getting thrown an executive appointment.
If what you're saying has any connection to actual reality, how much do these executive positions cost?
Usually the explicit quid pro quo isn't needed because self-interest is enough to keep the parties in step. In that example, once the kid is given the job, the guy on the purchasing board has an obvious desire to buy at as high a price as possible, since it's not his money.
These are the sorts of issues that would be considered conflicts of interest, and require the decision-makers to recuse themselves, anywhere but Silicon Valley.
Could you describe more fully a case where a nepotistic hire was made at a company you have first- or second-hand knowledge of where the impetus for that hire was an outside investor? I have for-sure seen crappy and nepotistic hires at startups. That's a banal observation. What I haven't seen is quid-pro-quo.
Further: your claim wasn't simply that there are nepotistic hires (again, of course there are; banal claim) --- it's that the quid-pro-quo for those hires was commitments to subsequent mergers/acquisitions activities. That is an extraordinary claim and one I think you're unlikely to be able to back up, but, I mean, prove me wrong.
But I thought it was VC's that were funneling money and prestige to their children.
Holding all else equal, if future investors value the company at fair market value A16Z will have over-paid to get into the round.
If this is true then what is A16Z's angle? Do they believe that overpaying is a cost they are willing to incur to get the best deals and concentrate talent in their portfolio? Does this concentration of talent make up for a company's overvaluation? Ie: does a 100% overvaluation with A16Z lead to a greater than 100% company growth compared with other investors?
In that case by pumping up a companies valuation in a financing event they're able to win the deal and put a stake in the ground for any acquisition offers.
If the company is acquired for less than the last valuation they still get all their capital returned to them under the liquidation preference as well as a percentage of the proceeds.
Mr. Andreessen and his partners have invested so much
in so many start-ups that it would take a remarkable
string of successes to make the approach pay off. For
all their skill — the firm bought into the likes of
Airbnb, Instagram and Pinterest relatively early — their
track record suggests it’s unlikely. Already, they’ve
suffered a few impressive flameouts, including Fab, on
which they are likely to lose tens of millions of dollars.