Andreessen Horowitz, Deal Maker to the Stars of Silicon Valley

This article is absolutely on point with respect to bubble inducing valuations (created by VCs such as AH). The problem is that VCs (even successful ones) are judged by inaccurate measures. A successful VC is one that has successfully unloaded his shares to someone else - not necessarily one that has gone on to create successful long-lasting companies. It's tool early to judge if AH is successful - after all it has been founded only in 2009. Win-loss records for companies should be compiled only in time-scales that measure decades not years, or in funding rounds. See https://medium.com/milibo-matters/a-critique-of-what-did-billion-dollar-...

Marc Andreessen - especially in his pre-AH days - has generally been associated with companies that show promise (or interesting technology) and from which he makes money by cashing out based on that hype. There is little if any track record of him being a key executive or early investor at businesses that later become highly profitable industry leaders (e.g., businesses like Apple, Cisco, eBay, Google, etc.) If one wants to be charitable to Mr. Andreessen, one can blame acquirers or successor executives for that lack of later success, and say that he has shown a good sense for timing exits. If one wants to be less charitable, one can say that he's made his money on the basis of hype and the greater fool theory - not building great companies.

As a long-time Valley CEO recruiter, I can second the author's description of Mark Andreessen as a poster child for the great tech bubble of 2015. Despite his public admonishments of CEO founders for overspending, his firm's investment practices encourage founders to run through their capital as quickly as possible.

What's worse is that many of A-H's companies are already acting as if they've made it, working in lavish offices and paying huge packages for executives in the process.

When the next recession hits, A-H will be rightly criticized for having fanned the fire of self-promotion and excess. They're not the only ones engaging in this practice, but they're MUCH more public about doing it.

It's all well and good taking care on the talents, but one main difference between Hollywood and Silicon Valley is that, Hollywood does "sell" the talents. As an investor, one has to ask, would you invest in anything that a "talent" (however talented) has, without regard of what those ideas are? The answer is an emphatically no.

To be sure, Marc Andreessen fashioned his career on the meteoric rise of Netscape. Truth of the matter is, he was not even the one creating the browser, when that honor actually belongs to another middle age programmer who did most of the work. Andreesseen got his break (and cover on magazines, publicity, among others) because back then, it's considered to be an easier sell to put this young kid as the front face.

All these VC's and angels are just taking the shotgun approach to investing, scattering their shots all over the place. Who cares if 999 deals fall through, as long as they hit that one big jack pot deal. As long as they have new money coming in, they can afford to write off the loser deals in 99.9% of the time. Do you call that wisdom or smart investing? Hardly.

1968, all over again - glamour, glamour, glamour - fueled by the back story of every notable billionaire. There will be free haircuts.

I would add the same analogy applies to professional sports and executive pay: "they tend to make everyone poorer but themselves".

VC is discretionary investing - the amount of money in VC is very elastic to recent returns, and probably very elastic to recent high-profile returns. After a few big hits, money pours into VC, and VCs are required to spend that money, every month, often in companies that everyone knows are dubious or overvalued. It's a simple contractual obligation. I was in VC before one of the bubbles, and the difficulty of meeting that obligation, and the contribution of that obligation to making the situation worse, were frequently discussed.
After a few high-profile failures, the money leaves VC, and good companies go without funding.
VC is inherently a boom-and-bust business.

I am a simple guy when it comes to business. There are no evil players here, just people trying to win with whatever tools they have. In the end, customers need to be willing to pay more than the cost of production. That is frightfully rare in the start-up world. How many of us, regardless of wealth, really want to find a contractor online, or someone to shop for food at a premium when a store is a few blocks away? A great many companies are only sustained because they have cash coming in from investors, not customers. When the investors tire and move on, these companies die. Or at least their valuations return to earth and approach metrics that the rest of us have based upon actual cash flow, not hype. Unfortunately those of us who invest in indexes and have tried to avoid the game, will see pain too. Gopro has a P/E of 47 or so. Box runs at a solid loss and seems to love to have its CEO in the news. They are a commodity product valued at 10x or so of revenue and no profit. Some will emerge as winners, some will survive, some will be sold and some will die. Such is business. The big wins of VC with a few elite companies, seem to outshine the multiple losses. As to CAA, the analogy loses me. As long as there are people willing to massively overpay for a boxing match live or on TV, where will be a place for talent to be hyped. CAA lives in a world where real money is made in real time, with willing buyers and sellers. VC's exist where losing and failure is the norm.

The Hollywood analogy is very interesting.

But here's another: a Ponzi scheme.

Wages, rent, interest, profits - the four sources of income that every Econ 101 student learns. When an economic entity becomes - or is believed to be - unique or non-reproducible, its compensation becomes rent, not wages. If somebody figured out the average hourly "wage" of film stars - rehearsal and performance time on the set - it might be considered irrational. The reason why Hollywood stars get paid so much is that they are rented, not simply paid for their daily labors. No one could "replace" Glenn Close - even though, let's face it - there were other actresses that the average moviegoer thought were just as beautiful or just as talented. What Ovitz did is convince studios/producers that its clients were unique, not reproducible and, therefore, introduced - at the least - "rental elements" into their compensation. Of course, its first step was to convince its clients that they really really were unique and irreplacable. Isn't this what Andreesen does?

good analogy to Hollywood studios except the studios never EARNED a ridiculous 2% management fee from their capital funding ie investors, they had to pay for their funding in the form of loans or give up points etc.

I wouldn't have chosen the analogy to Hollywood, having been through two successful start-ups, but this article has some pretty important points.

Hooking up with a VC is not so much about the money, it is the expertise and the "street cred". The VC helps you determine what to pay engineers, the number of option shares to hand out; how to find space and negotiate real estate leases, etc.

"Burn rate": sometimes it's just out of control spending, and, more often, it's about being first to market, or grabbing market share. With all the money and focus on Social Media companies right now, it's a little of both.

With a good idea and good people you can have a product out in 2 years. You don't have to spend 5 years writing code; much of it "plumbing" as we used to call it in the 90's. When your product is "free", "sold" to end users, and supported by advertisers, you don't have the problem that plagued enterprise software developers: finding your first big sales.

Where the Hollywood metaphor is apt, is that Silicon Valley is now turning out blockbuster product that is essentially junk for the masses. If you are trying to turn out something new and different, it's like being an Indie movie director, you have to raise your own money.

The Emperors New Clothes. Find it, hype it, convince everyone it's the next best thing, sell shares in it, make a ton of money while you can, at the first sign of trouble leave sell and make a wedge of money. What's new in that. From Twitter to whatever is next, their valuations based on zero profits and potentials that never quite pan out are delusions - juts like the Emperors New Clothes, until somebody dares to point it out and everyone else suddenly agrees. That's that bubble burst until the next one. Sadly the system allows these people to do it, market it how they please and getaway with it because the small boy who shouts out "Look the Emperor is naked" hasn't yet been heard. It amazes me how deaf the dollar sign can make people, and how willing they are to see what they are told they should be looking at.

It is good to see a non-Silicon Valley start-up like Dwolla (good on ya', Ben!) get mentioned favorably in a not-so-flattering portrait of VC excess.

This illustrates that not all VC money is misguided and ill-spent. The question is, how do other promising platforms (e.g. https://liberationmedical.com/) get on the radar of VC firms such as Andressen Horowitz?

Answer: Post comments with a link to your site on the NYT and hope an open-minded investor takes interest!

Are you reading this, Mr. Andreessen?

The economics of movies and TV have shifted since the Seinfeld-Friends era when, say, TV show casts were being offered 9 figures for 22 episodes. The holders of intellectual property have more power today in the era of movie sequels and reality TV shows than in the 1990s.

As a start-up CEO I look at many of AH investments and see reasonably good ideas overwhelmed with way too much cash at ego-inflating valuations. These mostly young entrepreneurs mistake cash balances with real business success and start spending on overpriced offices, unsustainable perks, expensive marketing campaigns and bewitch themselves with metrics like daily active users, session times and virality. Nothing is less beneficial to a start-up than to have too much money and a patron that encourages burn rates that no real business could ever have in the name of disruption. Add this to the new trend of allowing founders to take out cash in B-round financings creating millionaires long before their businesses are sound and you have a real Hollywood delusion. Once you are treated as a star, you'll never share a dressing room ever again.

The article only cites one piece of hard data supporting its main thesis: VCs (who have presumably lost out to Andreessen Horowitz on various deals) report "the firm often comes in 50 to 100 percent higher than many other bidders". OK - for argument's sake, let's take that as fact, despite the obvious flaws in doing so. What's the opportunity cost? If you only pay "market" and, as a result, only get in, say 1/5th of the 10X (or 100X) returns, you may be leaving on the table multiples of what you are "saving" by being more conservative. While only the firm and LPs will know if the strategy is ultimately successful, I've seen/heard of far worse ideas.

I'm surprised by the tenor and intensity of the claims in the article given that they're backed up by limited and spotty data. Of course a bunch of Andreessen Horowitz's investments have gone belly-up or only succeeded moderately, that's in their business model.

They're paying a lot to get into the best companies, because the thing that matters the most to each of their funds success is getting into the next Facebook, Google, LinkedIn, Salesforce, Twitter, etc. It seems on its face pretty crazy to invest $100M for 20% of a company that's spending money like crazy, but if that company goes public and is worth $10B+ (which the winners are) they return not only their whole fund (offsetting the losses from failed companies) but generating a hefty profit for their limited partners.

At the end of the day, they are beholden to their LPs, and if they don't produce returns they will go out of business. I think using their management fees to provide services for young companies rather than pocketing fat paychecks not based on investment returns is admirable relative to the rest of the industry.

A more interesting (and Upshot-like) article would have been to break down how the economics of VC firms works. It's not obvious, but because of the power-law distribution of outcomes, you can pay a whole lot for a lot of companies as long as one of them wins big. Instead of that, we got some spurious reasoning and comparison to an industry whose economics are fundamentally different.

Really insightful analysis. Here's something that jumps out at me: Hollywood studios chronically overpay for projects with big stars partly because, as unreliably "bankable" they are, they are marginally more bankable than unknown actors and directors over the long haul - it's a hedge play.

This is clearly different from Silicon Valley, in which disruption is an essential principle, and disruption virtually never comes from established talent. Unlike Hollywood, in Silicon Valley nobody but Andreeson-Horowitz thinks that investing in established talent is a hedge.

Come on people, bubbles aren't a problem for Andreessen Horowitz, they're integral to their business model. Find a fad, hype it, get out before it becomes yesterday's news. Dwolla? Zulily? What's next, Pumpidump?

When things hit the fan, i think they will be regarded the same way most view Angelo Mozilo. Unfortunately, these wont end up in jail either.

This IS a new tech bubble, not unlike the old one that led to the collapse in 2000. The valuations of the newer companies are not based on their real, perceived value, but on the idea that someone else will pay more, bet more, on their long term potential. If I buy in at 100 per share, I am betting that someone will be 120 and that person is betting that someone will pay 140 and so on and upward until...no one is willing to pay any more than the last person holding the stock decides he must sell before it loses all of its supposed value. It is like a paper airplane that stays up because people underneath it are blowing: what happens when they run out of breath?

The only question is where is the endpoint with each stock, which also relates to the end point of the bubble itself. When that endpoint is reached, it's over.

One way of seeing if a company is very likely to fail is to look at their "burn rate". How fast are they spending the money that came in from venture firms or public offerings? Many companies in the previous bubble economy spent money trying to demonstrate what dynamic, growing businesses they were. The money was being spent for show, not for actual growth. Spending money to quickly without a close tie to earnings is a huge warning sign.

None of this matters. The market is held up on a high level until it isn't any more. Those who profit don't care, as long as they get out in time.

Doug Terry

Marc Andreessen is more Con Man than anything else if you read this article a carefully and look at the reality of his investments. Baloney to the idea he and his partners are making carefully considered investments. They y=used their inflates reputations and insider status to buy into trends that they crate using money that institutional and individual investors feed them based on the hype of a few notable inflated success stories while many of the young companies they invest in return nothing to their investors but hefty management (sic) fees to Marc Andreessen and his buddies. Bitcoin ventures are a perfect example of this Con.

Mr. Andreessen was the promoter of the browser created by Eric Bina at the University of Illnois. Andreessen was not the brains behind the broswer and he has said so. Next... Andreessen was taking a job at a company after University. He was not starting his own company and may never have even become an entrepreneur. One day he received a phone call from James Clark, the founder of Silicon Graphics, asking him if he would like to start a company together and that company became Netscape. Perhaps Clark would have called Eric Bina and not Andreessen had he realized who actually made the browser that Andreessen was promoting. Andreesen got saved at Netscape when it was bought by AOL for $10billion at the height of the bubble. Netscape was shut down a few years later. It was never successful as a company. Internet Explorer became the world's browser till Google's Chrome took over. If anything Andreesen is a very lucky guy and a good talker. Ps. He did not invest in Facebook until it's much later rounds. That doesn't count as investing in Facebook.

The dynamics of Andreessen Horowitz are completely different than C.A.A. Mike Ovitz was always playing with other people's money, e.g. extracting a huge residuals deal for Jerry Seinfeld. Mr. Andreesen pays money out.

Andreesen might want to check Ovitz record when he was spending the money of the Disney corporation. He tried his hand at various acquisitions, like buying the Seattle Seahawks, but last I checked Paul Allen was hoisting the Lamar Hunt trophy.

"Any fool can buy a company," said Henry Kravis. Even if it is a partial investment.

Mr. Andreessen is supposedly - likely true - an excellent computer programmer who was employed decades ago on the project sponsored with federal government funding at the University of Illinois that involved creation of a web server and a graphical web browser. No doubt one of many excellent such programmers there. He then absconded with the knowledge gained there, including relevant code nod doubt, to start the Netscape Corporation with James Clark. Greed, self-interest are two other characteristics of his other than good computer science knowledge. I wonder what his one-time colleagues on that project thought of him then and think of him now.

The phrase "venture capital" has a laughably laudable connotation. The reality of the people involved with such companies is usually anything but laudable. The key characteristics are in effect pure insider trading on non-public information, reckless promotion of investments to the average Joe, inside, highly enriching agreements for few fellow-travelers and so on.

This is one more highly negative aspect of the version of capitalism practiced in the USA. Venture capital has zero to do with furthering innovation that provides some new social benefit to people in generall and everything to do with enriching certain individuals at the expense of society at large.

Facebook and Twitter as socially beneficial innovations? Please. The current equivalent of the wasteland generated by an earlier technology, television.