
Weary of ‘Fruit Fly’ Consumer Startups, Andreessen Horowitz Raises Series A Bar - _pius
http://blogs.wsj.com/venturecapital/2013/10/10/weary-of-fruit-fly-consumer-startups-andreessen-horowitz-raises-series-a-bar/
======
gfodor
I know it's been true for a while, but "pivot" is really gone from "alter part
of the business while retaining certain aspects of it and the company's core
strengths" to "pitch an idea in the trash and start over."

Properly pivoting an idea probably should not be too disruptive to investors'
investment thesis, since the pivot is happening because a new, clearly better
route has been uncovered in the process of the first idea that the team can
leverage their past efforts in executing on some tangible way. If you're
really going to just try a completely new idea from scratch, it would make
sense to refinance the business and give investors a chance to take their
money out, but that's hard to legally structure obviously and would take too
much time.

So I get the sense that AZ is saying a lot of startups aren't pivoting really
but just pitching and starting over too often if they fail to get initial
traction quickly enough. This combined with the illiquid nature of startup
investments forces them to not really know what they are investing in and be
stuck with it once it materializes.

People have started to forget that startups generally take a long time and a
lot of work to build momentum. It's easier to just pitch what you have and
jump into the next shiny thing. Particularly when you have ridiculously long
runways due to low costs and absurd valuations. I blame the ridiculous
liquidity in deals right now combined with the "fail fast" culture.

~~~
derefr
If the value in most startups -- as evidenced by the practice of acquihiring
-- is really just the team, then a pivot would be anything which changes the
business while keeping said team.

~~~
Cookingboy
The value of most FAILED startup can be salvaged from the team, you will never
see a startup with a valuable/popular product gets acquit-hired. Sure, the
team has value as engineers, but a company that keeps failing with their
products and keeps "pivoting" puts doubt on the value of their founders as
entrepreneurs (they may still be brilliant engineers). VCs like to invest in
entrepreneurs (especially entrepreneurs who are also engineers). So the
quality a VC looks for from a team is drastically different than the quality a
bigger company looks for when they acquihire a team.

~~~
dools
Since most startups fail wouldn't this make the parent's comment true?

~~~
001sky
Not if you go by investment returns...

------
npalli
It is interesting that a16z is making a public announcement following the
angelist syndicates announcement a few days back. The initial sentiment with
the angellist event was that it will drive down VC fees, angels and founders
will be king and take more control etc. However, a16z and by proxy (I suppose)
silicon valley VC community is making a public announcement that they will not
be funding series A anymore. It could be lead to some interesting outcomes.

1\. Via Angellist syndicates it will be easier to raise up to $1 Million
(maybe half). So you will have a bunch of companies that get funded via this
super series/seed/angel model.

2\. Then they will hit a roadblock, they will not get any $10-$20 Million to
fund growth or get a true product/market fit.

3\. The vast majority of the companies from step 1. will be wiped out because
even if they have a hint of product/market fit, they will not get funding.

4\. The tiny minority from step 1. that can get funding for Series B. in the
range of $50Million or more will wipe out all other startup in the category
and capture all the gains. This in turn means a16z and the likes will be able
to extract a lot more stake out of the angels and the founders.

Net net, won’t be surprising if angellist and other crowd funders end up
losers in the process and returns go to a16z and their compatriot VC’s.

Love VC double speak in the article. You know how politicians talk, when they
have to pass some unpopular law they invoke the common man and the small
business owner. Scott Weiss from a16z is a standup guy. Always fighting for
the engineer founder. Fucking those MBA types since the beginning. Please
elect him to be your VC. If AirBnB showed up at a16z do you think he would
turn them down (non-engineering, MBA type company). Yeah, didn’t think so :-)

~~~
not_that_noob
If you haven't found market fit on $5M, which you can raise on AL, you need to
fold, not try to raise $10-$20M. No one will give you that kind of money
without mega traction.

~~~
npalli
I don't think your numbers will work out. It is going to be very difficult to
raise $5M on AL. Here is an example of someone who raised $250K. He needed 35
backers[1]. This is during the heady starting days. At an average investment
of $10K to $20K you will need 500 investors to get to $5M. How will this work
with so many investors? My guess is you will get to $1Million, tops and stop.
I doubt you can show market fit with $1Million.

[1][http://blogs.wsj.com/digits/2013/10/09/how-one-angellist-
syn...](http://blogs.wsj.com/digits/2013/10/09/how-one-angellist-syndicate-
raised-250000-in-three-days/)

~~~
not_that_noob
The numbers are already working.

Crave just raised $2.5M on AL - see
[http://blogs.wsj.com/venturecapital/2013/09/19/50-shades-
of-...](http://blogs.wsj.com/venturecapital/2013/09/19/50-shades-of-angel-
funding-crave-innovations-raises-2-4m-for-luxury-sex-toys/)

Crave is showing lots of fit - market or otherwise.

With AL syndicates, getting to $5M for a hot startup on AL will be a cake
walk. All you need is for a few of the top syndicators to get excited about
you and you're at serious money. In fact, some of them are actively
contemplating that possibility: see
[http://www.linkedin.com/today/post/article/20130928204536-24...](http://www.linkedin.com/today/post/article/20130928204536-24171-the-
end-of-venture-capital-sort-of)

------
asanwal
This shift is yesterday's news. Given their size, brand and PR, however, when
Andreesen Horowitz does it, they get an article in the WSJ.

The reality is that tons of VCs have already migrated away from consumer
startups.[1][2]

Data to support above

[1] 84% of 2013's largest exits in tech have been to enterprise companies -
[http://www.cbinsights.com/blog/trends/enterprise-tech-
consum...](http://www.cbinsights.com/blog/trends/enterprise-tech-consumer-
exit)

[2] 70% of 2013's largest tech financings have been to enterprise -
[http://www.cbinsights.com/blog/trends/venture-capital-
enterp...](http://www.cbinsights.com/blog/trends/venture-capital-enterprise-
consumer)

Disclaimer: I'm a co-founder of CB Insights - the firm that put out this
research.

~~~
sillysaurus2
Looking at 2013 exits (or financings) is missing the mark. VC is a game of
1000x returns. And those returns have come from companies like FB, Google,
etc. Most of the value of YC's portfolio come from Dropbox and Airbnb. All of
these companies are decidedly consumer companies.

~~~
_lex
It's likely that Dropbox probably makes way, way more money from enterprise
than from it's consumer business.

~~~
ivv
Google and FB, too, make most of their money from enterprise customers.

~~~
CaveTech
This is only true if you blindly ignore the fact that enterprise customers are
willing to give them money _because_ of their consumer backing. If consumers
backed away from FB and Google, their enterprise customers would be following
them out the door. Clearly this makes them consumer oriented businesses.

------
hype7
In which an MBA dismisses MBAs. And pivots are dismissed by a fund that is
pivoting.

------
rflrob
Speaking as a practicing fruit fly geneticist, the metaphor of a "fruit fly
experiment" is lost on me... anyone care to enlighten me?

~~~
wmf
Fruit flies grow very quickly and don't live very long.

~~~
briantakita
The corollary is Fruit fly populations mutate at a fast rate.

------
not_that_noob
Basically, they can't compete at the A level now against Angelist. If you're a
fundable startup, would you take $5M from any VC (even someone as stand-up as
AH) with control strings attached or would you rather raise on Angelist and
stay in control?

So the real funding opportunity for AH is at the B round, where as Scott says,
they will go in hard.

Makes total sense.

~~~
pmarca
That's not why :-).

------
outside1234
This is not something they are choosing - it is a market reality. Its now
possible to start a company and essentially get to a B round without taking
investment because cloud services make it so inexpensive that founders really
don't need VCs any longer.

~~~
wensing
Cloud services have gotten cheaper but talented hires have gotten more
expensive, and the latter is always the largest expense in scaling. And no,
you can't scale a company and keep head count ultra tiny, there's just too
much to do.

------
3pt14159
To me this is essentially admitting that Andreesen Horowitz is loosing the
ability to identify impactful startups. That is fine, its harder to do at
scale, but nothing is different now than 5 years ago. We have lots of people
doing experiments, some hit early success, some pivot. Once you get product
market fit, you raise that B/C/IPO on the back of the growth you've been able
to afford thanks to your raises and revenue.

Just as Berkshire Hathaway had to change their investment strategy when they
grew very large, it is fine for AH to do the same, but I don't believe for a
second that things are hugely different in 2013.

~~~
aaronbrethorst

        Andreesen Horowitz is loosing the
        ability to identify impactful startups
    

Pet peeve: it's losing, not "loosing".

I don't know if _anyone_ can properly guess if a consumer startup is going to
get traction until it does, especially in the mobile space. That said, they
did manage to get a 312x return on their seed investment in Instagram (which
they declined to invest in a second time as explained here:
[http://bhorowitz.com/2012/04/22/instagram/](http://bhorowitz.com/2012/04/22/instagram/))

A-H offers seed investments to YC companies in order to get a foot in the door
with the small fraction who will succeed. Offering blanket seed investments
confirms that they really don't have any idea at first either. There's nothing
wrong with that, it's just the nature of the beast.
([http://venturebeat.com/2011/10/14/andreessen-horowitz-to-
giv...](http://venturebeat.com/2011/10/14/andreessen-horowitz-to-give-50k-to-
all-y-combinator-startups-through-start-fund/))

~~~
3pt14159
This will probably come off as dickish, but that is not my intention.

No where in your comment did you outline where my reasoning is wrong. Losing
vs Loosing. Instagram doesn't address why they are dropping series A
investments. 300x growth on nothing is still nothing.

As for seed investments into YC companies, who cares? If they are getting out
of the seed and series A game, I assume that that extends to everything else.

The fundamental point is that the further you move down the investment line
the less you are likely to be able to identify revenue before it happens.

~~~
aaronbrethorst
I don't take it as being dickish. When did they ever have that golden touch
you refer to?

None of the exits, except Instagram, listed on Wikipedia were invested in at a
seed or A stage.
[http://en.m.wikipedia.org/wiki/Andreessen_Horowitz](http://en.m.wikipedia.org/wiki/Andreessen_Horowitz)

~~~
mattschmulen
alternative perspective VC SV startup is at a tipping point and "smart money"
is being more cautious ( conservative ) as the market swings down .

------
codex
Has the number of tiny trivial startups increased lately? Judging from demo
days, I would say yes. The startup is the the new garage band. If you like
what you hear, we're selling CDs after the show.

~~~
outside1234
Is that bad though? We've democratized starting a company. Not everyone needs
to be a $1B exit or even a $10M exit.

~~~
debacle
Yes and no. The signal/noise ratio is certainly lower, but there is also more
signal overall, if you can sift through the noise.

------
pedalpete
I suspect this is more of a PR move about their focus than anything else.
We'll have to see how it plays out, but as a16z grows, I'm sure a ton of
Series A deals are trying to get an intro, this leads to overhead and a mass
of companies that a16z doesn't feel are a good fit for the exponential returns
they are looking to get. Get rid of those companies by saying we don't do
series A. But they'll still get deal flow through their contacts, and I'm sure
if an amazing Series A opportunity comes through, they'll jump on it. Nothing
here is stopping them from investing, they're just saying "if you're looking
for Series A, don't come to us".

My question is how does investing in YC companies at seed stage, but then
blanket refusing to invest in those companies Series A deals reflect on those
companies? Or is this another reason to state loudly that they don't do Series
A deals? That way it doesn't reflect badly on the early stage companies that
existing investors aren't re-investing. Then, if they do decide to invest in a
YC company series A, it's a positive response, rather than the expected.

~~~
pmarca
I think Scott's interview is being overinterpreted. We aren't blanket refusing
to do Series A investments -- in fact, we are working on multiple Series A
investments right now (both consumer and enterprise). Scott was describing our
framework for thinking about consumer vs enterprise in the current
environment, not laying down the law on what we will and won't do.

------
jamie
Interesting when read right after this from another z16z partner:
[http://bhorowitz.com/2013/10/08/cash-flow-and-
destiny/](http://bhorowitz.com/2013/10/08/cash-flow-and-destiny/)

------
brandonb
At what level of traction would you recommend entrepreneurs start pitching for
a consumer series A?

If an app has, say, one million (non-transactional) users, is that
interesting? 100k?

One of the hardest things I found with fundraising was calibrating
expectations for each stage. My last startup was enterprise, and there were
investors who told us we needed one hundred customers to raise a series A and
investors who told us two enthusiastic customers were enough. Nowadays, the
expectations for enterprise have gotten clearer, but in consumer there's new
ambiguity since you hear people say things like "10m users is the new 1m
users."

~~~
pmarca
I think it's mostly situational depending on the kind of business.

For the classic, pure, viral, social and/or user-generated content businesses
-- that will probably be monetized with advertising -- the generic headline
metrics like daily/weekly/monthly active users and engagement/retention rate
are important. There are just so many new products that attempt to be the next
Facebook/Twitter/Youtube/Pinterest that showing that you are already punching
through the noise is pretty important.

For two-sided marketplaces (the next eBay/Etsy/AirBNB/Uber) it's most
important to have a real theory about how you're going to get both sides of
the flywheel spun up. The traction doesn't need to be gigantic but there needs
to be a real plan. We still see too much handwaving in this category -- it is
REALLY hard to spin these up from a standard start and most simply languish
and die.

For ecommerce and ecommerce-like busineses (the next
Fab/Ziluly/OneKingsLane/Zulily), the most important thing is showing a model,
with initial proof, of how the cost to acquire customers is less than the
lifetime value of those customers. For example, in recent years it has become
harder to build these businesses based on Google keyword advertising -- search
volume isn't growing very fast, and lots of people are trying to acquire
customers in most categories, and so keyword ad rates often get bid up to just
past the point of unprofitability (the delta is the amount of excess funding
going into businesses in these categories). So creativity on customer
acquisition -- and showing that in economic terms -- is key.

I think that a credible team with any of this in reasonable shape from a seed
round is not going to have trouble raising an A in this environment. But for
those that have already raised an A, it has become really critical to have
these factors nailed (whichever are appropriate) to be able to raise a B.

Finally, probably obvious but worth saying -- investors are all over the map
on all of this stuff all the time. It's very valuable to be able to prequalify
investors for interest and knowledge about particular categories -- and
frankly IQ and judgment -- prior to meeting with them. Good advisors and
angels can be very helpful with this. This is also why we try to be
transparent on these topics (such as with Scott's interview) -- better for us
and for entrepreneurs to know how we think before they walk in the door.

~~~
nicklovescode
Why do you consider Uber to have the marketplace problem? If it is as simple
as hiring new drivers, isn't it more of a general business scaling problem,
similar to hiring more engineer to scale up more features in purely software
startup?

~~~
pmarca
Uber had the marketplace problem when they started but they figured out ways
to punch through it, as has Lyft (our investment). Both companies have a range
of clever techniques for how they did that. Drivers are not full time
employees for either company so it's not as straightforward as just hiring
them but money certainly helps in both cases.

------
malandrew
Somewhat odd because some of the most valuable enterprise ventures recently
have begun as consumer plays with a path to the enterprise. Dropbox is one
example. The iPhone was consumer before enterprise. Github focused on
individual debs before it made its enterprise play. I'd argue that AirBnB kind
shows the same because I've noticed an uptick in the number of business
travelers requesting to stay with us (i.e. they expense they Airbnb stay).

The enterprise is increasingly consumerized so any play that offers that
opportunity should be interesting.

~~~
jval
Great post, but I think when they talk about consumer they are talking about
totally free consumer facing time-sink eyeball-monetization companies like
Facebook, Twitter and Pinterest. I don't think they consider consumerised
enterprise to be in the same category. I could be wrong though.

~~~
pmarca
Yes, I (roughly) agree. The consumer companies Scott was talking about are
ones where they need to generate a "lightning in a bottle" effect to work as
investments. There are other kinds of consumer companies that are much more
straightforward to analyze -- for example, those that pay to acquire customers
and have a model to make money by doing that.

------
sfjailbird
I will go on record to say that Rap Genius is the most ridiculous investment
ever, and that it will tank with not a dollar in sight within ten years. If
this is the type of startup Andreesen Horowitz are backing away from in B2C I
would understand, but this is one of the consumer plays they _did_ invest in.
And now the message is that they want to invest in solid consumer startups
only. Makes no sense to me.

~~~
xsenna
Maybe it's a promo investment, this is something journos can get excited to
write about, more so than another ERP or middleware solution.

~~~
pmarca
Nope. We don't do those. It's the real deal. One of the fastest growing
consumer properties of all time with huge market opportunity.

------
rwhitman
I worked for a consumer startup that fit the profile. CEO would come up with
an exciting business model, raise money with the dream, staff up, fail the
execution and then 6 months later lay off half the company to go lean, pivot
and repeat. They've squeaked by with 4+ years in business doing this, raised
tens of millions from good investors. I could definitely see why any VC firm
would want to steer clear of a business like that

~~~
zacharycohn
Why do you work there? And I don't mean that in a snarky way, I'm curious what
motivates you to stay.

~~~
rwhitman
I don't anymore.

~~~
zacharycohn
Whoops. That's what I get for posting at 2am.

------
spullara
Most successful funds place the majority of their dollars in follow-on rounds
for their earlier investments.

~~~
pmarca
Correct -- this is a key consideration for actually running one of these funds
that is not always obvious on the outside. A $5M A round investment carries an
implied commitment to invest $10-15M more in later rounds.

------
Major_Grooves
Always a bit depressing when you are reading an interesting article, from
someone well respected, then _boom_ sudden MBA bashing. :/

~~~
pmarca
Scott is a Harvard MBA himself. Me, I'm going to let the MBAs fight it out
:-).

------
graycat
Reading that article, I get the strong impression that A16Z really doesn't
much know what the heck they are doing.

~~~
pmarca
Yep, that's probably it.

~~~
graycat
Yes, it is.

Next to no one at A16Z is qualified to review new, correct, significant,
powerful, valuable, useful technical material, review research papers in
technical fields submitted to peer-reviewed journals of original research, be
a problem sponsor at NSF, NIH, or DARPA, or be even an assistant professor at
a research university in a technical field.

An entrepreneur with some new, correct, significant, powerful, valuable,
useful technical material as the crucial, core technology of an information
technology startup would face a serious threat with a partner at A16Z on their
Board because that person would not be able to evaluate budgets and projects
for new technical work for the company.

------
twiceaday
Reminds me of a joke

Time flies like an arrow. Fruit flies like a banana.

