
Andreessen Horowitz Returns Slip, According to Internal Data - ballmers_peak
https://www.theinformation.com/articles/andreessen-horowitz-returns-slip-according-to-internal-data?pu=hackernewsva0zne&utm_source=hackernews&utm_medium=unlock
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georgewsinger
Andreessen Horowitz has a very strong spray and pray feel to it relative to
other funds in its class (much like YC). Look at how enormous its portfolio
page is: [https://a16z.com/portfolio/](https://a16z.com/portfolio/). I bet
this list isn't all inclusive, either.

For comparison: Founders Fund has an IRR of ~55%, at ~$1B AUM scale. It tends
to invest in fewer companies -- with much higher bar and conviction -- and its
portfolio has a much lower failure rate than competing funds (of course
failure rate doesn't matter as much for VC returns, but it's still an
interesting fact).

I have no connection to FF whatsoever, but have learned a lot from the way
they invest and much prefer their model to the spray and pray style (YC, Ron
Conway, A16Z, etc).

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lquist
YC (and probably Ron Conway) are apples to oranges with a16z. Spray and pray
works when you are looking at 10000x multiples on your best investments. It
doesn't when you are deploying billions and don't come near that order of
magnitude for your best bets.

~~~
georgewsinger
As far as I know YC doesn't have a single 10,000x investment (i.e., $100B+
exit). Not one. Yet I once listened to a YC video where Michael Seibel
(President of YC) discussed some of their stats. He said they've funded over
2,000 companies, and of those have 17 unicorns that are worth ~$100B in
aggregate valuation. So that means their hit rate is generously

17/2,000 = 0.85%

Compare to i.e. Jason Calacanis who on his own has a hit rate of better than 1
in 20. Now assuming YC paid $100K per company and gets to keep a blended 1% of
the $100B (is that too small?), they've put in about $200M in funding to get
back

$100B*1% = $1B

to net roughly $800M in profit for their stakeholders. So they're a 5x fund.
But that's really...not that good...(at least it's not world class).

But am I missing something? They've definitely gotten a lot better at picking
companies during the Sam Altman era (by, IMO, funding deep tech companies that
actually have the chance of 10,000xing), but it'll still take another 5-10
years to really prove that.

Now YC might argue that they're not purely a profit-driven fund. And that's
true. But isn't it a bit worrying that after thousands of investments they
haven't funded a single $100B+ company? YC has an enormous influence on the
startup ecosystem. Is an institution with a 0.85% hit rate really sending us
the right lessons?

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AlchemistCamp
I would be very surprised if Stripe didn't surpass $100B.

~~~
streetcat1
wait until libra.

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boulos
So, I keep seeing articles comparing S&P 500 return versus the IRR of a VC
fund, but none seem to compute "IRR" for the S&P 500. That is, they all seem
to assume $1 invested at t=0 in S&P 500 (and I assume total return, so
reinvested dividends), and then compare that to venture investing.

Except an $100M fund isn't $100M instantly deployed. The investors are putting
probably $20M/yr into it via capital calls. That makes a huge difference in
IRR.

This isn't to defend the particular investments or performance of any firm,
but it does seem like the reporting is quite poor. Even taking the time to
compute a "what if each year you invested 1/5th into the S&P 500" would be a
marked improvement. But you definitely don't get to say "The 2010 Andreessen
Horowitz fund performed slightly better than investments made in the S&P 500
in the same year" (as the article does).

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Areading314
If the fund manager leaves your money sitting around in cash for a few years,
that impacts your returns, since you could have put that money to work
elsewhere. Including the gradual investment as part of IRR is the correct
thing to do.

~~~
boulos
Sorry for not making it clear: they don’t _ask_ for the money, until it’s
“needed”. The term of art is “capital call” and while it’s possible to call at
any time (perhaps you want to make a huge investment and you don’t have the
cash currently), it’s usually somewhat spread out. The “default” behavior is
an even-ish set of calls over say a 5-year period for a (nominally) 10-year
fund.

~~~
609venezia
Isn't the money in some sense tied up if it has to be ready for a capital
call? At minimum it should be in some relatively low risk liquid investment.
So there is opportunity cost regardless of whether the investor or the fund
holds it until it is deployed?

~~~
boulos
Yep, but that’s equally true of any IRR calculation (for any IRR, you should
compare to the risk-free rate or alternatively some other equal-risk
benchmark). As an example, perhaps the real comparison for VC investment
should be to having your “capital to be called” in the S&P 500 while waiting
for capital calls. Except, as you allude, that’s quite risky for “you are
required to deliver” (and IIUC, often within days). That makes the easiest
assumption some sort of money-market fund or treasury something something.

In any case, the $X in S&P 500 at t=0 versus the _IRR_ of a venture fund is
not an apples-to-apples comparison. There are many ways to meet your capital
calls, and I suspect that sophisticated investors aren’t keeping the cash in
their checking account waiting for an email.

~~~
609venezia
I agree it isn't apples to apples. I wonder if it is nevertheless the best
comparison, though, because they're two fundamentally different beasts.

If I have a lump of cash I need to deploy, I can buy lump sum SPX at t=0. I
can't call a VC and say "here's X money, invest it all immediately."

The fairest comparison probably would be lump sum SPX against a blend of VC
IRR and money market, converted from one to the other at a typical capital
call rate, but as the number of variables increases so do the number of
assumptions, and given the low returns on money market funds I don't see how
the extra complexity adds much to the story.

Am I missing something?

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itcrowd
Here are the totals, based on the figures in the post:

10.8% gross for A16Z

14.5% for S&P 500.

Calculation: [https://imgur.com/a/jeFN8fL](https://imgur.com/a/jeFN8fL)

~~~
ransom1538
Ok. Picking on a firm because it didn't beat the 500 is harsh. Beating the 500
is damn hard. An 500index fund is basically a collection of large monopolies
that extract cash.

~~~
storgendibal
Yes, but then why invest in an actively managed fund at all, as an LP? whole
premise is that fund managers can beat an index such as the S&P500 or total
market etc.

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ramphastidae
LPs don’t invest in funds to beat the market. By the time they are investing
in VC they have already have millions in traditional investments like index
funds, real estate, etc. VC investments are a high-risk, high-reward play.

~~~
hendzen
Individual VC investments are a high-risk, high reward play, but for an LP,
investments in large baskets of VC investments via VC funds are ideally
intended to collect an uncorrelated risk premium. The idea isn't to simply to
beat the SP500, its to diversify, and thus improve risk adjusted returns, of
their broader investment portfolio.

For large institutional LP's like pension funds, endowments, charities, etc,
they need steady smooth returns that they can draw upon year after year to
fund their beneficiaries. In particular a down year really hurts them since
they will have to draw down on their principal. This is a very different risk
calculus to an individual saving for retirement who can stomach 30-40 years of
stock market volatility with a good probability of having enough money at the
end of their career.

So rather than chucking the bulk of their fund in to the asset with the
highest expected returns as an individual might, these institutional investors
buy a big basket of very different return streams (i.e. as uncorrelated as
possible) to smooth out the bumps in each one.

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iambateman
This article is absurd. It says the 2011 fund return rate is 12%, which isn’t
spectacular. That’s the whole point of the article.

Except the 2011 fund includes stakes in Airbnb and Stripe, two massive
companies that have yet to go public.

So, sure, at the moment the returns aren’t awe inspiring. But give I can’t
imagine anyone at AH is losing sleep over the long-term success of that fund.

~~~
609venezia
Those positions are still being valued according to some internal measure at
AH, I think. So they should be factored in already.

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ballmers_peak
Saw there was some interest around this piece on HN last week so I went ahead
and unlocked it.

~~~
bcx
thanks.

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dang
The previous thread was
[https://news.ycombinator.com/item?id=20985687](https://news.ycombinator.com/item?id=20985687),
but since the article is readable now, we won't mark this one a dupe.

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thesausageking
What are the "Parallel" funds? And why do they much better returns than the
main funds?

~~~
anxman
Parallel funds tend to be funds that are used to double down into winners.

~~~
thesausageking
Those are "opportunity funds". "Parallel Funds" normally are funds that invest
at the same time and in the same fund percentage as the main fund. These are
often setup as a way to group together LPs; for example you may have a main US
fund and one in the Caymans that's for foreign investors. They function as a
"Fund Family" and because they make the same investments at the same
percentages, they normally have the same returns.

Looking at the SEC filing for Pinterest, you can see this is the case for
a16z. Fund III and Parallel Fund III invested in the same rounds, always at
the same proportion:

[https://www.sec.gov/Archives/edgar/data/1503674/000114420419...](https://www.sec.gov/Archives/edgar/data/1503674/000114420419020119/xslF345X02/tv519076_3.xml)

What's not clear given this, is why the parallel fund has much better returns.
It may have to do with how the fees are structured.

~~~
anxman
Thanks for the clarification

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mattmaroon
"Poor investments can contribute to a fund’s weak performance, but so can
decisions to put too little money into startups that ultimately turn into
smashes."

I'd guess the problem is the opposite. Too much money into startups that fail.

VC is hard now because there's so much money chasing startups. The valuations
they're getting are absurd. When you pay twice as much, your hit gives you
have the return and your failure twice the loss. VC has been a pretty poor
investment historically, and the high valuations now are really hurting.

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aaavl2821
Compare that to the returns from the top-performing funds from 2007-2015:
[https://mobile.twitter.com/zavaindar/status/1159660549615116...](https://mobile.twitter.com/zavaindar/status/1159660549615116294)

Note that this data is from preqin and doesn't include all funds, just those
that self report or have LPs who publish returns of funds they invested in

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outside1234
Why anyone invests in any VC fund, when you can do better in the stock market
with an index fund, at much less risk, is beyond me...

~~~
nradov
Perhaps, but we don't really know how much risk many of those VC funds are
actually taking. With liquid, publicly-traded stocks we can sort of use
variability of returns as a proxy for risk. But there's no equivalent good way
to really quantify VC fund risk. Sure you can do risk modeling but it's just
an educated guess.

~~~
JumpCrisscross
> _there 's no equivalent good way to really quantify VC fund risk_

Distribution of returns. Longitudinal volatility is a (good) proxy for this.

~~~
nradov
Not enough data points, too much noise.

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vadym909
So when the economy is booming they do as good as S&P. I wonder how they'd
compare in a recession. S&P:4% and VCs:?

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samfisher83
Over the long-term it's hard to beat mr market. That's why buffet made a bet
with the hedge fund manager.

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EGreg
What kind of slip did they return?

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xjoins
I, too, read this headline quite literally. It sounds like they could have
returned something they bought on Amazon.

~~~
boulos
Yes, because they failed to use a possessive here. The headline should have
been “Andreessen Horowitz’s Returns Slip”. Then we’d parse Returns as a noun
rather than a possible verb.

