I'll be honest -- my first impression after reading this piece was to research Peter Sims and figure out his connection to a16z, since my gut reaction was that blatant puff pieces usually have some sort of connection hidden below the surface. (I was unable to find anything.)
Sims brings up the following point about VC returns:
> The predominant old way of thinking about venture capital is that you: a) build up a great brand and reputation with a large portfolio of investments, b) hire partners who have individually strong brands of their own, and c) collect hefty management fees on each fund. The industry standard is a 2–2.5% yearly “management” fee, a figure that gets pretty large on a billion dollar fund. And, in my experience, not surprisingly, the senior people get a disproportionate slice of that management fee. At the same time, the venture capital industry has been a glaringly poor-performing asset management group, consistently underperforming the S&P 500. (For more detail on the struggles within the VC industry, a recent article on the Harvard Business Review Blog by Diane Mulcahy, a senior fellow at the Kauffman Foundation, entitled “Venture Capitalists Get Paid Well to Lose Money” is well worth reading).
But never swings back around to it (unless I missed it amongst the flowery prose). Which leads me to ask: are there data points that compares a16z (or other VC firms!) against the S&P 500, besides the aggregate?
I would love these figures too but VC is notoriously secretive about their returns. There was a court case where Reuters sued Sequoia to get them to disclose their returns based on the fact that a big public-sector pension fund was one of their investors. Reuters lost.
I have data that compares other VC firms to the S&P 500. Give me a few minutes and I'll find it. Foreshadowing: it's pretty bad, you'd do much better putting your money in an index of the S&P 500.
That's a great paper but most people are interested in the performance of the top 10 firms, not the average of the top 100. If I invest only in Sequoia/KPCB/AZ/Accel how well am I doing?
"Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index"
That's helpful but the argument will always be that you just need to pick one of those four or that Kauffman are bad pickers of funds and therefore exclude many of the best from their allocation.
Outside of the VC industry, one technique used by some investment management companies is to launch enough funds that some will outperform the market by chance. Then they quietly close down all those that perform equal to, or worse than the market average and trumpet the success of the one or two that lucked out.
Perhaps which four of the thirty you should pick is only obvious with hindsight :)
or that Kauffman are bad pickers of funds
I assume when they compare VC funds to a "common stock index" they mean an index fund [1], a type of fund that aims to provide market-average performance with lower fees than an actively managed fund. For example, an index fund tracking the S&P 500 does it by holding all the shares that comprise the S&P 500.
> ... one technique used by some investment management companies is to launch enough funds that some will outperform the market by chance. Then they quietly close down all those that perform equal to, or worse than the market average and trumpet the success of the one or two that lucked out.
Yes, that's how independent investment advisors puff up their reputations also. In fact, it's the basis of a sneaky and convincing promotion scheme called "Miracle Man":
I agree with you, it just would be nice to have some data to further support the argument. It is much more convincing if Sequoia funds have inconsistent or mediocre performance than if they all had outsized returns. I am also genuinely curious as to the exact returns the premiere funds have.
Also what I meant regarding bad fund picking is that the universe of VCs funds that were in the Kauffman portfolio may not have included all the great performing funds.
Depends what's the Beta of PE/VC vs the S&P 500 / FTSE 100.
And blindly tracking major indexs means you are highly invested in a smallish number of stocks in the same area in this example investing in the big indexes means you will have take all the losses with the bank crashes - instead of a share/fund that got out or banks when it looked to toppy.
The data is misleading because it's much easier to identify the good venture funds and they perform much better than pretty much any other investment class (ie, Sequoia, Andreesen, Accel, Benchmark, Founders, etc.). Also, venture, unlike pretty much every other investment category actually can influence its portfolio and in a variety of ways.
The very nature of the S&P 500 would exclude it from such a comparison. VC funds are targeting startups not established entities. To make the S&P 500 list you have already achieved a significant balance sheet through years of tweaking /improving.
The return comparison is unequal.
A better barometer would be cash on cash returns but with vc funds that may be difficult to track.
That made me ill. I'm sure a16z is great and all, but there wasn't even a hint of criticism there. They couldn't find one slightly pejorative anecdote to contrast with the endless amount of fawning? I had to double check the byline, because by the end of it, I was convinced it had to be written by Robin Leach. Champagne wishes...
I agree. It's also worrisome that Marc Andreessen predicts the future so much lately. The future simply can't be predicted with such reliability as his certainty implies.
Andreesen Horowitz became the apple of every startup founder's eye because they were the new guys who had success as investors while being friendly to startups
I'd rather raise money from a guy who wears a 'No Bitchassness' [0] shirt who wants to pump up my valuation, help me recruit tech talent, and allow me to give equity to compensate my best people versus some stodgy old guy who thinks he's better than everyone because he invested in [insert successful company from the 90s/early 2000s].
Basically, they were the uber of VCs in terms of how they treated their portfolio companies.
That said, I generally don't like media that praises investors because once we start glorifying the fund-raising process rather than bootstrapping and making money, we'll have tons of companies with too much money and no exit. Bubble burst.
1) Like any great knowledge based firm - which strives to differentiate over and above its people - they have invested in tools. While the inspiration maybe CAA, firms like Mckinsey (knowledge management system) and Goldman (SecDB / Slang on the trading side and a detailed CRM system for the banking side) used the software / infra layer to develop a sustainable advantage which did not just depend on hiring the "smartest people" I.e. if people quit Goldman / Mckinsey - suddenly they were not able to outperform. On wall street - they call it seat value (how much value are you adding versus the seat/organization)
2) As a complete outsider - one can still easily see how the CRM software + sales connectors capability translates to $$$ for portfolio companies. For e.g. Box's recent deal with GE.
3) Therefore, on the enterprise side , if AH acts like a sales force (led by Mark Cranney) - then how does an enterprise company that is not backed by AH compete? In other words, over and above the prestige factor of being backed by a top tier VC firm- will NOT raising money from AH in the enterprise side put you at a disadvantage?
4) How much of this sales force / business development muscle applies to the consumer side? AH partners have referred to consumer startups as fruit fly experiments and will invest with a strong offer post-traction/ series B? But is there value in the consumer side as well in BD deals like how Moritz/Doerr helped Google power yahoo search and collect valuable search engine user behavior which was used to refine and test thier algorithms.
5) The article did mention in passing about recruiting support. But - I have read about a detailed software + people capability on talent hiring.
6) So, if sales + recruiting + strategy/advise are three value adds by VC firms (not counting money!) - does AH have a lock on 2 of the three?
Right, but the real question is: what are their returns? (And: how do they compare to VC as a whole?, how do they compare to long-term US treasury bonds?, how do they compare to the S&P 500?
Besides the fact that Skype was an exceptional insider deal these numbers can be misleading ("twice over" for a 10 year fund is about 7% a year and IRRs are distorted when money is returned early because you are not getting that return for the remaining period of investment).
As linked, AH's first fund had an IRR in the 30% range for 3 years which blows away pretty much every other asset class. I'm sure Accel, Founders, Sequoia, Benchmark, etc are doing even better.
You can't look at venture averages because the best firms are easy to identify and perform much better than average.
Three years is a very short timespan from which to make claims about asset classes. In most cases, seven years is considered the minimum for a true sampling of baseline performance; ten years is better, and more than ten is better still. Obviously a16z hasn't been around for ten years, so metrics like three-year IRR are the best we have. That said, it's silly to take a three-year IRR and benchmark that confidently against something like the S&P 500.
On the other hand, I would strongly suspect that the top VC firms massively outperform the VC industry as a whole, due to any number of factors, including deal access, ability to secure favorable terms, ability to make new rounds or exits happen, etc. In time, a16z's longitudinal performance may well beat the market. But it's way too early to call the ball.
I agree that you can't really look at the aggregate performance of the entire VC industry. It's probably a highly skewed distribution, with almost all the big returns going to a handful of funds.
I don't know about that. Over that time period, post 2008 crisis, many funds (PE, fixed income focused HF's and equity funds) did very high returns as most asset classes bounced back from the crisis depths. Helped along, of course, by unprecedented money printing and credit expansion by the Fed.
I don't think the geography is the best parameter. Think of it this way: if something was contrarian in all other aspects, would you prefer it in the Valley or outside? Can you say that about other parameters?
Contrarian investors try to do what most investors don't. Don't most VCs invest primarily in companies that are nearby, meaning Silicon Valley proper and maybe the larger peninsula? Which means a contrarian would invest outside it. Maybe way outside it. Like Kansas.
Well, I was just trying to explain why that might not need to be the case. You can be contrarian and focus on the Bay Area. And that in fact might be smarter.
This resonates so strongly with me, and I'm so glad you posted it. It reinforces the framework I've been using myself for the past few years and perfectly articulates what I've been trying to explain to myself even.
I can add even one more I personally follow. The standard way most tech companies put capital to work is hiring or aqui-hiring tech talent.
My own experience tells me that's too risky since I've worked with far, far more overvalued people than undervalued. Therefore, I reinvest the profits of my tech business into companies that have steady and real return on equity (e.g. Wells Fargo). Imagine that: A tech company that invests all retained earnings in a boring bank! :)
And from reading some books discussing Andreessen & his past ventures I wouldn't have thought he'd have considered Snowden anything other than a +ve force in the information world.
Perhaps Andreessen has interests in companies that were hoping to help governments spy on their charges?
Or maybe he just happens to believe what he says? Maybe he believes that the sensitive information that Snowden released is damaging the security of the US?
I personally think Snowden was a traitor. He released way more information than was necessary to accomplish his goal; The information he released has almost certainly put lives in jeopardy; AND he fled to Russia which is essentially a totalitarian state where his presence, if not aiding in a material way, is aiding Russia in a PR capacity. If you haven't noticed, Russia is turning out to be, if not a geopolitical foe, and outright enemy of the United States.
Why have we got to jump to questioning people's motivations every time they stray from the party line? ...As if there is only one acceptable opinion to hold on everything.
The only comment he made were to blame Snowden and brush off the massive surveillance and obstruction of civil liberties without a word. So rather than consider the problem that created Snowden he only blames the messenger. I can't think of a single character from the past year, be they pro or con, that commented on the topic in a more pathetic way.
I wasn't aware of all the great stuff AH is doing. It looks impressive.
They're not the only VC firm innovating, though. First Round Capital, for example, also has a terrific recruiting division (I know this is common at other firms as well). FRC also created the Dorm Room Fund[0], which invests small amounts in student-run companies and gives them access to FRC resources. FRC has an internal "platform team", developing technology to enable knowledge sharing between portfolio firms. In short, they work hard and do new things to help entrepreneurs succeed.
I'm speaking about First Round because I have direct experience with them, but I'm sure the same is true of some of the other VC's as well.
[0] dormroomfund.com - disclaimer, my former startup received funding from them.
It seems really odd to have such an powerful part of the Silicon Valley establishment accused of disrupting anything. Unless there's some aspect to their business model that differes from venture capital in the most traditional sense, and that I am missing.
Right - but linking their company's abbreviation to the software development concept of I18N, would have been a great introductory paragraph, that picked up on the essential geekiness of Ben and Marc. It's
Andreessen Horowitz has generated a positive reputation (in a field where most of its counterparts are ridiculous, incompetent assholes, so seeming strongly competent provides prominence) but here's a stark indicator for "wolf in sheep's clothing": http://a16z.com/2014/07/30/the-happy-demise-of-the-10x-engin... . Read it.
If you don't have a nose for rot, I'll point your way to it:
Today, if you have a great idea for a software product, you need to either
be an engineer or find one. Tomorrow, that billion-dollar startup acquisition
might not need an engineer at all.
I have no direct knowledge of A16Z, but admitting a desire to make software "a low-skill trade" is chewing our food for us. The moral conclusion is right there. They've actually admitted to being the bad guys, to wanting to commoditize top talent in favor of our MBA-culture colonizers.
Most of the time, the bad guys don't say, "We're the bad guys". You actually have to do some research. You have to poke around the countryside and find the emaciated political prisoners and the mass graves to figure out who the bad guys are. Not here. The good news is that the Silicon Valley elite have such unprecedented arrogance that, often times, they'll actually admit what they are. They'll flat out say, "fuck you programmers, you had your turn."
For those who aren't educated on the matter, the evil of Silicon Valley's last 20 years is that it has become an economy of resource extraction (like Saudi Arabia) instead of one that genuinely creates wealth. The difference is that, instead of said resource being oil or natural gas, it's the intelligence and energy of each generation of young people that hasn't figured out, yet, that the only people with a decent chance of getting rich in this Valley game are VCs and landlords (i.e. not them, the people doing the actual work).
Your acting just like the old factory worker who's pissed that his profession is starting to become more automated. Wake up and smell the coffee, developers are getting more productive and you have to adapt to the decreasing demand that this will cause. Programming is job in the labor market just like a fast food cooker. If you want to make some more money, either learn some skills that most other people do not have and that are needed (low supply, high demand), or start a company so that you can make some profits (which technically have no limit).
BTW, I think you need to look at the salaries of some other professions. I'm gonna be making 6 figures out of college as an SDE, while most of my engineering and business friends are going to be making about half of that. Talk to non engineering/business majors (cough, communication majors, cough) and the pay gets even worse.
You're right, of course. Developers still hold a lot more of the cards, and power, than investors would like.
But you're also missing the irony here: when software foundations consolidate, so will everything else in software. Instead of a thousand crazy 'apps' like SnapChat, you'll have user-derived variations, fulfilling the long tail, leaving little need for VC and the silly valuations they inspire.
Sims brings up the following point about VC returns:
> The predominant old way of thinking about venture capital is that you: a) build up a great brand and reputation with a large portfolio of investments, b) hire partners who have individually strong brands of their own, and c) collect hefty management fees on each fund. The industry standard is a 2–2.5% yearly “management” fee, a figure that gets pretty large on a billion dollar fund. And, in my experience, not surprisingly, the senior people get a disproportionate slice of that management fee. At the same time, the venture capital industry has been a glaringly poor-performing asset management group, consistently underperforming the S&P 500. (For more detail on the struggles within the VC industry, a recent article on the Harvard Business Review Blog by Diane Mulcahy, a senior fellow at the Kauffman Foundation, entitled “Venture Capitalists Get Paid Well to Lose Money” is well worth reading).
But never swings back around to it (unless I missed it amongst the flowery prose). Which leads me to ask: are there data points that compares a16z (or other VC firms!) against the S&P 500, besides the aggregate?