There was a discussion on HN about a week ago on a16z and its performance[0]. Does anyone know how a16z's funds' IRRs compare to those of other top-tier VC firms (Accel, Benchmark, Greylock, Sequoia)? And are these "top-tier" firms actually providing the best returns for their LPs, or have they just created that perception?
With so few IPOs or acquisitions, how are the LPs actually getting their cash back? And how much of that money is eaten up by the "services" that a16z provides to its portfolio companies, not to mention the insane amount of content marketing they've done over the last few years (blogs, podcasts, books, etc.)?
So the big wins claimed were all early in the first round: Instagram, Twitter, Skype, etc.
They made about $100M off Skype, and probably comparable or less from the others, but if they proceeded to raise $3B and invested it in companies like Jawbone, that completely kills their IRR. That's what I was getting at when I posed the question in the original thread. A few small wins do not undo many large losses.
It will take at least a full cycle to see. In another 5-10 years we can compare to the firms you mentioned. Obviously in the meantime a16z don't mind being compared to Sequoia et. al.
a16z charges 2 and 25. 2% of AUM each year, 25% of the profits. (2&20 is standard in hedge funds.)
Yeah the problem is that their instagram investment made great returns on a small investment, which just didn't make a big enough impact on their overall returns.
"And how much of that money is eaten up by the "services" that a16z provides..."
As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc.
Therefore a16z's management fee from this specific fund is about $30M a year ($1.5B * 0.02).
However, please note that this is just the management fee of ONE fund. A VC firm often raises additional funds before a previous one ends its cycle (that's why you see fund names such as a16z fund I, a16z fund II, etc). a16z therefore has additional annual management fee from the previous, unfinished fund as well. I would not be surprised if a16z has $50M management fee per year across its multiple funds.
> As a rule of thumbs, VCs take 2% of the fund's totally funding every year as "management fee", to pay for salaries, office rentals, marketing etc.
a16z spends much more than most VC firms on providing all kinds of services (such as recruiting) to their portfolio companies, and hires a ton of people for that purpose. It's not clear whether those expenses come out of the management fee or not.
They're clearly not the only ones to do that. For instance Social Capital provides all portfolio startups with a comprehensive data analytics platform and a team of data scientists. For recruiting, almost all large VC funds have one or more dedicated talent sourcing people - Index, Accel, etc. Bottom line: I don't see any specific reason to justify a 3% management fee, except the cofounders' unique insights and contacts in the Valley and their personal relations with LPs
That's interesting to know. My guess is that, other than the management fee, there are two potential sources of money that can pay for those additional services:
1. A portion of the profit that a16z made from previous exits.
2. This is a less likely option - asking portfolio companies to pay for those services. I know VCs that bill their portfolio companies for certain professional services.
Business development, market assessmebt, technical development etc.
None of these firms that charge their portfolio companies are the typical valley top-tier funds, but I do not think it means that charging portfolio companies for professional services is a bad thing.
A16Z has a lot of in house partners that focus on things other than just investments.
Edit: Just want to say that the top funds do not charge for these services. Some funds do - they invest and then you pay them back a bunch of money for services.
The only original IRR which was semi-published was the first fund (300 mil). If I recall it was a 200 ish % because of Nicira, Skype, Instagram, and FusionIO.
I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs.
As to the expenses...the marketing is quite inexpensive and has more than paid for itself. No idea on the costs around the services to the portfolio companies.
Full disclosure: I've worked for quite a few of their portfolio companies.
> I would expect the IRR is quite good as the follow up funds tend to be oversubscribed and are full of original LPs.
If the IRRs for the follow-on funds are counting portfolio companies that haven't exited (according to their latest valuation), then it might be quite deceptive. If those companies can't IPO or be acquired without a significant drop in the valuation, then the paper IRR won't hold up.
Most fund agreements prohibit cross-fund investment, mainly because it's an incentive for fund n+1 to be used to prop up losing investments from fund n, deferring the day of reckoning.
Really? That's interesting, though not unheard of. I haven't seen their LP agreement of course.
There are actually two reasons why LPs typically don't want to agree to this. The first is that most funds focus on a specific stage (early, late etc); typically early stage funds want to invest through the entire cycle (so if firm X puts $5M into your A round they plan to put a total of, say, $20M through the liquidity event). But a later stage fund might want certain investment criteria (expansion, growth, whatever the partners come up with) and don't want it used for "familiar" deals that might not fit that thesis.
The main reason, the one I mentioned above, is propping deals up. the big driver for this is that the IRR numbers are completely made up based on judgement, which has to be the case as most of the fund will be tied up in illiquid investments. However the people making the decision is conflicted -- they are the fund GPs and of course want to look good to get new investors into their next funds. You shouldn't assume they are corrupt or malevolent: inherently they can't be dispassionate, otherwise they wouldn't be qualified to be supporting their portfolio companies through thick and thin. But this is why firms are unhappy about CALPERS releasing IRR numbers, or why Fidelity might legitimately (publicly, as they are required to) mark an investment down while the venture firm might just as legitimately consider it higher in value -- and different venture firms could even disagree.
So the poor incentive cross-fund investing provides is that a fund that is struggling, especially a zombie fund, might want to bridge some of its firms via an investment from a newer fund in the hopes that things might turn around. This incentive is even stronger during a negative macro event (i.e. a recession). An LP in the new fund doesn't want to see its good dollars following bad, it wants the money in new, promising investments.
Now if you are a big firm and can throw your weight around, or have some unicorns that everybody is clamoring to get into even at a nosebleed valuation, then you might be able to get the LPs to permit cross-fund investments. But you might not even want it (don't forget the GPs will likely be different in the different funds so their interests might not even align.
Ah, I think you misunderstand the structure. They have structured the raise as two interrelated related funds. The two funds presumably invest in the same set of portfolio companies. I assume they structured it this way as way of reducing fees and perhaps because some LPs were interested in different levels of exposure.
This is the same size as Andreessen Horowitz’s past two funds and, like each of those efforts,
includes a primary pool (which can do both early and late-stage deals), plus an overflow pool
for portfolio companies that require significantly more capital.
The breakdown this time is $1 billion for the main fund and $500 million for the parallel
fund―the latter of which only collects management fees once capital is committed.
If this parallel fund had been able to invest in earlier funds (remember each fund is a separate company with a different set of LPs and GPs) I am sure they would have mentioned it.
Unlike most VC firms which may be paying MPs millions in cash comp, a16z takes their management fee and plows it back into the platform (marketing, HR, research, etc). a16z's core team would never half to towel again in their life, so they don't care much about a couple hundred k here or there. They're looking for the next G/FB/TW/AirBnB/Uber.
Is there any evidence that VC firms are any better at predicting the future than hedge funds? I understand a few years ago that perhaps there were some inefficiencies in the startup market which could be exploited, but now that everyone focused on SV (and elsewhere) startups, is there really a reason to pay 2% of AUM for someone to make guesses on your behalf?
It's interesting that Zynga and Groupon could be considered as part of a basket of "decent results". I mean, I'm sure a16z made out quite well, but both companies are worth a fraction of what they were sold to he public for. A less generous interpretation is that the early investors in these companies pulled a fast one on the public. "Getting to IPO" shouldn't be a measure of success, but that's just me.
Keep in mind that IPO investors are not John Q Public, but sophisticated Wall St. types. They knew the game on those investments - stock market musical chairs.
Not sure why you get downvoted. Its true, with all this VC casino "startups", you as a hobbyist, not living in the us or be part of the bubble stand no chance.
With so few IPOs or acquisitions, how are the LPs actually getting their cash back? And how much of that money is eaten up by the "services" that a16z provides to its portfolio companies, not to mention the insane amount of content marketing they've done over the last few years (blogs, podcasts, books, etc.)?
0: https://news.ycombinator.com/item?id=11836341