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Tech/VC

VC returns suck even more than I thought

Andreessen Horowitz performance is not as high as you would think.
OPM 2 min read

The 21st century is the century of disagreeableness. — Mark Andreessen, founder of Netscape and venture capitalist

Though the upcoming core of the Second Mouse Plan is to offer solutions, the introduction was largely dedicated to pointing out the flaws of early-stage investing. To do so, I relied mostly on the essential nature of what investing is and the experience of what happened in the 20th Century. I am not a VC insider, I only had anecdotal evidence that VC returns weren't so hot. And in any event, my point was that over the next few decades, despite the transformational role of technology, VC type investors would not have great returns. Since then, I have come across data that validates what I am saying.

This is how Silicon Valley publication The Information discusses the returns of luminary VC Andreessen Horowitz (aka A16Z):

One of Silicon Valley’s best-known venture firms, Andreessen Horowitz, saw its performance slip significantly after the blockbuster results of its initial fund, internal data show, illustrating just how cutthroat venture capital has become as even big names struggle to deliver outsized returns.

The funds the firm raised in 2010 and 2011 showed a net internal rate of return of 16% and 12%, respectively, as of Sept. 30, 2018, according to an internal report on Andreessen Horowitz prepared by one of the firm’s current limited partners and seen by The Information. During those years, Andreessen Horowitz’s limited partners […] could have done about as well investing in common stock market index funds.

The results are a significant drop from the 44% return rate of its 2009 fund, which benefited from an investment in Skype, the internet telephone-calling company that Microsoft acquired in 2011 for $8.5 billion.

The article goes on to claim that subsequent funds have not been so hot either for the most part. I am not hung up on all the specifics. These are leaked data, VC return measurement is complicated and I don’t even know if the funds are fully unwound. But consider how eminent A16Z is in its field. How much they have gotten the zeitgeist of the past 10 years right (ie their famous essay “Software is eating the world” in 2011). The 2010 and 2011 funds included such huge wins as Slack, Stripe and Airbnb. If A16Z cannot deliver meaningful outperformance in what must be a golden age of tech investing, then forget about it, the whole thing is hopeless. You can imagine how unpromising VC investing is going forward (and for lesser practitioners).

We don’t evaluate public investors on the basis of a few 10 baggers they have had. And yet, today, if you had one or two big VC wins, that seems sufficient to raise a second larger fund. In fact, just being an early employee of a unicorn is often sufficient to raise a fund. This pattern where everyone and their dog is able to raise a fund has often signaled the top of an investment strategy. There will be a lot more adversity to come in venture land.


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