Andreessen Horowitz and 'zero interest rate phenomena'

https://twitter.com/tylertringas/status/1627449217294958592

by belltaco • 3 years ago

432 242 3 years ago

twitter.com

cgb223• 3 years ago

If a16z eventually “collapses” what exactly happens to the billions in equity that the fund currently holds?

Do they fire sell major chunks of companies to whomever buys it or how does that game theory out?

What impact does it have on the companies themselves?

moralestapia• 3 years ago

what exactly happens to the billions in equity [...]

Same thing that happened with FTX/FTT, they sublimate.

glenngillen• 3 years ago

I can’t speak to the specifics of a16z’s funds so take this a very broad generalisation, not a direct answer to your specific question.

When a VC firm says they have a “$500M fund”, what that often means is they have $500M of funds at call. The LPs (investors in the fund) don’t immediately put all that money into a pot that sits there waiting to be deployed. They just agree to make it available as called. In previous downturns those commitments have suddenly become a lot less committed when the fund tries to call them in. So, again generally speaking, there is no pot of cash lying around to be returned. They only called it when it was needed to close a deal at which point it was immediately spent.

As for “assets under management”, you’d probably want to try and read some fine print in how it’s calculated. A fund might try a slight of hand to include the previous “committed” number to pad it and make it look larger than it is. If so, see previous point re returning that. The rest is going to be the current valuation of deployed capital. But that’s a questionable number even in the best of times, and we are not in the best of times. It’s mostly tied up in illiquid private companies and so what there is to return depends on if, when, and for how much they can exit those positions.

lmm• 3 years ago

That depends on the details of the "collapse". If they outright went bankrupt then yeah we'd be looking at their equity stakes getting auctioned off by a bankruptcy court. If it was possible for all their investors to pull their money from the fund then they'd have to sell those stakes, or at least sell something, at market rate within perhaps a handful of days, which might be even worse. More likely there are restrictive terms on when people can withdraw from those funds and how much, which ought to limit the possibility of a quick death spiral; more likely you'll see big investors negotiating special terms, and a "lost decade" style stagnation (at least on paper) rather than a plummet.

In theory there's no effect on the company until they come to raise more money. (I mean, their stocks are worth less, and that might make it harder to retain talent if their stock options are now worthless, but that's industry-wide at this point). Companies who have enough to make it to IPO are basically fine (although it's also not a great time to IPO). But raising money privately on a "down round" is very difficult (although again, if it's an industry-wide downturn that might change things) and commonly you see companies in that situation using tricks to juice their valuation (e.g. offering a high liquidation preference to the new investor so that their headline valuation stays high).

mbesto• 3 years ago

Depends on what scope of time you're looking at.

Let's take a $5B growth fund. Let's say over 7 years they deployed all $5B of that fund into 100 companies. When you say collapse what do you mean? Do you mean all 100 companies are worthless to acquirers? In what time range? In those 7 years, a16z would have earned 2% revenue ($100M) per year to cover operations. If there fund failed to produce ANY return, they just wouldn't get any 20% carry and their investors money would be completely be lost. For example Stanford's endowment fund would have a minor dent in it for those 7 years.

PE/VC funds rarely collapse. They usually fail to produce returns, people leave, and then they cease to raise their next fund.

grey-area• 3 years ago

Same as happened to the 3 trillion valuation of bitcoin and its imitators - it melts into air, as if it never was.

The valuation on all their equity was speculation, it is not based on earnings.

chrisco255• 3 years ago

It got marked down to current industry valuation of ~$1.2 trillion. It very much is still a liquid, 24/7 market, and like other drawdowns in the past, there is no indication that a future recovery of prices is out of the question.

snowmaker• 3 years ago

No, one of those dramatic things would happen, even in a worst-case scenario.

The worst case scenario for a venture fund (not A16Z specific) is that their future funds would be smaller and as a result they would need to make fewer investments and perhaps reduce the firm's headcount. Existing companies are not very affected.

dam_skippy• 3 years ago

There are also funds (secondary funds) in the business of buying entire portfolios of GPs in case of distress or fraud. Buying cents on the dollar in some instances.

nsoldiac• 3 years ago

Interesting thread, wonder if that was the internal backdrop for the decision to deploy their biggest deal ever in Adam Newman's new venture (which has several folks scratching their heads).

kqr2• 3 years ago

https://www.vice.com/en/article/4ax3bw/nimby-marc-andreessen...

jarsin7• 3 years ago

Sure cause this time for the first time in 20 years the federal reserve is actually going to do what they say...not.

We'll be back to zero and negative is coming folks.

silisili2• 3 years ago

In what time frame?

latency-guy2• 3 years ago

Good point, maybe the 'inflation is transitory' crowd can chime in as well

jarsin7• 3 years ago

Back to zero by end of year. Negative in response to deflationary bust next year.

fijiaarone• 3 years ago

If you’re the type of guy that gets money from the fed, you’re still getting it at zero percent. If not, you won’t get it on the market for twice the official 4% interest rate either.

JumpCrisscross8• 3 years ago

you’re still getting it at zero percent

What?

qeternity• 3 years ago

I don’t think you understand how this works. Nobody is taking money from the Fed right now, everyone is lending to the Fed. That’s why rates have gone up, the Fed is literally borrowing money.

bink• 3 years ago

That sounds like a black swan. Rates that are historically unprecedented will soon become the norm. I can't say if you're wrong or not, but I don't think I'd gamble on it.

jarsin7• 3 years ago

Jeremy Siegel who has proven to call monetary policy correct and proved the fed wrong many times is calling what the fed is doing the 2nd worse mistake since great depression.

If you think these morons can't cause a bust much worse than 2008 then pray to god Siegel is wrong for once.

https://youtu.be/vNGdI4i9xok?t=581

lotsofpulp3• 3 years ago

How are they unprecedented?

https://fred.stlouisfed.org/series/fedfunds

The latter half of the 90s was >5%.

weatherlite10• 3 years ago

And simply live with high inflation? Sound great, I'm sure the poor will have a great time.

bolanyo6• 3 years ago

The poor are not necessarily the most affected by inflation, and can be among the least affected. Being poor means having around no dollar-denominated wealth, and usually less than zero.

jarsin7• 3 years ago

I believe deflation death spiral is coming due to the fed drastically over tightening. It will be worse for the poor than inflation.

spaceman_20204• 3 years ago

I truly believe this. I do not think the people in charge have the guts to blitz through a forced recession.

hammock2• 3 years ago

Well he might be right however I believe we have to start a recession first before they fully pivot and start cutting

Nowado• 3 years ago

This thread would be way, way more interesting with a mention of a single date in the future.

hn_throwaway_995• 3 years ago

I'm actually glad it didn't. Setting a date is near impossible in public markets ("markets can stay irrational longer than you can stay solvent" and all that), and more often than not hitting or missing a date can be attributable to luck.

It's not like the other is really giving investment advice (where timing is important), but moreso saying that, directionally, this is where he thinks a16z's bets will end up.

Zetice• 3 years ago

It’s so immensely easy to predict doom without a timeline, as everything ends.

It’s also completely useless, because everyone already knows everything ends.

Dates make stakes; without stakes, this prediction is nothing more than, “This to shall pass.”

monero-xmr2• 3 years ago

VCs are salesmen. They are selling to public markets.

All of VC is trying to make a product that looks attractive to public markets. VCs are in sales and public relations.

The most obvious signal of this is how they continually select a college dropout or 20-something as a “genius founder”. There are rare examples of this happening but a much more logical play is someone who has worked in their industry for 10+ years and made a lot of connections. The invention of the “dropout genius” was because public market investors like that story to mimic Gates and Zuckerberg. In reality 99% of 20 year old CEOs that are handed millions of dollars are fucking idiots and nightmares to work for, lacking any professional and managerial experience, plus the “anointed one” marking giving them unearned authority.

While I loved the free-money era as an entrepreneur, honestly the mal-investment is absurd and we need a cleansing of the charlatans in the tech industry. VCs are an area that needs to massively contract.

photonbeam• 3 years ago

As someone in mid-30s with a child, I absolutely could not imagine founding a startup based on hope. We do need the 20-somethings to go out on a limb

riku_iki• 3 years ago

You would receive compensation from seed round?..

monero-xmr2• 3 years ago

The youngest CEO I ever met who didn't give me WTF vibes was 29 years old. I know because I asked directly. He was raised by a successful CEO dad and I think absorbed a lot of wisdom.

I agree the idealistic 20-somethings are important. I don't think they should be handed tens of millions of dollars and trotted out like show ponies.

jnsaff2• 3 years ago

I think of the VC-unicorn sales pitch to young people as: "look, here are all these nobodys who made it hyper rich by going doing some crazy thing, you go spend your youth on 20hour days of inventing shit and if you are one of the 1000 that has an interesting idea, we fund it and take most of the profits".

The other 999 are doing free idea-invalidation.

raverbashing• 3 years ago

The issue, I think, is that the 20yo are getting "crazier" and having more vapid ideas

And I mean, Wework is an ok business idea, the problem is the cult around the person (only to show it's not only a matter of age)

nostromo• 3 years ago

Not everyone in their 30s has kids. Many that do have plenty of money to start businesses. And lots of 20 somethings have kids.

Just because you’re not in a place to start a business doesn’t mean other people your age aren’t. So don’t make universal and ageist comments about how 20-somethings are better at starting companies than 30-somethings.

pototo6662• 3 years ago

Can relate to this.

I have a child and is going to have another one this year. I have this crazy idea that is big if true but 99.9% it would fail. I would totally do it if I was without a family. This idea is VC type idea.

Now I am working on some idea that is 99% going to feed my family but it is boring as hell and no VC would look at it.

hobs• 3 years ago

That's the point, you are not supposed to start anything on "hope" - you have to actually believe and perceive a value in the market.

In some cases people are wrong or even crazy, but fundamentally I don't meet many 20 somethings with both the conviction that they are right, the organization skills to do the logistics, and the wisdom to not jump at pointless things.

I certainly didn't do it right when I tried to start a company at 19.

dgacmu2• 3 years ago

Having done startups at 19, 39, and 45, I can say that the sh$t I pulled at 19 is a no go at 45 with kids, but I'm also a lot wiser now. That week of near death panic due to having had my backups fail as. 19 year old will never happen to me again (knock on wood, backblaze don't fail me now). Etc. You trade some hours for some efficiency.

(There's also the financial risk, which for me is easier to absorb now. At 19 I didn't care, at 30 something I did, and now I'm lucky enough to not have to care much).

KptMarchewa• 3 years ago

Sure, only people who can realistically do that outside of early 20s are people who have extremely soft landing such as rich parents.

naravara2• 3 years ago

You underestimate the risk-blindness that comes from having access to the bank of mom-and-dad.

mariosisters• 3 years ago

As someone that helped build and sell a startup (for hundreds of MM) in my 20s+30s pre-family, and now having a family… I cannot possibly conceive of putting in the time and energy to another venture. Maybe after the kids leave?

Back then I would climb for a couple hours in the morning for fun and then work until 8pm or later. Get beers, go to bed, do it again. Every day, most weekends, most holidays. It didn’t feel hard because it’s what I was meant to be doing. So much fun.

Now I can’t string together 2 focused hours. I’d rather take the kids to the park, or have to take someone to the doctor, or a sport, or whatever. Even if I had to work a “regular” job, the idea that I would work any harder than absolutely necessary, at the expense of time with my family? Not a chance.

I’m not saying you must be 20s or 30s or whatever. You just must care more about the venture than other things.

(In my experience).

allenleein• 3 years ago

Also, VCs are herd animals.

Most of them are driven by hype and market trends, leading them to overgeneralize and make inaccurate predictions.

They swayed by the latest buzz in the industry and invest in companies that may not have a sustainable business model.

api• 3 years ago

They do this in the hopes of flipping to a bigger fish. They understand how bubbles work.

naravara2• 3 years ago

Being as how most of their analytical grunt-work is being done by fresh-faced graduates this should be expected.

miohtama• 3 years ago

The most obvious signal of this is how they continually select a college dropout or 20-something as a “genius founder”.

I believe this has more to do with American fondness of exceptional individualism and American dream, as media likes these stories.

adreamingsoul2• 3 years ago

Indeed

dboreham• 3 years ago

Such people may also be more open to believing in magic.

rexpop• 3 years ago

Sure, it takes two to tango. VCs aren't going to push outlandishly unpalatable narratives.

misja111• 3 years ago

.. like that story to mimic Gates and Zuckerberg. In reality 99% of 20 year old CEOs that are handed millions of dollars are fucking idiots and nightmares to work for, lacking any professional and managerial experience ..

You forgot to include Steve Jobs in your examples. But were these guys not actual nightmares to work for? Apparently this is not a red flag at all.

smugma3• 3 years ago

I started with: “How many unicorns were founded by people in their 30s? The biggest example I can think of is Larry Ellison” but it was easy to come up with so many more examples: Benioff, Reed Hastings, Bezos, Reid Hoffman.

Of course there are many examples of billionaires who founded companies in their 20s as well (Box, Dropbox, Airbnb, Stripe)… intuitively, I think there are a lot of factors (familial obligations being near the top, ahead of American “genius” bias) that tilt the scales towards younger founders.

maxerickson• 3 years ago

Lots of smart people in their 30s and 40s with family obligations and also "it would be fun to" money.

ElfinTrousers4• 3 years ago

I've heard that if you look at _successful_ startups, not necessarily unicorns but ones that grow into solid companies on a firm financial footing, the average age of the founders was in the middle 40s.

__derek__• 3 years ago

It seems that VCs are primarily selling to LPs. They hire bankers to sell to public markets.

whatshisface• 3 years ago

Some other reasons to pick a 20 year old:

- They are willing to work long hours and sacrifice the life they mostly don't have yet for a 1% chance of success.

- They haven't figured out that the risk preference of someone diversified across 100 startups is incompatible with theirs, and they won't push back as much against moon-or-bust strategies.

- They have the highest fluid to crystalized intelligence ratios of their life, giving them an advantage competing in novel areas where there is no preexisting knowledge, like enterprise sales. ;)

berniedurfee• 3 years ago

i.e. 20 something genius founders are plentiful and fungible.

They also can be more easily convinced their idea will contribute to a more utopian future, rather than the mundane reality of the bait, switch and get rich tactics of those they’re indebted to.

zeruch• 3 years ago

"While I loved the free-money era as an entrepreneur, honestly the mal-investment is absurd and we need a cleansing of the charlatans in the tech industry. VCs are an area that needs to massively contract. "

This. 100% this.

Most founders are utterly ferrets having seizures and unfathomably out of their depth. The VCs are populated by former founders at the long tail of the Peter Principle.

kepler1• 3 years ago

I remember a Silicon Valley historian / older generation entrepreneur was speculating whether the entire environment of this area was a product of 2 things:

-- low interest rates

-- favorable capital gains rates

And any ebb/flow to that could dry up what we take as granted about the circumstances that produce the VC, startup, tech landscape we have been accustomed to.

twblalock• 3 years ago

The low interest rates are a recent phenomenon. Rates were high for most of the period during which Silicon Valley grew into what it is now.

kevin_thibedeau• 3 years ago

A simple fact that deflates any finance wizard's claim that an economy can't succeed on "high" interest rates which are still substantially lower than in an era of significant growth. All it means is that they get a more equitable chunk of the pie rather than most of it.

quickthrower2• 3 years ago

The legal ponzi is the systemic one

bushbaba• 3 years ago

Wouldn’t a16z get preferential returns where even if a firm does a down round, a16z still ends up getting a return on invested cash at the cost to employees/founders?

SilverBirch4• 3 years ago

It's absolutely true that a16z will have preferential terms to their investments and will screw a lot of the founders they invested in, but that just mitigates downside, it doesn't stop it. Firstly, because VC returns are meant to be dominated by the 100x-er, mitigating downside doesn't really impact their returns too much. Secondly, because it puts firms in a death loop. When a company is in a position where all the founders and early staff are going to be washed out they suddenly have no upside. You've been slaving away at a start up for years hoping for your payday, but you're forced to raise a down round, suddenly there's no upside, even if the business succeeds you don't get the financial returns, it's time to leave. So these companies that would generally survive, suddenly have no staff.

Apocryphon2• 3 years ago

What does it say about this entire industry if it seems like all of this supposed disruptive, revolutionary, making-the-world-a-better-place activity seems to be going away with a simple move from the Fed?

pas2• 3 years ago

even the most resilient trees can't sprout in winter...

blablabla.

but of course the truth is that it's not the entire industry, it's not just the Fed, that fucking disruptive book is bullshit (most disruptors end up losing out as incumbents adopt), and the making the world a better place gang has 100000 spreadsheets and infinite amount of malaria bednets, but all they managed to do so far is that everyone and their dog now only associates them with that fallen crypto kid.

a bit more importantly, these super amazing "returns" and asset bubbles and stock market to the moons and quarterly make it rain bonanzas can only continue as capital amortization doesn't start eating into it hard.

and by capital I mean the culmination of the last however many decades of actual community and infrastructure building, not the nice financial instruments.

yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds.

the question is what are we going to do with this? the signs point to slowed incremental progress and general incompetent cycles of fake it till you make it cooperation (on all levels, from individuals to don't be evil companies to countries) and xenophobic populist outbursts of untreated change anxiety, dotted with hints of hope of more of the better stuff that's out there, like mRNA vaccines and other biotech magic, small modular nuclear reactors powering walkable cities without burning dead plankton, against a backdrop of war, pandemics, crazy AI and apathy.

weatherlite10• 3 years ago

yes, low interest rates are here to stay most likely, because of all the extremely wealthy retirement funds of aging populations all over the developed world are buying safe assets, so the US Treasury can sell a lot of bonds.

Isn't it also dependent on inflation? Higher inflation = higher bond yields

blihp• 3 years ago

That this has all happened before and it will all happen again.

thebigspacefuck• 3 years ago

So say we all

benjaminwootton2• 3 years ago

You can get 4% on treasuries. It’s amazing how the whole startup game and VC ecosystem doesn’t absolutely trounce that considering the risk and effort everyone is applying.

_5uxp• 3 years ago

Sit long enough with that %4 and you will see with opp. cost that you're not getting anything for long term. That's for short term cash and such.

refurb• 3 years ago

Whats the real return on a 4% treasury when inflation is running 4-6%.

Its negative.

unicornmama• 3 years ago

You get 4% on some deposit accounts. You get about 5% on 1 year treasuries.

xnx• 3 years ago

Now 5%!

JumpinJack_Cash• 3 years ago

People want to make money while being at the helm of stuff.

Being the responsible person at a company is some weird mix between being a painter, a father, a helmsman and the leader of a battalion/cult.

Investing in treasuries on the other hand is very depressing considering that it doesnt give you any authority or ability to call the shots in the organization you are investing in (except for voting of course, but everybody can do that)

In places which are up enough on the Maslow pyramid startups and sports teams will always get equity financing regardless of interest rates, because they aren’t just a business, it’s something people do to find purpose.

And actually the real reason for Fed lowering interest rates is to allow people to finance their dreams via debt in order to get the best of both worlds: cheap financing and not having to part ways with equity and not having to share the helm of the company with anybody else.

It’s an anomaly that all that resulted in the explosion of VC/PE. Mostly because both people and banks were scared AF by debt post 2008 even though with low rates it was the moment to be bold not scared. Those who weren’t financed their dream very cheaply and retained control of it.

spaceman_20204• 3 years ago

The last wave of "unicorns" has been hardly "disruptive" in the positive sense of the word. If most of them were to disappear, my life would just be a little more cumbersome, but it won't change in any material way.

DoorDash is nice, but restaurants delivered food before that too. Uber is nice, but it's barely better than the taxis it replaced - at least in my city. Airbnb is a good option, but if it were to disappear, I'll just do what I always did - get a hotel room.

Considering that it tooks tens of billions of dollars to create businesses that were at best "nice to have", I have to wonder what's "disruptive" about any of this stuff.

soneca2• 3 years ago

Uber, at least in my city (São Paulo), has been truly disruptive and made my life significantly better (since I don’t own a car or even know how to drive)

kragen• 3 years ago

where i live, downtown, uber is nearly equivalent to taxis. pros for taxis: you have to wait less time, you can tell ahead of time if they have air conditioning, and pricing is predictable. cons for taxis: uber is always available, you know what you're paying before you get in, and taxi drivers rob you every chance they get, while uber drivers never do

where my girlfriend lives, in the suburbs, taxis don't exist, so uber/didi/cabify is the only option other than taking the bus (which doesn't run at night) or walking (which is dangerous, especially at night)

'disruptive' innovations are worse in important ways than the incumbents they challenge, but much cheaper; from the perspective of the consumer, this isn't true of rides from uber or lodging with airbnb, but from the perspective of the provider, this is extremely true of uber and airbnb, which are 'competing' with the taxi medallion mafia and the regulatory regime established to protect established hotel chains

getting a taxi medallion or getting licensed to open a hotel are enormously more expensive than signing up with uber or airbnb

BurningFrog• 3 years ago

In San Francisco, Uber was a mobility revolution!

boringg4• 3 years ago

In the long run all these apps did was take you away from your traditional means and then put those price increases into the product over 5-10 years. In some cases getting you hooked to a new cost stream (i.e. doordash/uber). Those margins are just getting repackaged to the corp and the dev costs amortized over a longer time period.

anthomtb• 3 years ago

In my city Uber was worlds better than the taxis it replaced. Before Uber, you would call taxi dispatch and give them your address. If you were lucky, the driver would show up at that address, within the wait time the dispatcher gave you. He (always a he) would rarely take credit cards too...better plan an ATM stop into the ride.

Now that's in my home city. I cannot be the only one who got scammed by a taxi driver in an unfamiliar city when they took a deliberately circuitous route to the destination. Lesson learned: never tell the driver its your first time in <city>. If asked "is it your first time in <city>" tell them, "no, I come to <city> monthly for business".

I am not justifying Uber's sleazy behavior, both internally and with their poor vetting of drivers early on. But the taxi industry in the mid 2000's was just asking for disruption.

duringwork12• 3 years ago

You could do vrbo even before airbnb existed. Airbnb innovation was the room in someone else house and almost no one does that at this point.

twic• 3 years ago

This thread is specifically about A16Z and their "lose money but make it up on volume" strategy. A traditional VC fund, which carefully only invests in startups which are going to succeed, can still make good returns with 4% interest rates.

hammock2• 3 years ago

Subsidies are a powerful drug, with serious withdrawal symptoms

alxmng6• 3 years ago

Why would bond rates make or break A16Z?

A lower interest rate on bonds may mean LPs allocate more money to VC funds, but the bulk of A16Z’s fund is surely not people who will all pull out their money and put it into bonds if rates go up a bit.

Correct me if I’m wrong, but the only affect a rise in rates could have is to reduce the amount of funds raised going forward? Is that even significant for VC funds?

ak_111• 3 years ago

you need to think 2nd order effects: VCs need mega exits to make returns, which usually are blockbuster IPOs. Higher rates will crash quite a lot of high-growth stocks making IPOs less appealing for investors, which messes up with A16z business model of exiting via IPOs.

antupis• 3 years ago

They can also get fabulous deals currently so it is not bleak as it sounds. Also both Andreessen and Horowitz have that cockroach like ability to survive so I would not count them out even whole business model would collapse overnight.

jxf3• 3 years ago

VC returns are fiercely skewed: a long tail of stuff that's effectively negative to zero returns and a tiny minority of stuff that does really well.

How does it do really well? By having a very profitable in-demand public IPO.

How do you get macroeconomically favorable in-demand IPOs? Lots of capital looking for alternative returns.

What creates willingness to consider alternative returns? Among other things, reductions in the risk-free return rate obtained by bonds.

High bond rates reduce the demand for alternative returns, which reduces the demand for IPO participation, which in turn affects VC returns.

alxmng6• 3 years ago

Sure, maybe the IPO shares sell for lower with higher rates, which may mean a lower total return for the VC. But to what degree? So the VC get $9 billion instead of $10. It seems to me the only thing that would affect is future fund allocation.

cameldrv2• 3 years ago

VCs invest in companies that typically won’t make big profits for 10 years or so. At zero rates, the market doesn’t care if it gets its money today or in ten years. At 5%, the 10 year money is worth 60 cents. That means all of those hypothetical companies are worth 40% less, but it still costs about the same to build them.

alxmng6• 3 years ago

That means all of those hypothetical companies are worth 40% less, but it still costs about the same to build them.

I don't follow. The gains are realized when the company is acquired or goes public. If bond yields are 0%, the VC invests $9 and gets $10 after 10 years, the returns are $1. If bond yields are 5%, the VC returns are still $1. If they had instead invested in bonds, their return would have been $0.45. Even if bonds yield better returns, that doesn't change the VC's returns.

hn_throwaway_995• 3 years ago

I irrationally want this to be true because I have an unreasonable amount of anger for how much a16z put into Adam Neumann's Flow. Neumann destroyed billions in value at WeWork, then used essentially hostage tactics to walk away with about a billion, and he still got a16z to invest $350 million in Flow.

I've been following Flow news fairly closely, and it always sounds like tons of fluffy BS to me, same as the new-agey BS that permeated WeWork. If the best example Neumann can come up with about building a sense of "community" is that you get to fix your own toilet, can't wait to see this, and a16z's $350 million, crash and burn. I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.

recuter5• 3 years ago

How did he destroy billions in value? He created the company and spun it up very effectively before being done in by run away valuations -- thank Masayoshi Son who is also a bit of a cowboy. The hostage tactics went both ways..

same as the new-agey BS that permeated WeWork.

The thing is, this worked great for WeWork. Neumann successfully hyped it up into a global brand. The company still exists. People still enjoy using it. Some people like new-agey community vibes apparently, why is that bad? Apple wouldn't be Apple without some Steve Jobs mystique to capture the popular imagination either. These are lifestyle brands.

You could just work from a crummy McDonalds or your bedroom, nobody really needs a coworking space. Vibes are actually worth something.

I think I might even be at the very least impressed if Neumann manages to destroy a ton of a16z's money and still pocket tens of millions or so.

I like how there are lots of stories on HN about founders who assume disproportionate risk getting completely screwed by investors and end up with nothing -- yet a guy who is a little bit more savvy is so easily painted as a villain. Ha.

benjaminwootton2• 3 years ago

If it was Adam’s personality and approach that bought them down, it was the same thing that built a $multi-billion company in the first place. He deserved to be paid rather than it all falling into investors hands.

bolanyo6• 3 years ago

How did he destroy billions in value?

He turned around $25bn in cash into a company worth about $4bn, how else would you describe this?

LarsDu88• 3 years ago

I think a lot of folks undervalue the power of "cult-like" behavior when it comes to successful companies. Steve Jobs learned directly from the Hare Krishna's how to get a bunch of people working hard and moving in the same direction for basically no money. We see the same thing in We work. The cult of crypto and even the cult of Elon are really not that far removed...

breck2• 3 years ago

100% agree. WeWork is great. It does suck for anyone who overpaid for shares, but I was buying FitBit at $40 a share. Sometimes you overpay. Live and learn.

weatherlite10• 3 years ago

It is irrational. I don't like Neumann at all but if you work in tech, these VCs crashing can't really be good for our jobs and salaries.

hnbad3• 3 years ago

If your wealth and well-being is tied to the puppy crushing machine continuing to crush puppies, maybe it's time to reflect on that and reconsider the systems we take for granted.

alright_scowl2• 3 years ago

This is the right answer.

I think the startup scene is mostly a huge grift. Companies that don't make any sense being propped up by VC money until they find and exit (typically an IPO) and are left to crash and burn. I avoid working for startups like I avoid the plague.

But I like that the grift exists. They inject money into the industry, being indirectly responsible for my salary being much higher than I ever expected.

I hope the startup grift and the advertisement fueled maelstrom keeps going until it's time for me to retire, god bless them.

HillRat• 3 years ago

It's inevitable, though. Eventually the butcher's bill comes due; irrational valuations based on user growth or revenue alone always had a fuse attached to them, because they required a greater fool to come along and pick up the tab. Now that the tech market is having to mature and focus on profitability in general, VCs who only paid attention to the next big hype wave are going to get wiped out. Arguably, it would have been healthier if this had happened five years ago -- delaying the pain only increases it.

spamizbad• 3 years ago

Going to be contrarian and argue its perfectly rational to be angry about Neumann getting $350 Million.

Objectively, Adam Neumann does not have the track record to support that kind of investment. He does not have a track record of building sustainable enterprises. In fact, there's not even evidence he's more capable than the median technology entrepreneur. a16z could probably generate equivalent returns throwing $10million at the next 35 entrepreneurs who pitch them.

It would only be irrational if Neumann had a track record of actually building sustainable businesses. But he couldn't even do it in a 0% interest rate environment!

hn_throwaway_995• 3 years ago

I think it's irrational, but definitely not for the reason you post. If VCs are using funny money to invest in bullshit technology that deserves to die, I'm fine with our jobs and salaries taking a reset back to a reasonable proportion of actual value created. More of us will be working on actual useful stuff again.

automatic6131• 3 years ago

these VCs crashing can't really be good for our jobs and salaries

This stayed in my head for a day. I finally have a response.

If you're salary is dependent on turning $1.00 into $0.20 as in the case for Adam Neumann and his ilk and those who fund them, then eventually your salary and skill and job is going to crash because it "will run out of other people's money". If your trade is taking in 1 dollar from a VC to acquire 20 cents of customer revenue, your trade is going to end. All the myth making and loose monetary policy in the world will merely delay that end.

theGnuMe• 3 years ago

I have an unreasonable amount of anger for how much a16z put into Adam Neumann's Flow.

Why so angry? I'm interested in the idea behind flow because it is nontraditional in the American building sense. If I understand the idea, I think providing community is a really good one. There is a lot of loneliness and we know that when seniors move into senior housing they love it. Most young adults love college dorms. So why not have that for everyone else? You do have to contrast this with the "projects" which also tried to develop community but failed I guess, maybe because economic opportunities were not included.

Is Flow based on the idea of a Kibbutz?

ceejayoz• 3 years ago

No one seems to know what Flow actually is, which probably doesn't bode well.

https://www.fastcompany.com/90847220/adam-neumann-a16z-flow-...

oldgradstudent• 3 years ago

Is Flow based on the idea of a Kibbutz?

Maybe based on the 1980s Kibbutz Crisis:

Investments made without economic justification: due to the ease of credit gain, the kibbutzim invested large sums of money in industry and agriculture, often when the investment did not have an economic justification, and often without sufficient examination of the investment in terms of financial risk management.

https://en.wikipedia.org/wiki/Kibbutz_crisis

breck2• 3 years ago

I love WeWork as a customer now.

I joined in Poland and now use it when traveling around the USA.

It's great. I used to work at Microsoft and I loved that I could travel around the world and work from offices all over. That was awesome for creativity. Now our startup can do that, thanks to WeWork.

I don't know Adam Neumann's story. I do know my own though, and know that when you have success, watch your back, people will come with daggers.

I wouldn't judge someone who built something great, for making a billion dollars. You never know what kind of daggers in the back he took. I for one look forward to seeing what he builds next.

nemothekid• 3 years ago

Any customer will love a company selling a dollar for 50 cents. Neumann made a billion dollars by extracting it from a company that is now worth less than that. I think most of the blame lies with Masayoshi but Neumann was the top conman

hn_throwaway_995• 3 years ago

I don't know Adam Neumann's story. I do know my own though, and know that when you have success, watch your back, people will come with daggers.

This is such a BS false equivalence. There are plenty of people who built really successful companies who are billionaires whom I greatly admire, e.g. Stripe's founders, Google's founders, etc. I was a huge fan of Musk before he went off the deep-end and became more interested in just being a grade A asshole, liar and bully. Neumann likes to wrap his bargain variety avarice and greed in "changing the world" bullshit, and not all founders do that. For example, Neumann's self-dealing with the "We" trademark took a special level of sociopathic hutzpah.

I'm also a client of WeWork, and I like its services. That still doesn't mean it's particularly difficult to build a company with a market cap of $1.10 billion when you are given a total funding of over $22 billion to start with. Neumann literally destroyed $20 billion in value, and for that incredible feat was given a billion dollar payday. I agree most of that blame goes to Softbank, but doesn't mean I can't have incredible distain for Neumann for conning his way the whole time.

stcroixx• 3 years ago

I look forward to seeing him build some license plates.

paxys2• 3 years ago

Why be angry about rich people giving money to each other? You aren't involved in the equation at all. It has nothing to do with you.

myroon5• 3 years ago

VCs invest others' money, including endowments, pensions, etc. It's not their money to blow without scrutiny

lazzlazzlazz• 3 years ago

WeWork is great. Hopefully Neumann builds something even better this time.

JamesAdir• 3 years ago

As much as the thread is interesting, the author is mentioning the most important point in the end - VC's operated are looking for commission. They will get massive commission from the money already committed to them. and some commissions from startups. They can't lose.

blindriver2• 3 years ago

If people are concerned about a16z they should be more concerned about Softbank.

Softbank followed the same strategy except they are in serious debt. I think at some point they could be forced into liquidation and it will drive the second leg down for the tech market.

JumpCrisscross8• 3 years ago

they should be more concerned about Softbank

I disagree. SoftBank isn’t raising new funds. It doesn’t have a functioning mouthpiece [1]. Andreessen is still taken seriously as an investor and thought leader, despite its abysmal record.

[1] https://www.ft.com/content/02a249fb-c1ca-4947-a324-d8fd6c2fe...

geodel• 3 years ago

I agree. But still unable to get why tech/media is so craven when it comes to Andreessen. Since we get to see many other tech big shots, CEOs are frequent receivers of media lashing.

blindriver2• 3 years ago

I don't know what there is to disagree with. Softbank did exactly what the tweets say a16z did/is doing, except 5 years ago. Except Softbank is 10x larger in size. They have already suffered a huge loss, except they are dripping in debt, and there's still plenty more for Softbank to fall. 5 years ago Softbank was considered a Tier 1 company as well. They are now what the tweets believe a16z will become in a few years. The final stage will be liquidation of their positions to pay off debt, which will critically injure Silicon Valley for years.

recuter5• 3 years ago

So basically, you should build something real, raise less money but keep more shares.

blitzar• 3 years ago

At the end of the day it was never the VC's money at risk, it was the LP's.

If the investments make less, the investors in the VCs get less. Unless there is a series of redemption clauses that trigger fire sales of illiquid investments, there wont be a big bang moment.

college_physics• 3 years ago

Rates are like inverse temperature. When its cold (high rates) economic reactions slow down or stop. When its lukewarm (an activation threshold rate) interesting stuff might happen [0]. When its too hot (low rates) the primordial soup burns to ashes.

[0] its a might not a will happen because invention and adoption of science and technology have an external element that can't be "faked till it is actually made".

paganel2• 3 years ago

web3 is dead, and now that we've had the super bowl ads phase of the hype cycle, there just isn't another wave of greater fools coming to pump up prices and end the crypto winter.

This explains the mania that used to be present on forums like this one about two years ago, billions (and tens of billions) of dollars were on the line if the people involved had managed to pull it off (i.e. to find even greater fouls).

Another relevant tweet from the same thread:

a16z was early and all-in on crypto. Their first $300m crypto fund, invested at the start of the bubble, was reported to have generated eye-popping returns, which they parlayed into raising and investing $7B+ more in crypto funds in a giant double-or-nothing bet

m_ke• 3 years ago

Should have also mentioned how VCs are compensated and that following Softbank into the mad rush for huge rounds got them filthy rich off of fees without having to worry about real returns.

steveBK1232• 3 years ago

Not mentioned in the thread - a lot of VC capital is now going to be tied up in follow-on investments to keep their zombie investments alive a few more years.

So a lot of the "dry powder" left in VC is not so dry.

v8xi2• 3 years ago

yes - prepare for the era of the normalization of down rounds

steveBK1232• 3 years ago

It still feels like we are far from valuations normalizing back to earth.

I have a neighbor who co-founded a startup in a space I know fairly well. It is something of a niche space, with some publicly traded incumbents.

The startup is over 10 years old, and has now raised more capital than the entire market cap of the comparable publicly traded incumbent.

So presumably someone has their investments in this startup booked at 10-20x the valuation of the public incumbent?

They even managed to raise another round of money in the last 6 months, equal to something like 50% of the incumbent total market cap.

rwmj• 3 years ago

How does it work? Are investors in these funds able to pull their money out at any time?

TBH Andreessen Horowitz has been the redest of flags for a long time, spouting all their nonsense about crypto and "web3".

v8xi2• 3 years ago

Depends on the firm, but there is usually a "lock-up" period of several years where you cannot divest. Sometimes the firms will return the money early if things are getting bad but once the money is deployed they can't risk a bank run because they'd have to fire sale their investments which would be bad for everyone.

ghc• 3 years ago

Once you commit capital to a VC fund you generally can't pull out. VCs don't take the money immediately, but eventually they will issue capital calls, which require you, as an LP, to wire them money. Your commitment amount is basically the most money, in total, you're willing to wire them over the course of an entire fund (10 years).

It's important to note that most of the time when VCs do poorly they still find a way to return most of the original investment to the LP. The downside is not nearly as pronounced as the potential upside. So you can invest in several VC funds and if only one wins the math will still work out in your favor.

LPs know what VCs are. LPs have risk spreads and VC is (IIRC) the riskiest legal asset class. They expect to (on average) lose money on VC commitments, but the upside is much higher when a VC hits, meaning a single win can make up for a lot of losses. Picking VCs that win is one way LPs generate outsized returns on their assets.

spaceman_20204• 3 years ago

A16Z has an awful reputation in crypto circles. They're considered a mercenary VC and there's a dominant assumption that if A16Z has led a round, they'll likely do an "airdrop" or similar token generation event just so they can sell their own tokens and get exit liquidity.

Sad to see a name like A16Z reduced to this.

EMM_386• 3 years ago

Sad to see a name like A16Z reduced to this.

It really is.

These ICOs were essentially considered "free money". Mint a coin, put some power behind it, profit.

This isn't a business, it's a get rich quick scheme.

anonu• 3 years ago

Yes, I've been preaching the same thing. The era of free money is over (for now). There is going to be a sea change in how investors - and more importantly founders - need to think about business. Founders will need to tighten their belts (age of austerity) and think hard about profitability. Timelines may need to be stretched out to get there. This is ultimately good for founders as it creates a laser focus on building real MVPs that can scale.

Finally, one of my favorite exhibits of the excesses of near-ZIRP are right here: https://web.archive.org/web/20221027180943/https://www.sequo... << glorifying SBF article on the Sequoia Cap site. This is the very definition of irrational exuberance.

dakial1• 3 years ago

Well, my question here is, is there any use case of web3 that has a viable business model or is the whole industry a case of "The Emperor's New Clothes" fueled by the VCs looking to lure the excess of cash around?

specialp• 3 years ago

One use case is to make a decentralized form of micropayments. The "Open web" is at huge risk right now (and is declining in usefulness) due to the incentives given to content providers. You can either make money in a walled garden like YouTube or provide affiliate links. Now this is more at threat with things like ChatGPT using your provided content as training data with zero attribution. This will continue to get worse.

So as someone with knowledge about a particular area, and with people that need such knowledge (such as those that need training data or someone looking for something) you can be incentivized to provide it.

Of course in reality this is super hard to accomplish with bad actors abound but it would be nice.

jrm4• 3 years ago

I'm out of this loop, but I still struggle to consider: In the world of tech (which scales) what good is VC? As in, what companies/products/services have come about and existed in a healthy way due to this process? Why should I not cheer the death of all of this?

pavlov• 3 years ago

Synthetic insulin was first created in 1978 by Genentech, a VC-funded company with only twelve employees. The inventors had been previously unable to get research funding for the project.

Previously all insulin was extracted from animals. The Genentech process brought its price down by 1000x and undoubtedly saved many lives.

https://www.gene.com/stories/cloning-insulin

fidgewidge• 3 years ago

Google was VC funded. They were a classic case where VC makes sense: highly risky, and needed to spend money up front to get usage in order to make money (you can't sell ads if you don't have traffic, can't pay for serving traffic if you don't have ad revenue, VC breaks the circle).

boringg4• 3 years ago

Can someone tell me how Tyler Tringas differentiates him. He is clearly selling his Calm Fund in a round about way - I am unfamiliar with him and his business model. As such it does take a bit out of his argument.

garbagecoder• 3 years ago

"Zero interest rate phenomena" sounds smart to non-econ people the way "cryptocurrency" sounds smart to non-tech people. The fact that a lot of people were making bad investments (apparently mostly in tech, since job growth is up in other sectors) had very little to do with the interest rate. Failure might come a bit quicker, but this is all just pure, unprocessed copium from a sector that routinely fails to duplicate its own magic.

Apple is on its third or fourth life depending on how you slice it. Microsoft is coming back strong. But Facebook and Netflix are getting lame and Amazon is turning into something other than an online market. Google has never had as profitable and revolutionary of a product as search depending on how you rate Android. I doubt Apple gets a fifth life or Microsoft a third.

Meanwhile, the rest of the economy continues to do OK even without "zero interest rates." And interest rates didn't trigger the tech stock crash in 2000 or the general recession in 2008.

I understand that they're trying to say "people will do anything to get a return." But isn't that always true? Maybe more people will park their money in bonds. But people will look for a return that beats inflation because most people don't borrow money directly from the fed and most of the commercial rates haven't gone up that much.

I dunno, these people are chronically full of shit.

Andreessen Horowitz and 'zero interest rate phenomena'

Related Stories