The Andreessen Horowitz Effect(techonomy.com)
techonomy.com
The Andreessen Horowitz Effect
http://techonomy.com/2012/08/the-andreessen-horowitz-effect/
9 comments
“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.)
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.)
AH is trying to get into the very few Big Deal companies that are created every year. That does probably mean they're willing to "overpay" relative to other investors to get into them, if need be. But if they pick well this is only "overpaying" in the sense that Accel overpaid for Facebook in 2005. So far they seem to be picking pretty well.
I think most VCs are just intimidated by AH's conviction. It takes guts to make the moves they've made in such a short period of time. They do big things faster than most VCs do small things.
I think most VCs are just intimidated by AH's conviction. It takes guts to make the moves they've made in such a short period of time. They do big things faster than most VCs do small things.
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.
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.
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)
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)
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.
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.
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.
To be pedantic, it's a16z...like i18n or l10n. (so you can edit if you want)
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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.