[jtzhou]

There is definitely a lack of transparency in venture funding, and studies show overall how VC's have been barely breaking even. Most of the big name investors were successful entrepreneurs (e.g. Andreessen and Netscape, e.g. Khosla and Sun, etc) who are assumed to be good investors. In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave.

Also, the quote attributed to Andreeseen at the end was originally from Warren Buffet's 2001 letter to shareholders. "After all, you only find out who is swimming naked when the tide goes out." http://en.wikiquote.org/wiki/Warren_Buffett

[garry]

> In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave.

This demonstrates a lack of understanding of venture returns. Actually Khosla, Andreessen, Benchmark and the rest of the top tier account for the vast majority of the outsize returns. The "average" VC you haven't heard of, and those are the ones who can't even get introduced to the startups that account for the majority of the return. The power law distribution for startup returns is widely acknowledged, and the top VC phenomenon is that power law at work.

"Adjusted for risk." Actually this particular part of what you say is particularly untrue. When people talk about risk, they also talk about reward. Typical public companies may only yield a few percentage points increase, or 2X at extreme best over a year, but startups can yield 100X to 1000X return. So even after adjusting for risk, VC at its best (given a: good deal flow and b: good ability to help / pick companies) absolutely can outperform the S&P500 / index funds. The asset class as a whole is terrible (understandably professional LPs have difficulty picking the right general partners to back) but the best VCs do just fine.

Professional VC's aren't throwing darts at a board. The best ones see great founders and great new businesses far in advance of the rest of Wall Street or mainstream business press.

[adventured]

Your 100x and 1000x example would represent the best of the best of course.

Then you use that to contrast how a public company may only yield 2X at an extreme over a year.

First, VC investors are rarely looking at a one year horizon on a new investment, so I have no idea why you chose a year as a reference point. Why would you compare an elite outcome of 1000X in VC to a typical public company?

Second, just like the best VC investments, some of the best public companies have returned 100X and 1000X. Dell, Microsoft, Oracle, Cisco, Walmart, Berkshire Hathaway, AOL, and numerous others.

Berkshire is closing in on a 1,000X return. Walmart has produced a 1000X return.

Cisco pulled off a nearly 100X return in the first seven years as a public company (it took Facebook eight years to IPO, and Google six years).

Apple recently did it as well, with a 100X return since 2003. Las Vegas Sands managed an 85X return over five years recently.

The only valid hit against public companies like these, is the time frame it took.

[garry]

You're right about time frame. We live in very different times now though — the vast majority of fast growing companies opt to stay private for far longer, thanks to Sarbanes-Oxley. Those juggernaut public co's you mention went IPO with a valuation in the hundreds of millions, which accounts for the 100X to 1000X. Now all of that is happening in these late stage rounds. Major macro shift that wasn't true before.

[foobarqux]

I guess the entire professional investment community is incompetent then for investing so little of their money in VC.

[garry]

Most professional limited partners typically do a small allocation (only a few percent) to VC overall.

[Brushfire]

There are a limited number of great, breakout startups, and they can only really utilize so much capital. Reallocating your pension fund doesn't magically create more amazing startups.

[foobarqux]

Scarcity should drive up the price and push net returns towards those of the broad market.

[ajju]

The thing you are missing is that it's really really hard to find the breakout startups. Even the top tier VCs don't know for certain whether a specific investment will be the breakout in their portfolio. They are betting that 1 out of n will be 1000x.

[dylanjermiah]

VC is a relatively small sector, it was ~50bn last year.

[vonklaus]

Just like in a venture portfolio, the venture industry is characterized by a few big winners. While the industry in general may lose money, a few firms consolidate most of the profits of the entire industry. AH is one of the smartest firms, and one of the first to push the philosophy that "it is easier to train a technical founder to be ceo, than a ceo to be a technical founder".

This was one of the firms that lead the founder first philosophy, and is run (obviously) by well known entrepreneurs. They atrract top talent (founders) like the article says, and gain great positioning in rounds, and in the ecosystem.

> if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave.

The market typically delivers ~10% on average[0], while you are correct that their isn't a lot of transparency, AH almost certainly beats 10% annually. Another top VC/Angel is Chris Sacca. I have heard that his initial fund which was heavily in twitter, was single or double digit millions and is now worth over 1 billion dollars. So key firms do have outsize gains.

As to the MA tweet

> "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE."[1]

This is not about a bubble, but individual companies not focusing on business fundamentals. In a climate where raising money is easy, he is pointing out these companies grow without underlying businesses. The grow big enough to sell advertising/information is not sustainable, as everyone was made painfully aware of in the 90's and 00's. Vanity metrics and valuations mean nothing if you are not profitable (or even generating revenue), and it will be apparent if there is a funding freeze.

[0]http://quicktake.morningstar.com/index/IndexCharts.aspx?Symb... * This has the 10 year around 8.3

[1]http://www.businessinsider.com/marc-andreessen-on-startup-bu...

[jtzhou]

> AH almost certainly beats 10% annually.

AH was started in July 2009, at the start of a bull market. Since that period, the S&P 500 has had an annualized return, with dividends reinvested, of 17.2%. http://dqydj.net/sp-500-return-calculator/ This is significantly better than AH which has much greater single-sector risk (early stage/small cap, Bay Area, technology companies with little to no earnings). And AH at least by many sources is a "best-of-the-best" VC, so woe to the less successful VC's.

Whether they are good at intangibles, such as training future CEO's, providing jobs to highly-networked individuals, and encouragement to founders, is less relevant from an investor's standpoint.

[ajju]

"This is significantly better than AH which has much greater single-sector risk"

Are you saying a16z will make less than 17.2% per year in average returns on the years 2009-2015? Want to bet?

[ironchef]

That information is definitely not public, so he's just guessing. One could look at some of a16z's hits and show they have done well at least in some cases. 50 mil into skype which they made into an estimated 150 - 170. They were one of nicira's biggest backers who sold to vmware for north of a billion. They were investors in Facebook, etc.

[dylanjermiah]

Any source on AH's returns from 2009-present?

[bsbechtel]

There is also no guarantee that top firms such as A16Z and Chris Sacca will continue to achieve the returns they've gotten over the past several years. Have the top venture funds of the 90s and early 00s continued to achieve the returns they got then?

[foobarqux]

> AH almost certainly beats 10% annually

If so, why don't they publicize their annual returns?

[joshu]

It's hard to know what the return is on any fund that is immature. Companies that exit early tend to return far, far less than companies that exit later. Check back around the 7 year mark.

[foobarqux]

> a few firms consolidate most of the profits of the entire industry.

The problem is you don't know which ones beforehand.

[joshu]

The statistical distribution of fund performance means that average doesn't make sense as a centrality measure. The top few funds take the lion's share of returns.

[michaelochurch]

Venture capital does a great job when it comes to the VCs' real objective function, which is to maximize for their own careers and those of their buddies. It's a mediocre investment vehicle, but it's a great gig for a 21st-century job seller. Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies.

Chasing "unicorns" doesn't actually work out well because the failure rate is so high, but if you're optimizing for your own career, it makes sense because it creates an aura of social access to "have been in on" a brand-name company, and because people will cling to you in the hope of getting thrown an executive appointment.

[SamReidHughes]

> Instead of selling off prestigious civil and foreign service jobs, they're selling executive positions in fast-growing companies.

If what you're saying has any connection to actual reality, how much do these executive positions cost?

[michaelochurch]

They don't sell them in an explicit jobs-for-cash trade, so much as they use them to curry favor with counter parties. It's about information and favorable future action (e.g. I'll make your kid VP/Eng if you agree to make your employer buy us at $2B no matter what.)

[tptacek]

"I'll make your kid VP/Engineering if you agree to make your employer buy as at $2B" does not sound like something that has ever happened. Has it?

[michaelochurch]

I don't know that it's ever been put so explicitly, but I have seen startups and ex-startups give out very highly compensated positions (over $300k) to people who were spouses, proteges, and children of people on purchasing boards at other companies.

Usually the explicit quid pro quo isn't needed because self-interest is enough to keep the parties in step. In that example, once the kid is given the job, the guy on the purchasing board has an obvious desire to buy at as high a price as possible, since it's not his money.

These are the sorts of issues that would be considered conflicts of interest, and require the decision-makers to recuse themselves, anywhere but Silicon Valley.

[tptacek]

Can you clarify this by citing a specific example where a board member or executive of a privately-held company recused themselves from a recruiting decision because of a conflict of interest concern?

Could you describe more fully a case where a nepotistic hire was made at a company you have first- or second-hand knowledge of where the impetus for that hire was an outside investor? I have for-sure seen crappy and nepotistic hires at startups. That's a banal observation. What I haven't seen is quid-pro-quo.

Further: your claim wasn't simply that there are nepotistic hires (again, of course there are; banal claim) --- it's that the quid-pro-quo for those hires was commitments to subsequent mergers/acquisitions activities. That is an extraordinary claim and one I think you're unlikely to be able to back up, but, I mean, prove me wrong.

[SamReidHughes]

> I don't know that it's ever been put so explicitly, but I have seen startups and ex-startups give out very highly compensated positions (over $300k) to people who were spouses, proteges, and children of people on purchasing boards at other companies.

But I thought it was VC's that were funneling money and prestige to their children.

[SamReidHughes]

What are some examples of this? Or more generally, why do you believe this happens?

[foobarqux]

I don't think job placement is a primary motivator for a VC. Instead, it's a prestigious, well-paid, low-risk (for the VC) position, and on top of that you own a lot of high-volatility, and therefore valuable, options in the form of carried interest, for free.