
Andreessen: Beware Non-Silicon Valley Investors Bearing High Valuations - goronbjorn
http://blogs.wsj.com/venturecapital/2014/04/08/andreessen-beware-non-silicon-valley-investors-bearing-high-valuations/
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bruce511
The problem Marc has is that he is in a position to better understand a VC
issue, but then has less credibility if reporting on it comes from him.

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.

~~~
apu
Well said. More generally, it is often difficult to disentangle someone's
motives & beliefs (and therefore the things they say) from their occupation.
After all, the more deeply you believe in something, the more likely it is you
will try to make it happen, the limit of which is making it your primary
career.

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.

~~~
brazzy
The problem is that the two possible causations can and very often are
intertwined.

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.

~~~
ritchiea
Let's be clear here. He's not saying "do this, it's in your benefit." That
would be cause for skepticism because Mark is a VC in competition with other
VCs. What he's saying here is that some firms engage in a particular type of
unethical behavior. This is reporting on an industry trend. It's even a
falsifiable claim despite the fact that we are tremendously unlikely to have
access to the information that would confirm or refute his claims.

------
jroseattle
Overall, I have no problem with Marc's suggestions from a credibility/benefit
POV, and I don't think he's making those comments to further any strategic
position for himself.

"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.

~~~
tankenmate
Sure, but how do you do effective due diligence on the likes of Goldman Sachs,
Morgan Stanley, et alia? They have so many deal makers, partners and deals
going that it can be nigh on impossible to get a grapple on how that affects
the term sheets that _you_ received. My gut tells me you should deal with
companies that make most of their money from the finance market you are
getting your capital from, are of a similar relative size in their market as
you are to yours, and if possible have a similar head count (which is almost
impossible as a start up); these are the rules I tend to make when hitching my
horse to someone else's service wagon, be it finance, legal, comms etc.
Obviously it is much harder to meet these goals as a small business.

~~~
jroseattle
> how do you do effective due diligence on the likes of Goldman Sachs, Morgan
> Stanley...

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.

~~~
wpietri
Maybe you can tell us a story about how you've applied your incredibly due
diligence powers against an investor who negotiates more deals in a month than
you'll do in a lifetime and come out on top?

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."

~~~
jroseattle
Hmm, sorry I cannot provide you any stories of my due diligence powers. I can
only speak to the fact that I know my existing fiduciary duties don't make
this an optional task.

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.

------
abalone
Rule #1: Beware _any_ VC bearing advice on how to negotiate with VCs.

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.

~~~
amirmc
> _"... why are the valuations still sky high?"_

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.

~~~
abalone
Sure, but valuation is probably the biggest one. Why aren't we seeing lower
valued companies then with non-SV investors?

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.

~~~
amirmc
> _" Sure, but valuation is probably the biggest one."_

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.

------
jval
2024: a post-industrial dystopia where the global economy runs on a
cryptocurrency called 'Bitcoin', people wear computers on their faces and the
Wall Street Journal has been reduced to reprinting tweets as news.

~~~
apu
_the Wall Street Journal has been reduced to reprinting tweets as news_

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.

~~~
vidarh
I particularly "love" [1] articles where they take screenshots of a bunch of
tweets, and present them with interspersed commentary, rather than actually
writing a coherent narrative. Guess it makes it easier to recruit
"journalists" when you don't need to worry about whether most of them finished
high-school.

[1] for certain values of "love"

~~~
mjcohen
I often enjoy these kind of articles, especially when the interpolated
comments give me information and ways to look at things I did not previously
have.

------
amirmc
For those claiming that Marc is acting in his own self interest, well of
course he is. You should also bear in mind that he's advising _his own
portfolio_ to be highly skeptical of such deals.

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...](http://www.businessinsider.com/skype-scandal-silver-lake-2011-6)

------
dmk23
Translation: A16Z does not like competition doing to them what they've been
doing to older VC firms

~~~
spamizbad
Really? I'm not seeing too many companies in A16Z's portfolio where they're
the sole investor.

~~~
dmk23
That's not the point, A16Z is the lead on their key deals.

The lead sets the price/terms and has significant control over who else gets
access...

~~~
adambenayoun
pmarca only highlighted a practice that he thinks is unethical.

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.

------
blazespin
It was all sound advice up until he said non silicon Valley. That positively
dripped of prejudice. There are lots of terrible SV VC. Note I am a massive
pmarca fan boy.

------
higherpurpose
Beware Silicon Valley investors who will invest in your company a lot of money
initially, and then force your hand to sell to the companies where they are
board members.

------
7Figures2Commas
Breaking news: big fish in smaller pool worried about arrival of bigger fish
from larger pool. Details at 10.

------
mathattack
I have heard anecdotal stories of very bad post-investment behavior from non-
traditional investors. My impression is that mainstream tech investors assume
they will all see each other again. There are some challenges with this, but
is solves the prisoner's dilemma. They won't overtly screw their investees, or
word will get out. This isn't the case with some of the other sharks throwing
money around. I have heard horror stories of shakedowns based on obscure
clauses inserted into term sheets by PE investors. I have heard stories of
these investors abusing the founders as they take full control of the
companies, because it is in their legal right.

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.

------
trhway
disruption of SV VC. Heard from other sources about "old" out-of-state money
frequent visits to SV lately. They have and talking scale, in all senses.
Good. Would fuel next wave of the boom and gives a chance to SV to not become
a final destination for squeaky clean Russian money.

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ams6110
With general investment firms like T. Rowe Price, BlackRock, Morgan Stanley,
doing SV venture deals, is that a sign of a bubble in tech valuations?
Typically by the time "main street" investors get interested, the growth
potential is all but tapped out. Or so I've heard.

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kyleblarson
Are non Silicon Valley dollars less green?

------
foobarqux
Are there any actual examples of this happening? The article gives examples of
investments by PE firms but not predatory behavior.

------
perlpimp
I thought reason to get investors is two way street and money is only one of
the reasons to get funding from an investor. Getting funding might mean
opening a door to new relationships and contacts that would otherwise be
unavailable to a company. So yes getting lots of money from a first that
mostly invests in some rather different area might just not lead to lucrative
deals, life changing contacts one might get if the VC firm might have for the
company otherwise.

my 2c

------
adamhooper
This certainly won't win Marc any friends in the "non-SV" private equity shops
and will certainly cause many to question his motives.

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.

[1] - [http://ycombinator.com/hdp.html](http://ycombinator.com/hdp.html)

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bedhead
Andreessen is basically just a troll, I'm tired of him.

