
Defending A16Z - rgbrgb
http://blog.garrytan.com/defending-a16z-noam-sheiber-mistakes-a-vc-portfolio-for-his-401k
======
staunch
A16Z isn't doing $500k checks in the next Facebook. They're waiting for the
"15 important companies" to emerge every year and trying to snatch them up on
the basis of their superior brand and checkbook. Exactly what the old guard of
VCs used to do.

They used to claim their partners were all successful founders. They gave that
up a long time ago. Now they hire pedigreed market analysts to be partners.
Their primary job seems to be to judge startups and tweet wisdom about them,
even though they've never done it themselves.

They passed on investing in Oculus because they thought Microsoft would crush
them. Probably because they underestimated the creator of Oculus, Palmer
Luckey, because he didn't go to any of the fancy schools.

Then, later, when they realized what millions of Carmack fans had already
realized (Carmack was involved long before any investor) they bought their way
in to a later round and flipped the company to their friends at Facebook for a
cool $2 billion.

And of course, when it came to funding RapGenius.com, they had tens of
millions to spare. They weren't worried Microsoft would beat them at the
lyrics SEO game.

The ultimate test of a Silicon Valley investor is whether they help bring
about great new stuff that would otherwise not exist. Most VCs do not pass
this test with a very high grade.

~~~
fraserharris
Actually, the ultimate test of a Silicon Valley investor is their return on
capital. Your test is _projecting your desire_ onto investors.

~~~
staunch
I was obviously not making a claim about how LPs judge VCs, just stating my
own opinion about how I think VCs should be judged.

Try to imagine every sentence in a comment is prefixed with "I think..." to
test if you're just being snarky or not. In this case, you're just being
snarky.

(And like most snarky comments, it's not even correct. There is in fact no
official test for VCs. Some LPs are socially motivated and would rather lose
money than invest in evil companies. Your test is not the one they use.)

~~~
fraserharris
The bulk of your comment is an highly speculative attack on A16Z. Chris Dixon
publicly stated they passed on investing initially because of technical
obstacles.[1] Their investment in RapGenius was in part because Marc
Andreessen tried to build it himself as part of Netscape.[2]

A VCs job is to make an ROI for the LPs. "Socially motivated" is just window
dressing to attract capital that might otherwise go to a different fund.[3]
The significant LPs are primarily restricted by asset allocations. You are
projecting your desires onto VC to hope that it is anything different.

[1] [http://www.wired.com/2013/12/oculus-vr-
funding/](http://www.wired.com/2013/12/oculus-vr-funding/)

[2] [http://genius.com/1107425](http://genius.com/1107425)

[3] Pessimistic? Sure. Better to be honest about the underlying motivations
and surprised by the outcomes than not.

------
harmegido
| Noam doesn't make a data-based argument. He uses an anecdote.

And that argument is then countered with another anecdote. The only way to
really win this argument is by releasing all the data. Not thinking that's
likely to happen.

~~~
gozo
It's also a very strange anecdote since the NYT articles primary point is that
A16Z are pushing up valuations so deals like the one Peter Thiel made are no
longer possible.

Quoted in this blog post from the NYT article: "It’s easier to triple or
quadruple your money when you’ve invested $10 million in a $100 million
company than when you’ve invested nearly $100 million in a $1 billion company
[...]"

Peter Thiel invested $500,000 for 10.2% i.e. in a $5 million company.

Unless there's something I'm missing here?

~~~
austenallred
The point is that A16Z is paying high prices (and you correctly note that
everyone is). Tan's point is that there are still power laws at play, and that
choosing one random investment to disprove portfolio theory is incongruent.

~~~
chetanahuja
_" Tan's point is that there are still power laws at play, choosing one random
investment to disprove portfolio theory is incongruent."_

Except that he made no such point and just countered the anecdote with his own
anecdotes. The original NYT article comes across as a well-researched,
sensible piece of writing compared to this lazy, ill thought out blogpost.

~~~
austenallred
> Multi-billion dollar companies happen when non-obvious ideas and huge market
> needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb,
> Dropbox, Stripe, Instacart — and when you have the potential for 100X to
> 4000X returns, it's not about avoiding loss or minimizing downside. A proper
> venture portfolio is not like your 401K. The only way startup investors
> truly lose is if they miss the Uber.

------
__derek__
That's a silly comparison. Avatar was made by James Cameron, someone as
established as it's possible to be in Hollywood. If Mark Zuckerberg or Larry
Page or Jeff Bezos started a new company, then that company would be a good
analogue because you aren't going to get the terms that you'd get out of a
long-shot like Facebook. A better comparison would be something like
Paranormal Activity (12,893x ROI) or the Blair Witch Project (11,111x ROI).
Avatar is a good proxy for how much _revenue-generation_ Hollywood is capable
of, not its profitability measured by ROI.

~~~
prbuckley
I was thinking the same thing, quora has a list of highest ROI films of all
times. Most are low budget break away global success's.

[https://www.quora.com/Which-movies-have-the-highest-
Return-o...](https://www.quora.com/Which-movies-have-the-highest-Return-on-
Investment-ever)

------
rock57
I have great respect for Garry Tan. However, I find the key quote on "how
profitable Hollywood can be at best" a bit strange, and want to correct his
statement below based on specific data. Here's the quote "...11X return on
capital. That's the highest grossing film ever made, and a good proxy for how
profitable Hollywood can be at best." Since 3,800X return on capital for Peter
Thiel's FB investment is an obvious outlier/best case scenario, let's compare
apples to apples and take the best case for Hollywood-type investments:
"Paranormal Activity With just $15,000, the visionaries behind this project
created a movie that took in a worldwide gross of almost $197 million." That
sounds like 13133X return to me, which is even greater than 3800X... See
[http://www.businesspundit.com/10-most-profitable-low-
budget-...](http://www.businesspundit.com/10-most-profitable-low-budget-
movies-of-all-time/)

~~~
supster
The real point here isn't really Hollywood vs SV but rather that VC portfolios
can outperform on just one stellar investment despite the rest being losers bc
the ROIs can get so high. So paying a premium to get into a contested round of
a high growth startup is worth it if you think the company can be one of these
outliers. For example: a "mere" 20x return on one of ten companies will more
than pay for the other 9 companies that lost you money on.

~~~
gozo
I just don't see how that invalidates the anecdote. Because if you're
investing "$100 million in a $1 billion company" you're probably aren't
expecting a 20x return, not to mention a greater one. So that would suggest
that there is something else going on, which is the greater point of the NYT
article.

~~~
supster
If you are investing at that late of stage you'll likely negotiate downside
protection like liquidation preferences which significantly de risk the deal.
In which case a 2-10x return is actually really good b/c you are not expecting
to lose all your money in your individual investments. So in a late stage
portfolio you would break even on a few and hopefully make returns on one or
two.

~~~
gozo
Sure. I'm not saying it's a bad deal, just that it supports what the NYT
article is saying and that the anecdote would therefor be relevant.

> Within Silicon Valley, Andreessen Horowitz is famous for bidding valuations
> to heights that make rivals uncomfortable. To offset the dilution of
> ownership that comes from such prices, Andreessen Horowitz [...] increases
> the amount of money it invests. The firm often kicks in more than the
> entrepreneur asks for, according to rival V.C.s who have been involved in
> these deals. “They want to basically change the table stakes in a poker
> game,” said Greg Kidd, an angel investor in several companies Andreessen
> later funded. “There are some other folks who can cut checks like that, but
> there aren’t that many.”

> More than is the case with other firms, the fate of Andreessen Horowitz may
> be closely tied to that of the overall tech market. If prices remain
> buoyant, the eye-popping valuations of the firm’s top-performing companies
> will keep it profitable and losses will be containable. But if the market
> turns, Andreessen Horowitz could have serious trouble.

> Worse, Andreessen Horowitz isn’t just a beneficiary of behavior that’s
> driving up valuations. If a bubble is forming, it is ultimately because too
> much money is chasing too few companies. But the firm’s own aggressive
> bidding may be partly responsible. “Because there is competition for deals,
> when you have actors in the market showing no price discipline, it drives up
> the cost for everyone,” said one investor.

And by the way, for completeness, the company in question sold for $2.6
billion three months after the article and post was written.

------
chetanahuja
The OP starts off with: _" Noam doesn't make a data-based argument. He uses an
anecdote"_

And then goes right on to the rest of the post with zero data and a couple of
anecdotes to make his case.

------
ojbyrne
I suspect that due to the well known creative accounting in Hollywood, Avatar
returned significantly more than 11x. Top line costs are inflated.

~~~
dunkelheit
That's interesting, could you elaborate on "creative accounting"?

~~~
ojbyrne
[https://en.m.wikipedia.org/wiki/Hollywood_accounting](https://en.m.wikipedia.org/wiki/Hollywood_accounting)

------
jasonwilk
The only fact I'd point to is that if A16Z were to raise a new fund, it would
be wildly oversubscribed as with most other top VC firms. If I'm Andreesen,
that's the only thing I'd point to.

------
dunkelheit
So the nytimes article goes like "maybe, just maybe if we are in a bubble then
it is going to hurt. and here are some signs that it is indeed a bubble". And
the response is like "don't worry there is no bubble because you know,
facebook is huge and software is eating the world". Not very convincing if you
ask me.

------
Patrick_Devine
I'm not sure why this even needs a rebuttal. If venture capital wasn't
profitable, Sandhill Road wouldn't exist.

~~~
doctorpangloss
Because when you're A16Z and take a 3% management fee, regardless of profits,
you don't need venture capital to be strictly speaking profitable.

You need your particular brand of venture capital to be perceived to be
profitable. If you have $4.2 billion under management during a year, you took
$126 million in non-performance based fees that year. A16Z could make a ton of
risky investments, collect fees, and die out in 7 years (2009 + 7 = 2016)—it
really doesn't matter to its partners. They banked their fees.

Mutual funds aren't necessarily more performant than buying index funds. Many
forms of investment aren't. You're not appreciating how a smart manager can
use time and a fee structure to enrich himself handsomely without actually
delivering results for investors.

Venture capital wouldn't exist if it wasn't profitable, sure, but Sandhill
Road? That's an artifact of how venture capital is done and taken advantage of
by real human beings, not of how profitable it is.

~~~
austenallred
But A16Z isn't doing that.

The people who started A16Z have had multiple billion dollar exits, and are
investing their management fee in services for their founders. They only make
money from carry (if the fund is successful).

------
7Figures2Commas
> Multi-billion dollar companies happen when non-obvious ideas and huge market
> needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb,
> Dropbox, Stripe, Instacart...

It's kind of funny to see some of these companies uses as examples of "perfect
execution." Two of Dropbox's latest late-stage investors have already
reportedly written down their investments by ~20%[1], and Uber and Instacart
are facing class action lawsuits that, in worst-case outcomes that are not
entirely improbable, could upend their business models.

> ...it's not about avoiding loss or minimizing downside.

This is silly. Good fund managers are _always_ concerned about downside. That
doesn't mean they don't take on risk, but they try to understand and mitigate
risk as approprite for the kind of fund they're managing. In the world of VC,
there's a reason liquidation preferences, ratchets, etc. exist.

Just because FOMO in this market has made it difficult for VCs to get terms
they'd normally like doesn't mean they aren't exposed to downside risk. As
Warren Buffett once said, "Only when the tide goes out do you discover who's
been swimming naked." When the cycle turns, we'll learn which VCs didn't have
their speedos on.

[1] [https://www.theinformation.com/mutual-funds-mark-down-
dropbo...](https://www.theinformation.com/mutual-funds-mark-down-dropbox-
holdings)

