
Andreessen Horowitz’s Returns Trail Venture-Capital Elite - forgingahead
http://www.wsj.com/articles/andreessen-horowitzs-returns-trail-venture-capital-elite-1472722381
======
warcher
To my eye, the story here is how awful VC is as an asset class.

Like, this is as good as it gets, guys. This is it. Even with these returns
being kinda so-so (relative to the lack of liquidity, ten year return cycle,
et cetera), these guys are _easily in the top five percent of VC firms_.

Dumb old index funds are going to roughly double your money in ten years with
reinvestment of dividends. If a VC can't hit 3x, the numbers don't really add
up to make it worth your while to write a big check and just park it for a
decade.

The point of the article is that _even the best of the best can miss those
numbers and still be in the top fifth percentile_.

Yikes.

~~~
quaresma
Can you point me to some materials about how to invest in index funds? I'm an
engineer looking to start making wise choices on where to invest my money.

~~~
kchoudhu
Do your due diligence, but here are the cliffnotes:

All stocks in the US: FSTVX, VTSAX

All bonds in the US: FTBFX, VBTLX

Step 1: Put {your_age}% in one of the bond funds, and the rest in the stock
fund.

Step 2: Religiously invest a portion of your salary every month.

Step 3: Don't look at your savings more than once every quarter or so.

Step 3.5: Don't let your spending grow out of control as your career
progresses and your salary grows.

Step 4: Retire a multi-millionaire in inflation adjusted dollars after 20-30
years or so.

~~~
jrlocke
Guidance on the portion of salary to invest?

~~~
kchoudhu
Save until it hurts just a little bit, and then a little bit more.

My wife and I did 50% of our nominal takehome every month in a high COL area.
It was fine.

The more you save, the faster you get to Stage 4.

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inputcoffee
The AH model isn't venture in the sense of betting on very early stage
companies.

AH seems to invest huge amounts in much later stage companies. The idea is
that some of these companies would be public in the old days and all the
growth is happening on the private side. (This is based on things @pmarca has
said many times in many different forums).

One could argue that the relevant comparison would be very volatile tech
stocks.

Comparing it with the few VC funds (the one VC fund?) that hit the great firms
two funds in a row is not really fair.

Edit: To put it yet another way, the volatility of the returns should be lower
so we should be happier with a lower expected return.

~~~
jasode
_> The AH model isn't venture in the sense of betting on very early stage
companies. AH seems to invest huge amounts in much later stage companies. _

But that funding at later stages may have been happenstance rather than
deliberate strategy.

For example, a16z looked at AirBnb during the Series A fundraising. But they
decided to pass on it, partly because Marc Andreesen didn't believe AirBnb's
trust model for strangers in personal homes would work. When a16z looked at
AirBnb again during their Series B fundraising, they invested. Marc has been
on record saying they regret missing the earlier Series A round because it
would have made them a lot more money.

a16z also made a late 2010 investment in Facebook but some observers thought
they did it for "logo shopping". In other words, observers said it wasn't a
late investment timing on purpose -- it was because they were a new firm
(2009) and they wanted to add immediate credibility to their portfolio.

It seems they do want to catch companies early if they can.[1] On the other
hand, I remember Ben Horowitz saying they deliberately held back on an Oculus
Rift and let another VC take the lead (the risk). They later invested in the
subsequent round.

It doesn't seem like there's any rigid single strategy there with regards to
timing.

[1] scan for their "Seed" and "Series A" investments:
[https://www.crunchbase.com/organization/andreessen-
horowitz/...](https://www.crunchbase.com/organization/andreessen-
horowitz/investments)

~~~
inputcoffee
You raise an interesting point, but I think the data actually makes my point.

Firstly, I think you should count the "majority" of their investments as where
the majority of their money goes. If they had one fund with a billion dollars,
and $400 million went into Uber and $400 million went into a Facebook, but
$200 million went into 90 tiny companies, I would argue that they are 80%
(800/1000) late stage and not 2.2% (2/90) late stage.

Secondly, what they call the round is kind of arbitrary. Consider that many
(most? traditionally?) VC funds earmark around $5 million for all rounds in a
company.

They may put in $100k pre-product, $1 million after market fit and so on.

AH put $25 million in Clinkle's "seed" round. Imagine how valuable Clinkle
must have been at that point.

Nonetheless, I think this shows that they are making much larger, much later
investments than the "traditional" VC, and for reasons that Marc has talked
about in public.

Of course he wishes he had got into successful companies even earlier.
Everyone wishes that. I wish I had got into AirBnB in the Series A. So do you,
presumably.

He fully concedes he is not as good as Peter Thiel (a, who is?, and b, this is
his example) at going for the really early stage company and prefers to go in
later. Its just really hard to tell which of 1500 companies is going to make
it big, but it is much easier to guess that most of 20 big companies are going
to get bigger.

~~~
jasode
_> Of course he wishes he had got into successful companies even earlier.
Everyone wishes that._

Unfortunately, I made it sound like MA's thoughts about Airbnb was a generic
"invest earlier means more money" cliche. I intended to show how AirBnb
contrasted with Oculus VR. They passed on the early rounds for those 2
companies for different reasons.

For AirBnb Series A, Andreesen didn't understand the value. It was a gap in
knowledge/imagination about what AirBnb could be. It was _not_ because of a _"
we're a late-stage not Series A investor so come back when others have already
invested in you"._

For Oculus Rift Series A, a16z got the value of it, but they weren't sure
about it gaining traction while the company was trying to solve the motion
sickness issues. They let the other VCs take on that risk and they knew ahead
of time they'd pay more to get in on the next fundraising round.

Based on their actions and interviews, it's possible that AH's primary
investment thesis is Series B or later but I'm not sure you can beat Sequoia
and Benchmark with wait-&-see late-round investing at sky high valuations.
Those other VCs hunt aggressively to get in on Series A. Part of the prestige
for a VC firm is to be seen as a leader and not a follower.

~~~
inputcoffee
I will just re-iterate that the letter of the round is not as important as the
valuation, and the amount invested, in determining what "stage" the investment
is.

I accept that they passed on the two different Series A rounds for two
different reasons, although I am not sure what lesson I can draw from that.

In terms of your last comment, yes they absolutely cannot beat the returns of
the early stage investors (whatever Series that may be), but presumably
they're compensated by lower risk, which is the main point I was trying to
make.

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grandalf
The most promising (low risk) startups get their pick of investors, so most
who can choose will prefer a top-tier VC.

If you are a VC the only way to differentiate yourself is to take on risk that
you perceive to be less risky than the herd does, and to build your portfolio
on the basis of such decisions.

Since there is no reason to believe all VC firms share the same time horizon
for realizing their investment returns, it does not make sense to compare
firms on the basis of returns published this way.

A more sensible approach would be to remove the outliers (good and bad) from
their portfolios and evaluate how well they picked on average.

Or, if you only care about highly successful outliers, the way to compare
firms is to look at how much and how early they invested in the _same_
unicorn.

~~~
nradov
The outliers are the whole point of VC.

~~~
20yrs_no_equity
But not the point of startups.

Also, not what's better for founders.

You're better off with a %50 chance of being worth $200M after 7 years than a
%1 chance of being worth $1B after 3.

VCs place many bets, you only get to place one.

At this point if I were to ever take VC again, I might take it from A16Z. They
would be top of my list. All those "top tier" guys would have to give me terms
I believe they are not inclined to give me.

Fortunately things are radically different than they were even 10 years ago,
and VCs have a lot less power.

Unless you're building another Uber. Don't build another Uber. Build a github.

~~~
grandalf
This is a good point. I think it's fair to say that the tiny subset of
businesses VCs are interested in investing in are the ones where a well-timed
influx of capital has a chance of allowing massive growth.

Any novel business that appears to have those characteristics is ripe for such
a speculative investment, but most of the valuations are based on the
assumption of massive growth.

As soon as the growth trajectory turns out to be less impressive, the
valuation goes through the floor, and usually results in a loss for investors
(even if the company can be sold).

But this is by design, since the investment was highly leveraged on the
upside, it is also leveraged on the downside and the firm will often simply
fail.

Doing a typical startup (less than two years from seed round to massive growth
or failure) is a lot more like flipping a house than like starting a business
with a proven business model.

This is why there is so much trendiness and so many me-too companies... They
are like real estate developers who saw that McMansions sold for 2x investment
a mile away and decide to rapidly build nearly identical ones hoping for the
quick profit. The goal is entirely in the short term and the long term is
irrelevant.

Google found a very powerful way to sell ads, and once it built the
infrastructure to do so it was able to massively broaden its product offering
and appear to be almost a modern conglomerate. But the fact remains that ad
revenue is the vast majority of Google's income, and most of the rest of its
businesses are (in comparison) failures that would never have continued to be
funded by VC-style investors. Alphabet reflects the investors' realization of
this and is a compromise resulting from Sergey and Larry having a lot more
control than typical founders.

Github is interesting. I wish I could see its financials! I had hoped for a
lot more in the product arena from Github, but who knows, maybe they still
have most of the $100M.

------
replicatorblog
So basically their 2 earliest funds are just over half way to maturity and
already closing in on the 3X benchmark Andreessen promised to his LPs?

It's hard to 3X a billion. That makes Sequoia and Benchmark even more
impressive, but doesn't reflect badly on A16Z. Michael Jordan once came in 3rd
in the MVP voting—does that diminish his legacy? [http://www.basketball-
reference.com/awards/awards_1993.html](http://www.basketball-
reference.com/awards/awards_1993.html)

It's a good reminder that press attention doesn't equal results, but A16Z
still seems like they're a force to be reckoned with.

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Kaedon
It feels a little unfair to compare fund groups from 2003 and 2006 to those
that must be after 2009, when A16Z was founded. Give it a few years and we can
have an article like this...

~~~
matco11
Good point. Also, I wonder if the mark-to-market policies of the various funds
are really comparable.

When you have a public market price reference it's pretty much irrelevant, but
with the majority of the portfolio in non-listed assets, mark-to-market
policies could have a large impact on your paper returns.

~~~
matco11
Official response from AH: [http://a16z.com/2016/09/01/marks-
offmark/](http://a16z.com/2016/09/01/marks-offmark/)

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swingbridge
They're still doing quite well all things considered--really well in fact
relative to most people trying to manage other people's money.

Personally I don't place much value in comparing short term returns as it
applies to saying who's a better manager. The same thing happens with hedge
funds. A firm can have a great year but the real test is how they perform over
years or even decades. How many hedge funds can outperform someone like a
Warren Buffet over the long term? Not many. In fact sadly many fail to even
beat index funds. One great year makes a headline, consistent great years
makes a great investor.

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staticautomatic
Am I misunderstanding or am I the only one calling bullshit on all these firms
for talking about making money where there's no liquidity event. These are
mostly paper gains. Shenanigans.

~~~
prostoalex
Most of the world's investable assets (real estate, oil wells, corner ice
cream parlor, a Taco Bell franchise) have not had a liquidity event but are
valued nonetheless.

~~~
robotresearcher
Don't all those example assets change hands for cash (or equivalents) pretty
regularly?

~~~
prostoalex
Valuation by comparables is an acceptable model if both parties agree on it.

However, it's still far from a done deal as each transaction has its own
minuscule details, and in commercial property, e.g., one party might value
such things as location, quantity/quality of parking spots, proximity to
traffic flows, quality of neighbors, recently incurred maintenance, etc.
differently from the other.

With that said, a 409a valuation firm (or potential acquirer) is likely to
look at the peers, current and historic ones, to at least start at some
ballpark figure.

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paulpauper
_Facebook bought the photo-sharing app for $1 billion in 2012, the firm said
it made $78 million on a $250,000 investment._

damn....and had Instagram not sold to facebook it would probably be worth
$1-1.5 billion

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not_that_noob
Almost a hit piece on AH. Their returns are definitely top-tier, but WSJ
presents it a failure that returns are not the very best. Seriously? It's
statistical noise at that tier.

