
The Andreessen Horowitz Effect - rrbrambley
http://techonomy.com/2012/08/the-andreessen-horowitz-effect/
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ChuckMcM
I wonder how close this is to the 'ebay' effect, basically before ebay existed
there were garage sales and flea markets that people would go to in order to
buy junk. Something I was familiar with was old computers, they were just fun
to buy for a few bucks and get them running again. Something cool about
getting a machine for $5 that you knew sold new for $100,000 up an running
'like new.' (albeit it could be emulated by a modern PC at a much faster rate,
that wasn't the point :-)

Then Ebay came along and opened up the market to a lot more people, and the
people in that market actually had a sense of what some of this stuff was
worth (primarily to folks keeping legacy systems alive) and prices shot up.

What was worse was that at the flea markets now vendors wanted 10x what they
wanted before for their junk. And if you offered them a more typical amount
they would say "Nah, I'll just go sell it on Ebay rather than take that
offer." So you could get a discount (sort of a real world buy it now) but your
leverage was greatly diminished.

In the world of investing, and Venture Capital specifically, I think
Andreessen Horowitz brought a better understanding of value to the table. That
meant that VCs that used to be able to get away with underpaying were forced
to stump up closer to market value and that makes them grumpy. Just like I was
paying $50 for a DEC VAX that I knew I could have had for $5 before Ebay
ruined things.

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pg
_“They are overpaying for deals,” says one VC_

This is false. If anything they can get lower prices than other investors due
to their prestige.

(If you're wondering why a VC would say such a thing, it's the one thing a
competitor could say that could raise doubts in the minds of LPs, the people
who invest in VC funds. AH's successes are obvious, so the only way to spread
FUD about them with LPs is to imply that they're paying too much to get into
those successful deals, and that their returns will thus be proportionately
lower.)

~~~
wamatt
Balanced opinion is often useful, but this article does have the slight
feeling of a hatchet job.

That said, it's certainly possible that AH are _inflating_ rounds. (this is
different to _overpaying_ )

Github's Series A raised some eyebrows, but yet they are growing phenomenally,
have loads of revenue, and have an exceptionally talented team.

However, it's doubtful that anyone currently knows whether today deals are
justified. We may need to wait a few years, until more exits materialize.

~~~
ghshephard
That's ironic - I read the same article you did, and came away thinking that
it was a puff piece on A16Z.

There are lots of negative things you can say about Ben, Marc and the others
in the name of "Balance" - and other than saying "They are paying a lot for
companies" (which isn't even an indictment on them, just a description of
their strategy) - I didn't see it.

I'm surprised they didn't mention Instagram/PicPlz in the article, that was a
bit of a stumble (though for honorable reasons)

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programminggeek
It sounds similar to the pricing effect that Apple has on suppliers. By buying
out the existing supply of a component, it drives up the price on the
component for everybody else, giving Apple that much more advantage. If
Andreessen Horowitz can pull the same thing against other VC's, well that is
going to make them that much more profitable over the long haul.

~~~
bravura
I don't think this argument is correct.

It is true that there is a limited supply of potential breakout startups. But
by monopolizing the market for iPhone components, you can only charge 2x-3x
times as much for the product. You aren't going to make tons more money, like
if you invest in breakout startups.

The point is more that a16h realizes most of its returns through the small
percent of startups that do phenomenally well. These startups have a higher
expected valuation, because of potential extrema values.

So a16h is trying to correctly valuate the top 1% (for example) of startups,
not that top 5% of startups. This means that the valuations (in this example)
could be ~5x more than is what is conventional, and still be accurate
valuations.

~~~
ironchef
To be pedantic, it's a16z...like i18n or l10n. (so you can edit if you want)

