Andreessen: Beware Non-Silicon Valley Investors Bearing High Valuations

http://blogs.wsj.com/venturecapital/2014/04/08/andreessen-beware-non-silicon-valley-investors-bearing-high-valuations/

by goronbjorn • 12 years ago

79 49 12 years ago

blogs.wsj.com

jval• 12 years ago

2024: a post-industrial dystopia where the global economy runs on a cryptocurrency called 'Bitcoin', people wear computers on their faces and the Wall Street Journal has been reduced to reprinting tweets as news.

catshirt• 12 years ago

the only real prediction here is that bitcoin will be a standard global currency :)

ChrisGaudreau• 12 years ago

Pretty sure that honor goes to Dogecoin, but nice try. :)

apu2• 12 years ago

the Wall Street Journal has been reduced to reprinting tweets as news

Why 2024? I've already seen this happening for the last few years, where the established press takes original content/reporting/etc. from online sources (blogs/etc.) with scant attribution.

vidarh• 12 years ago

I particularly "love" [1] articles where they take screenshots of a bunch of tweets, and present them with interspersed commentary, rather than actually writing a coherent narrative. Guess it makes it easier to recruit "journalists" when you don't need to worry about whether most of them finished high-school.

[1] for certain values of "love"

benjamincburns• 12 years ago

You missed out on so many upvotes by not going with 2048...

declan• 12 years ago

Good line! But in reality -- speaking as a former journalist and a founder of a new SF bay area startup that's in the same business -- news organizations have done this kind of thing forever.

One journalistic function is ingesting a tremendous amount of information, then filter it -- so people reading the WSJ's venture capital blog can bookmark it and read only articles that are relevant. A generation ago it might have been highlighting the best news stories in the trade press. Today it's subscribing to the Twitter feeds of dozens or hundreds of VCs (including Marc A.). Highlighting the best ones provides a valuable service.

Of course the HN-relevant question then becomes: can this be better done, or equally well done for less $$$, algorithmically. :)

dmk232• 12 years ago

Translation: A16Z does not like competition doing to them what they've been doing to older VC firms

spamizbad• 12 years ago

Really? I'm not seeing too many companies in A16Z's portfolio where they're the sole investor.

dmk232• 12 years ago

That's not the point, A16Z is the lead on their key deals.

The lead sets the price/terms and has significant control over who else gets access...

arfliw• 12 years ago

Actually, they are the sole investor in lots of companies - and have stated they don't mind doing that.

Two I can think of off the top are Github and Rapgenius. There are more.

tptacek2• 12 years ago

Strongarming themselves into deals by baiting and switching entrepreneurs? That's a pretty serious accusation.

trhway2• 12 years ago

disruption of SV VC. Heard from other sources about "old" out-of-state money frequent visits to SV lately. They have and talking scale, in all senses. Good. Would fuel next wave of the boom and gives a chance to SV to not become a final destination for squeaky clean Russian money.

bruce511• 12 years ago

The problem Marc has is that he is in a position to better understand a VC issue, but then has less credibility if reporting on it comes from him.

This is true in many other situations as well, and indeed I personally have been in the same situation. Often the nuances of some business are best understood by those competing for that business. And let's be honest, for most of us the nuances of the VC world are poorly understood outside of actual VC companies. Sure, the basics are understood, but as with any business the specialists know more than the generalist.

So let's hypothesize that Marc understands this nuance, and wants to alert people to the issue. Clearly the warning benefits him at the same time as benefiting those being warned. Does he then speak out, or keep quiet?

To frame the question in a general sense, in situations where you have a credibility problem, do you go ahead anyway, or keep quiet and let others take the fall? What would you do? As far as i can tell it's a no-win situation.

I was in a similar position last year, and chose to write the warning anyway. I disclosed the conflict of interest - even though, like in this case the connection was obvious. To those being warned. Predictably I got a fair bit of negative response, but I like to think, if nothing else, it helped people at least take a bit more time to evaluate the situation.(I got some positive responses as well.)

So hats off to Marc. He'll get pilloried here, and elsewhere, but maybe one day if I go looking for VC funding, this is one more tidbit of knowledge that I'll have, which I probably wouldn't get anywhere else unless I learned it the hard way.

Full disclosure: I have no connection to Marc or any other VC. I don't know what his motive is, suffice to say that it could be either, and assuming the worst is not necessarily valid.

apu2• 12 years ago

Well said. More generally, it is often difficult to disentangle someone's motives & beliefs (and therefore the things they say) from their occupation. After all, the more deeply you believe in something, the more likely it is you will try to make it happen, the limit of which is making it your primary career.

Suppose someone working at a travel website writes a post about the problems with the existing travel industry. A large percentage of commenters will then pipe in with, "of course she'd say that, she works at a rival firm!"

But is that the causation? Suppose an "independent" person writes the same blog post. The reactions to the blogpost would have been different in that case, even if that person later goes on to start a travel firm.

In other words, is the causation:

1. start/work at travel firm -> try to encourage people to switch to them -> write blog post

2. dissatisfaction with travel firms -> write blog post -> decide to start competitor

(And of course there are many other possible causation chains.)

Yet most commenters seem to assume that (1) is not only the most likely option, but often the only possible explanation.

brazzy• 12 years ago

The problem is that the two possible causations can and very often are intertwined.

If you personally profit from something, then it becomes very hard not to fall victim to massive confirmation bias, where you want something to be true, and any evidence that supports it is viewed favorably while anything to the contrary is held to impossible standards.

The easiest person for you to fool is yourself.

romaster• 12 years ago

There's always going to be a battle between VC money/specialists and Much-much-bigger money/generalists (ala hedge funds, asset managers, private arms of big banks or corporations). Some of these 'big money' folks actually don't need as high IRR as a VC, or can pitch to their own management the type of synergies or 'track record' they are building by paying a premium now.

Marc's "heads up and watch out" falls short in one key respect: it doesn't give any color. It doesn't let the newbie startup CEO understand what bed he might actually get stuck with before it's too late. It doesn't provide any detail about what to really look for or the types of terms and conditions that get discussed 'in more detail' when the offer and final paperwork start getting hashed out.

And from that perspective, it is a bit of a disservice to a newbie because if such a CEO starts to immediately take Marc's words at full value (and it's hard not to, given the legend that he is), that creates a negative bias and an air of skepticism if that newbie CEO is approached in the future by big money and overly large valuations.....

and that, would be a clear negative to the startups, and a clear positive to the VCs.

7Figures2Commas2• 12 years ago

It doesn't let the newbie startup CEO...

We're not talking about newbie CEOs here. The big-money "outsiders" are not coming in and wooing inexperienced entrepreneurs so that they can invest in their seed or Series A rounds. We're talking about CEOs of growth-stage companies. These are folks who, even if they're relatively young, have been running their companies for years and have the counsel of experienced advisers. The notion that they're haphazardly and naively choosing to negotiate exclusively with a single investor is laughable.

Andreessen Horowitz's latest $1.5 billion fund is big by venture capital standards. You can't manage a fund of that size by doing tons of small deals. My read on Marc's comments is that he's very concerned about players with bigger money using their leverage to push firms like his out of the type of deals that his firm needs.

In essence, he sees that bigger capital has the potential to disrupt his business in big bank take little bank fashion. For anyone who doesn't know what big bank take little bank is, I'm sure you can find the definition on Rap Genius. The irony.

ritchiea2• 12 years ago

Well put. Also the advice he's offering doesn't even seem to be that self serving. The takeaway is be wary about getting to a point in a VC-deal where you have no leverage and the other party may still change the terms. That's good advice in general. And what Marc appears to be doing is making the public aware of a trend he has seen in the industry rather than offering tactical advice or opinions.

After all if what he's saying here is not true, then he is a liar and the investors he's talking about know it.

abalone2• 12 years ago

Rule #1: Beware any VC bearing advice on how to negotiate with VCs.

If his claim is true that non-Silicon-Valley investors are applying unethical leverage, why are the valuations still sky high?

This claim would make more sense if there were a bunch of companies taking non-SV investments at strangely low valuations. Or are there hidden unfavorable terms that Andreessen is hinting at? Is there any evidence of that? Exempt evidence I would assume the default position that this is advice calculated to reduce competition with Silicon Valley VCs.

amirmc3• 12 years ago

"... why are the valuations still sky high?"

It's a tactic to get the company into the 'no-shop' stage of a deal, where they've agreed (and probably signed legal paperwork) to say that they won't talk to other investors. Once in that stage, the investor is free to begin renegotiation of key terms. Valuation is rarely the only item on the table. Consider, board seats, liquidation prefs, change of control, etc. there are myriad ways that a company can end up (inadvertently) screwing itself.

abalone2• 12 years ago

Sure, but valuation is probably the biggest one. Why aren't we seeing lower valued companies then with non-SV investors?

The whole point of Andreessen's comment is that companies would have little choice. It doesn't follow that valuation, the biggest term, would be magically exempt from this renegotiation tactic.

antr• 12 years ago

exclusivity is one clause in that term sheet. what i don't understand is how can exclusivity apply if the investors are allegedly renegotiating those same terms. surely, if investors breach any terms along the way, exclusivity/no-shop doesn't apply any more.

i'm having some trouble believing the entire Andreessen rant. if companies get screwed during the no-shop period because major pre-agreed terms are broken, the company/founders are free to go to other investors. something doesn't add up, I wished Andreessen was a bit more explicit in his complaint.

7Figures2Commas2• 12 years ago

Breaking news: big fish in smaller pool worried about arrival of bigger fish from larger pool. Details at 10.

higherpurpose• 12 years ago

Beware Silicon Valley investors who will invest in your company a lot of money initially, and then force your hand to sell to the companies where they are board members.

amirmc3• 12 years ago

For those claiming that Marc is acting in his own self interest, well of course he is. You should also bear in mind that he's advising his own portfolio to be highly skeptical of such deals.

What he's getting at in (imho) a rather roundabout way is that deals with these other firms are likely to be 'non-standard' as compared to those with 'SV' firms. You don't have to go very far back to see that people can get caught by surprise in such arrangements. Just look at the Skype options scandal of a few years ago, which was a Private Equity deal (they just have a different view of 'normal' regarding options). I've no idea what hedge funds are doing by investing in companies but I'd be wary of the terms.

http://www.businessinsider.com/skype-scandal-silver-lake-201...

jroseattle3• 12 years ago

Overall, I have no problem with Marc's suggestions from a credibility/benefit POV, and I don't think he's making those comments to further any strategic position for himself.

"People in SV generally consider this unethical and abusive."

But this comment stood out to me. In my interpretation, this translates to Marc saying the civility and integrity of the benevolent overlords of Sili Valley are the true standard bearers of how to operate in the technology capital business. Further, anyone who doesn't follow that protocol is out of bounds.

Marc even calls out how the market will take care of this problem and that tech companies will need to do their own due diligence on investors. The implication: tech companies are obviously not smart enough to do that on their own, so I better let them know. Really...if any company taking on significant investment doesn't execute their own due diligence on their investors, well you get what you get.

tankenmate• 12 years ago

Sure, but how do you do effective due diligence on the likes of Goldman Sachs, Morgan Stanley, et alia? They have so many deal makers, partners and deals going that it can be nigh on impossible to get a grapple on how that affects the term sheets that you received. My gut tells me you should deal with companies that make most of their money from the finance market you are getting your capital from, are of a similar relative size in their market as you are to yours, and if possible have a similar head count (which is almost impossible as a start up); these are the rules I tend to make when hitching my horse to someone else's service wagon, be it finance, legal, comms etc. Obviously it is much harder to meet these goals as a small business.

jroseattle3• 12 years ago

how do you do effective due diligence on the likes of Goldman Sachs, Morgan Stanley...

Is this a suggestion that due diligence is a futile exercise?

If my company is taking hundreds of millions of dollars in investment, I will be damn sure proper due diligence is executed on all participants -- including Goldman, Stanley, etc. Because they are such high flyers, it should technically be easier to execute said due diligence.

kyleblarson• 12 years ago

Are non Silicon Valley dollars less green?

foobarqux• 12 years ago

Are there any actual examples of this happening? The article gives examples of investments by PE firms but not predatory behavior.

blazespin• 12 years ago

It was all sound advice up until he said non silicon Valley. That positively dripped of prejudice. There are lots of terrible SV VC. Note I am a massive pmarca fan boy.

perlpimp• 12 years ago

I thought reason to get investors is two way street and money is only one of the reasons to get funding from an investor. Getting funding might mean opening a door to new relationships and contacts that would otherwise be unavailable to a company. So yes getting lots of money from a first that mostly invests in some rather different area might just not lead to lucrative deals, life changing contacts one might get if the VC firm might have for the company otherwise.

my 2c

ams6110• 12 years ago

With general investment firms like T. Rowe Price, BlackRock, Morgan Stanley, doing SV venture deals, is that a sign of a bubble in tech valuations? Typically by the time "main street" investors get interested, the growth potential is all but tapped out. Or so I've heard.

adamhooper• 12 years ago

This certainly won't win Marc any friends in the "non-SV" private equity shops and will certainly cause many to question his motives.

However, what has happened over the last several years to the credit of PG/YC [1], Naval/Nivi @AngelList/Venture Hacks et al is to create a much more transparent and founder friendly fundraising environment here in SV. With transparency comes accountability and reputations can quickly spread both for the good and bad.

The "culture" of fundraising in SV is one with more open communication of how investors behave. Word spreads quickly in the valley and kudos to Marc for raising the flag on what have most likely been firsthand experiences with such issues. Not many individual founders/companies are in positions to see broad market behavior over a broad data set like a16z portfolio companies.

So what's the downside of taking a "sky-high valuation" and then getting re-traded after you've told other, potentially better firms w/lower valuations, that you're going into exclusive negotiations? I see the options as follows: 1) non-SV investor holds their word, does confirmatory DD and company ends up executing a great deal at terms better than other firms or; 2) said investor comes back and re-trades any number of terms (valuation, control, preferences, board seats etc) and company feels stuck thereby having to take the now worse deal or; 3) investor re-trades and company walks. Result #1 is potentially great, #2 could be a pretty bad deal but in the end company has the capital, and #3 could be a killer - company is now damaged goods and has to come back to other firms, tail between the legs asking for another shot.

This happens all the time in the investment real estate world where I came from and I see a ton of parallels here. Oftentimes there is a full marketing process that ends in a best and final bidding process. A buyer is selected based on the terms/price/timing of their offer and they begin their DD process. Buyers that behave and honor the terms with only material changes coming due to material issues uncovered in DD earn great reputations and their offers are usually considered first from the seller's perspective. Buyers that go into contract and come back with ridiculous re-trades very quickly reach the bottom of the pack going forward on all future deals. So as a seller, you either take the now far inferior deal, or walk from the lesser deal and chance going back out to market as damaged goods. Not a good situation.

Again, sure there are some self-serving motives in Marc bringing this issue up, but as a founder of a company leading our fundraising, I certainly appreciate being aware of all the issues currently in the market. As fickle and at times irrational fundraising can be for startups, the more knowledge we can arm ourselves with the better.

[1] http://ycombinator.com/hdp.html

bedhead• 12 years ago

Andreessen is basically just a troll, I'm tired of him.

mathattack• 12 years ago

I have heard anecdotal stories of very bad post-investment behavior from non-traditional investors. My impression is that mainstream tech investors assume they will all see each other again. There are some challenges with this, but is solves the prisoner's dilemma. They won't overtly screw their investees, or word will get out. This isn't the case with some of the other sharks throwing money around. I have heard horror stories of shakedowns based on obscure clauses inserted into term sheets by PE investors. I have heard stories of these investors abusing the founders as they take full control of the companies, because it is in their legal right.

If the endgame is great company, or a high long term valuation, going with the wrong short term financing just to get a higher sounding valuation is foolish.

Andreessen: Beware Non-Silicon Valley Investors Bearing High Valuations

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