Andreessen Horowitz Returns Slip, According to Internal Data(theinformation.com) |
Andreessen Horowitz Returns Slip, According to Internal Data(theinformation.com) |
In general, it's hard to answer questions based on this chart. In addition to IRR, VC funds are judged on two other key numbers:
TVPI (Total Value to Paid In) which is the total value of all of the fund's investments divided by the capital LPs have put into the fund, both realized and unrealized. For the latter, LPs will often look at the investments themselves and make their own determination of value. Especially in this environment, many funds have investments in unicorns that are inflated and never end up being realized. A fund with a $800m TV may not actually look great if a large % of that is in WeWork and is based on a $40B valuation. This is also the case for IRR.
DPI (Distributions to Paid In) which is the total amount of cash a VC fund has sent to LPs divided by the amount of the LPs paid into the fund. At the end of the day, this is the most important number as it's what the fund's investors make, but it can take 10-15 years for a fund to completely distribute everything, so it's not that useful unless the fund has been around a long time.
1. A16Z has 17 funds, with varying degrees of investing angles (early stage, crypto, bio, etc). So trying to do a fund by fund analysis is unfair.
2. IRR can be deceiving as it's time based. Some LPs invest based on "X Return" or IRR, and so cherry-picking one over the other is disingenuous without mentioning the other.
3. The larger the fund, the harder it is to have a higher IRR. A16Z keeps growing the size of it's funds (latest is $1b+). There are just simply not enough good deals out there to deploy that amount of capital. This is just like growing your top line revenue 50% from $1M to $1.5M, vs 10% from $10 to $11M. The former appears to have be semantically "better performing growth", when actually you made $500k more than you did previously.
4. The fact that they, a VC firm, are even returning their money means LPs will continue to invest. VC as an "asset class" is notoriously underperforming, with exception to the top 10% of the firms (which A16Z would likely be). Which begs the question, "so what?".
"IRR can be deceiving as it is time based". No, it's the other way. A return without mentioning how long it took to earn it is deceiving.
The funds the firm raised in 2010 and 2011 showed a net internal rate of return of 16% and 12%.
The results are a significant drop from the 44% return rate of its 2009 fund.
But otherwise at a more local level high risk capital expects high rewards.
It seems like the more money you have, the harder it is to deploy it efficiently.
It would be interesting to know the influence of David Swensen (the CIO at Yale), who's put a large portion of their endowment into Private Equity and Venture Capital investment, and how other large funds might be mimicking his strategy.
People always compare VC vs the S&P500 but I wonder if there's a side benefit to VC in that it's not necessarily linked to stock market fluctuations.
Are VC returns in the aggregate going to turn to absolute crap over the next ten years as hundreds of new funds (with a new one popping up every day it seems) all grinding it out - or will we see the opposite, where a lot of these smaller funds have very successful first funds (partially constrained by the sizes they're initially able to raise), only to be dramatic underperformers as they raise second and third funds?
Finally, it seems like more money doesn't make for better results (past a point). The Vision Fund being example A.
Found in the Founder's twitter bio
Except that this is how some LPs want it to be reported, so how do you explain that? If you want to do a comparison to stock market returns ("seeking alpha") then sure, IRR makes sense.
But I agree with the rest of your statements. Better to have a VC investment that brings a 12% return or whatever than some negative returning European or Japanese government bonds.
Except the implication of the article is that A16Z funds are getting "worse" and thus underperforming ( = "A16Z must be a bad firm") making it newsworthy. I am far from an A16Z fanboy, but this is not newsworthy.
Normally business journalists refer to industry expert (for example, an LP analyst) to determine whether "is this bad or good?" rather than what appears to be "IRR is down, this must be bad".
Investors who put money in VC are generally so wealthy that by the time they are ready to invest in VC they have exhausted all other standard investment opportunities like stocks, private investments in mature companies, personal trusts and real estate and are simply looking for anything with a higher chance of return than a bond.
I’d estimate 90 out of 100 times the VC burns entirely through the money, 9 out of those 100 break even, and 1 out of 100 is profitable. 0.1 generate a return of something like Apple or Google.
That 0.1 in a 100 chance is good enough for the investors as they don’t feel any pain when it’s lost.
That’s why VCs have no interest in sustainable but mid-size businesses, only 100x opportunities. Their public marketing will push that it is because they are visionaries, the reality is that they have no interest or expertise in building mid-size businesses and the returns are so awful for their ‘visionary’ picks that without that 100x investment working out their funds would consistently be total losses.
1. Consistent High Performers vs Everyone Else: As with colleges, grad schools, starting salaries, hedge funds, and a host of other things -- it would be good to have a top-20 "typical" return and an aggregate "typical" return.
2. Returns are only one aspect, returns correlation is another. Even post-fee returns at s&p500 rates would be awesome if they are uncorrelated to the rest of the portfolio.
When you already have a few hundred million in stocks, bonds, etc, the marginal benefit to putting another few million into the bond market is completely irrelevant--it's a rounding error in the overall portfolio. But putting those few million into a venture capital fund has the potential to generate a noticeable return.
It can also insulate you against structural shifts in markets. If WeWork were to fundamentally change the global real estate market, or some new battery startup fundamentally changes the energy landscape, investors in the incumbents can be left with significantly devalued portfolios.
Having a piece of anything/everything that might become the "next be thing" is a hedge against that.