Andreessen Horowitz and 'zero interest rate phenomena'(twitter.com)
twitter.com
Andreessen Horowitz and 'zero interest rate phenomena'
https://twitter.com/tylertringas/status/1627449217294958592
252 comments
> 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.
I believe this has more to do with American fondness of exceptional individualism and American dream, as media likes these stories.
Such people may also be more open to believing in magic.
Sure, it takes two to tango. VCs aren't going to push outlandishly unpalatable narratives.
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. ;)
- 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. ;)
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.
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.
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.
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.
They do this in the hopes of flipping to a bigger fish. They understand how bubbles work.
We'll see if they understand, when valuations need to start being adjusted on the books...
I'm skeptical if someone understands steamrollers if they choose to stand in front of one.
Time, will tell.
I'm skeptical if someone understands steamrollers if they choose to stand in front of one.
Time, will tell.
Being as how most of their analytical grunt-work is being done by fresh-faced graduates this should be expected.
It's the other way round most of the time - partners select / nudge based on social proof and "intuition" and the analysts provide ex-post analysis to justify it with "hard data"
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
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.
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.
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).
(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).
If you’re worried about backblaze failing you, grab some local storage and do some manual physical offline backups you can take offsite.
Even monthlies have a value in the worst case scenario.
Even monthlies have a value in the worst case scenario.
If you worry about backblaze, the solution isn't to have yet another backup, it's to test your backup recovery process regularly
The risk from not being able to recover your data because of something wrong with your process (like, you are not backing up all the data you need) dwarfs the risk from backblaze to lose your data
The risk from not being able to recover your data because of something wrong with your process (like, you are not backing up all the data you need) dwarfs the risk from backblaze to lose your data
That's another type of risk, but if all your backups are in backblaze, you're exposed to "single provider" risk which can become very real very quickly (and not only by backblaze going bankrupt overnight).
Of course, that risk may be entirely acceptable; it's all about risk mitigation and trade-offs, not perfect security.
Of course, that risk may be entirely acceptable; it's all about risk mitigation and trade-offs, not perfect security.
>If you worry about backblaze, the solution isn't to have yet another backup, it's to test your backup recovery process regularly
The solution is to do both, or all three (or n), where #3 is another backup process. And to test the backups of all processes by trying to read or restore them (onto empty disks) regularly.
I.e., somewhere on a continuum between zero or minimal and the above, depending on how critical your business is.
Because Murphy's Law.
Edited to add:
And how critical your job is (to you).
Of course there is much more to the whole issue, like funds, PHBs, etc.
- Bildert.
The solution is to do both, or all three (or n), where #3 is another backup process. And to test the backups of all processes by trying to read or restore them (onto empty disks) regularly.
I.e., somewhere on a continuum between zero or minimal and the above, depending on how critical your business is.
Because Murphy's Law.
Edited to add:
And how critical your job is (to you).
Of course there is much more to the whole issue, like funds, PHBs, etc.
- Bildert.
Your comment made me wonder if there's anyone out there with regularly-taken long-persistence (tape, optical media, etc.) backups in their personal basement.
It seems a very specific Venn intersection to utilize technology to a high degree, but also to imagine and prepare for its worst case failure.
Maybe the NZ tech-prepper crowd?
It seems a very specific Venn intersection to utilize technology to a high degree, but also to imagine and prepare for its worst case failure.
Maybe the NZ tech-prepper crowd?
I keep an LTO tape robot around for just exactly that reason. I trust backblaze, but I don't trust them to the point of not writing off a weekly/monthly/yearly tape set.
A company I previously worked at (self-hosted) all production servers were RAID 5, plus continual cloud backups, with nightly backups that rotated weekly and monthly backups that were shipped out of state and stored in a disaster recovery facility in the event of a total catastrophe (earthquake, hurricane, etc).
The off-site backup storage was required by several of our largest customers due to the critical nature of our software.
The off-site backup storage was required by several of our largest customers due to the critical nature of our software.
I'm not really. We have onsite backups + off-site to backblaze. I'm comfortable with that for where we are. (We run on-prem for most things that involve a lot of data or GPUs.)
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.
The other 999 are doing free idea-invalidation.
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.
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.
what's the crazy idea? I don't have investor money but I might mention it to the right person.
I want to solve the problem that it's difficult for people to predict the future with skin in the game.
My idea is to create a prediction market where people bet on REAL world events under REAL name with FAKE money. All predictions are public and we can rank every user's prediction ability in each category by his ROI.
I have created a MVP where people bet on cryptos: https://rankvestor.com/. I wanted to start with finantial market.
Now I have to stop this project because I am moving my family to Japan because I don't believe in the future of China. I have to work for a Japan company to keep my visa. In my spare time, I work on a Japanese study app that gives me some money every month.
BTW, if anyone likes this idea, feel free to take it and implement it :)
My idea is to create a prediction market where people bet on REAL world events under REAL name with FAKE money. All predictions are public and we can rank every user's prediction ability in each category by his ROI.
I have created a MVP where people bet on cryptos: https://rankvestor.com/. I wanted to start with finantial market.
Now I have to stop this project because I am moving my family to Japan because I don't believe in the future of China. I have to work for a Japan company to keep my visa. In my spare time, I work on a Japanese study app that gives me some money every month.
BTW, if anyone likes this idea, feel free to take it and implement it :)
Interesting. I got around this by just betting very small amounts of real money - here's a video from my channel where I document my activities on that front: https://vistacaretech.sharepoint.com/:w:/s/engineering/Ea-py...
There is a 0.1% chance they will tell you.
Heh, and sometimes that 0.1% does happen. ;)
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).
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).
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.
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.
I think people taking shots at VC are misperceiving what all parties bring to the table.
VC provides capital and connections.
Young founders provide ideas and work.
VC can't / doesn't want to have ideas or do the work, but young founders can't access capital and connections.
To speak to up thread, most people who have been working in industry for 20+ years limit their aspirations to what they believe is possible, which is far shy of what's actually possible. Thus, it takes a young/dumb/crazy enough founder to even take the shot.
Furthermore, by scaling and making multiple bets, VC packages risk into more palatable ranges for investors.
We can point at and decry excesses and metastisized business models on both VC and founder sides (e.g. SoftBank Vision Fund and Theranos), but the underlying bargain is fair and effective.
VC provides capital and connections.
Young founders provide ideas and work.
VC can't / doesn't want to have ideas or do the work, but young founders can't access capital and connections.
To speak to up thread, most people who have been working in industry for 20+ years limit their aspirations to what they believe is possible, which is far shy of what's actually possible. Thus, it takes a young/dumb/crazy enough founder to even take the shot.
Furthermore, by scaling and making multiple bets, VC packages risk into more palatable ranges for investors.
We can point at and decry excesses and metastisized business models on both VC and founder sides (e.g. SoftBank Vision Fund and Theranos), but the underlying bargain is fair and effective.
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)
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)
You underestimate the risk-blindness that comes from having access to the bank of mom-and-dad.
You would receive compensation from seed round?..
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.
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.
> because you’re not in a place to start a business doesn’t mean other people your age aren’t
There are more twentysomethings without families, able to burn the candle at both ends, and not take a salary while a vision comes together than thirtysomethings. That isn’t an ageist proposition because it doesn’t imply many people in their fifties don’t do it.
None of the above are necessary for a founder. But they’re selected for, explicitly and implicitly, which means a random pool of start-up founders will tend to bias young.
There are more twentysomethings without families, able to burn the candle at both ends, and not take a salary while a vision comes together than thirtysomethings. That isn’t an ageist proposition because it doesn’t imply many people in their fifties don’t do it.
None of the above are necessary for a founder. But they’re selected for, explicitly and implicitly, which means a random pool of start-up founders will tend to bias young.
I don't see how providing a personal perspective is agism. Numerically there are more unattached 20 somethings than 30 somethings.
If you’re in your thirties and don’t have a child, you should probably have a child instead of founding a startup. The startup can wait, your likelihood of having a child (and a fulfilling relationship with one) won’t.
That's not at all how I have understood the parent comment. I think they meant that they would start a business in their 30s with a child, but not a hot air type of business with the hope to somehow make some money down the road.
Sure, only people who can realistically do that outside of early 20s are people who have extremely soft landing such as rich parents.
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.
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.
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.
I would wager a guess that if you actually based success on revenue/employee, operating margins, and overall "healthy" business criteria, the number skews probably even higher.
As we were clearly made aware of in the last year, many unicorns of the last 5-10 years were little more than good marketing and a Tier 1 VC footing the bill.
As we were clearly made aware of in the last year, many unicorns of the last 5-10 years were little more than good marketing and a Tier 1 VC footing the bill.
If you weight by market cap, Apple, Microsoft, and Google (Meta to a lesser extent) make it really hard to beat.
And if you’re a VC, weighing by market share makes sense.
And if you’re a VC, weighing by market share makes sense.
...what do either of those have to do with anything?
They all had founders in their 20s (technically, Gates and Zuckerberg were 19).
None of them have anything to do with the kind of companies we're talking about.
I would bet the same way.
Lots of smart people in their 30s and 40s with family obligations and also "it would be fun to" money.
"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.
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.
> .. 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.
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.
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It seems that VCs are primarily selling to LPs. They hire bankers to sell to public markets.
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.
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.
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.
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.
Not always. People thought Facebook had an insane seed valuation. Google was “very expensive” upon IPO.
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!
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!
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.
Let's not pretend there wouldn't be massive industry around puppy-crushing machines if it was profitable for corporations, and marginally legal.
Decades of industry centered around killing other baby animals have shown this.
If anything, it's likely that the lack of a profit motive for "puppy-crushing" has shaped society's general distaste for "companion animal" abuse, while accepting other types of animal abuse as just a way of life.
Decades of industry centered around killing other baby animals have shown this.
If anything, it's likely that the lack of a profit motive for "puppy-crushing" has shaped society's general distaste for "companion animal" abuse, while accepting other types of animal abuse as just a way of life.
There is a massive industry around puppy-crushing machines. We call them "puppy mills" and they're large commercial operations that overbreed puppies for sale and kill the undesirables.
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There are puppy crushing machines everywhere. E.g. physicians in the US are paid high premiums relative to other OPEC countries not because their quality of care of experience is significantly higher, but because of the insurance model we have here [1]. Capitalism works for everyone only with strong guardrails which have instead been eroding for decades.
[1] https://nypost.com/2023/02/19/doctor-insurance-companies-wan...
[1] https://nypost.com/2023/02/19/doctor-insurance-companies-wan...
Also because of massive student-debt loads - the average GP came out with like $250k even a few years ago. Someone's gotta pay that, and ultimately it's the patients.
The US medical system is so fucked it's almost hard to narrow it down to specific reasons: essentially it's at the nexus of the symptoms of virtually every crisis-of-capitalism that the US has allowed to fester over the last 70 years. Patents, education, insurance/financialization, employer-labor relations, federalism-induced complexity from state-level rulemaking (and racing to the bottom when that doesn't happen), racial bias to outcomes... I'm sure there's tons that I'm forgetting offhand.
Basically name a high-level problem/trend in american society and you can almost 100% certainly come up with a reasonable thesis for how that problem is making the american medical system worse.
similarly, name a group of powerful stakeholders and you can be sure that reform of the system will probably impact them negatively on a personal/financial level. Seniors? Investors? Doctors? Universities? etc etc.
to me it is without a doubt the single most politically-complex and personally-charged issue in the entire US system and that's really saying something.
The US medical system is so fucked it's almost hard to narrow it down to specific reasons: essentially it's at the nexus of the symptoms of virtually every crisis-of-capitalism that the US has allowed to fester over the last 70 years. Patents, education, insurance/financialization, employer-labor relations, federalism-induced complexity from state-level rulemaking (and racing to the bottom when that doesn't happen), racial bias to outcomes... I'm sure there's tons that I'm forgetting offhand.
Basically name a high-level problem/trend in american society and you can almost 100% certainly come up with a reasonable thesis for how that problem is making the american medical system worse.
similarly, name a group of powerful stakeholders and you can be sure that reform of the system will probably impact them negatively on a personal/financial level. Seniors? Investors? Doctors? Universities? etc etc.
to me it is without a doubt the single most politically-complex and personally-charged issue in the entire US system and that's really saying something.
> Also because of massive student-debt loads - the average GP came out with like $250k even a few years ago. Someone's gotta pay that, and ultimately it's the patients.
I doubt that's the reason for high doctor wages. They will keep making a huge buck even if tuition is cut by 80% imo. The reason I'm saying this is that the market doesn't care how much debt you have from school: you can pay Harvard 240K to get an art degree, that's not going to make anyone pay you what doctors are earning. You can become unemployed with big debt as you graduate.
I doubt that's the reason for high doctor wages. They will keep making a huge buck even if tuition is cut by 80% imo. The reason I'm saying this is that the market doesn't care how much debt you have from school: you can pay Harvard 240K to get an art degree, that's not going to make anyone pay you what doctors are earning. You can become unemployed with big debt as you graduate.
Yes. Hence what I said.
> If your wealth and well-being is tied to the puppy crushing machine
Let's crush some puppies m'boy.
Them bills, they keep coming.
Let's crush some puppies m'boy.
Them bills, they keep coming.
I wouldn't say my well-being but we all make a living in this industry, it's what pays the bills. Guess you don't care about that?
There are plenty of bits of the tech industry that aren't powered by hype and free money.
This industry involves plenty more than VCs, particularly these VCs.
That's why I said reflect on the system, not just your own actions within it. You can try to switch careers from a job that actively crushes puppies to one that merely maintains the puppy crushing machine, but the problem is the puppy crushing itself and if the only way to pay your bills is to contribute to that, that's a systemic problem, not one of personal responsibility.
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.
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.
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.
>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.
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.
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.
VCs invest others' money, including endowments, pensions, etc. It's not their money to blow without scrutiny
Others' money, not yours. Fund LPs do exercise a good amount of scrutiny over where their money goes. Ultimately if you aren't happy with Andreessen Horowitz and their proposed investment strategy, don't give them your money. Or talk to your employer or pension fund manager if you are indirectly impacted by this (I'm guessing no one here actually is, and this is all just the usual pointless online outrage).
WeWork is great. Hopefully Neumann builds something even better this time.
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.
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.
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
> 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.
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.
I look forward to seeing him build some license plates.
> 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?
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?
No one seems to know what Flow actually is, which probably doesn't bode well.
https://www.fastcompany.com/90847220/adam-neumann-a16z-flow-...
https://www.fastcompany.com/90847220/adam-neumann-a16z-flow-...
> 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
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
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.
> 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.
> 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?
He turned around $25bn in cash into a company worth about $4bn, how else would you describe this?
Same way I would describe Uber. SoftBank trying to muscle their way into ownership stakes by playing games with valuations and squeezing out the founder.
The greater fool theory seems to apply. Masayoshi knew all the numbers, he thought Neumann was a good hype man to unload WeWork unto less sophisticated investors -- when that didn't pan out he tried to make him the fall guy and ended up holding the hot potato.
Uber and WeWork are real companies, still around, providing actual services to actual customers. Both of their founders walked away billionaires, so what?
SoftBank might have to write down their imaginary valuations as the public markets didn't bite into their attempted flip.
The companies might survive long into the future as viable businesses with more realistic market caps.
The greater fool theory seems to apply. Masayoshi knew all the numbers, he thought Neumann was a good hype man to unload WeWork unto less sophisticated investors -- when that didn't pan out he tried to make him the fall guy and ended up holding the hot potato.
Uber and WeWork are real companies, still around, providing actual services to actual customers. Both of their founders walked away billionaires, so what?
SoftBank might have to write down their imaginary valuations as the public markets didn't bite into their attempted flip.
The companies might survive long into the future as viable businesses with more realistic market caps.
Firstly, it's not just a totally neutral act to hatch a plan to juice the numbers to a ridiculous extent and try and dump it onto public markets before it explodes. That's literally an attempt to scam you out of your pension fund.
Secondly, you know that phrase "don't break the law while breaking the law", Adam wasn't just building this massive ponzi, he was self-dealing left and right, buying artificial surf beaches, selling his own trade mark back to himself, getting wework to rent offices that he owned, getting Softbanks other entities to rent huge amounts of Wework space to massively juice the numbers in Japan.
The only reason WeWork was kind of acceptable is because he was mainly burning Saudi billionaire money, but make no mistake, the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
Secondly, you know that phrase "don't break the law while breaking the law", Adam wasn't just building this massive ponzi, he was self-dealing left and right, buying artificial surf beaches, selling his own trade mark back to himself, getting wework to rent offices that he owned, getting Softbanks other entities to rent huge amounts of Wework space to massively juice the numbers in Japan.
The only reason WeWork was kind of acceptable is because he was mainly burning Saudi billionaire money, but make no mistake, the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
I think it is really interesting that their is a strong consensus that WeWork is less admirable because it was burning capital for the founder's benefit, while Uber is OK because it burnt capital* for the benefit of the VCs that were able to sell it off to the public market. In the first case the VCs were burned, in the second case Joe Public (and his insurance fund/ his retirement fund) was burned.
* Uber is a valuable company, but I think it is safe to say it will never be profitable enough to justify an $82b valuation in 2019. Some day it will make FASBY profits purely from operations without having to sell a subsidiary that they built or invested in with the huge amount of capital they received.
* Uber is a valuable company, but I think it is safe to say it will never be profitable enough to justify an $82b valuation in 2019. Some day it will make FASBY profits purely from operations without having to sell a subsidiary that they built or invested in with the huge amount of capital they received.
The big difference is that WeWork spent a bunch of time arguing that you shouldn't value them based on the actual financials of their business. Whereas Uber pursued a risky but honest strategy of winning market share with the intention of recovering margins once they were the incumbent. The whole community EBITDA thing was just a transparent attempt to trick people into thinking there was financial value in the business when there wasn't. And to be clear, Neumann's new start up is trying exactly the same thing, waving his hands in the air about how fulfilling his tenants are going to be plunging their own toilets and how that will create financial value.
> Firstly, it's not just a totally neutral act to hatch a plan to juice the numbers to a ridiculous extent and try and dump it onto public markets before it explodes. That's literally an attempt to scam you out of your pension fund.
Sadly that is the entire premise of the Softbank Vision Fund and many others like it.
> the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
Is that so? When do you imagine Adam Neumann hatched this scheme? At the very conception of WeWork in 2010 when nobody would invest? Truly a supervillain.
Or perhaps four years later when WeWork was "the fastest-growing lessee of new office space in New York" and was on track to become "the fastest-growing lessee of new space in America." By which point everybody was calling him a genius visionary? I don't recall anybody complaining at that point that this company is doomed to fail or anything like that. It appeared to be on an upwards trajectory.
Perhaps he turned to the dark side when SoftBank showed up and demanded they grow the company even faster by throwing money at them? And what was Masayoshi's plan when he invested?
> and even having failed he walks away a billionaire.
What did he fail at specifically? Masayoshi tried to squeeze him out of his own company and Adam called his bluff. So Masayoshi got the press to drag him through the mud and trashed the valuation further in the process. Then covid happened. Had Masayoshi succeeded nothing would change except SoftBank owning a larger percentage. I don't see why you favor one party over the other.
My pension was never invested in any of this and neither was yours. This is as you noted, Saudis, Chinese, Koreans, and JPMorgan attempting to simply buy their way into what seemed at the time a very promising market with their overwhelming cash firepower.
Why you should feel sorry for them is beyond my comprehension.
Sadly that is the entire premise of the Softbank Vision Fund and many others like it.
Masayoshi Son is now personally on the hook for about $5.1 billion on side deals he set up at SoftBank Group Corp.
..As SoftBank grew into a global investor, Son argued the company couldn’t keep talent unless executives were allowed to cut side deals that tied compensation to the company’s performance. That’s exposed him further to the current market downturn.
> the entire plan was that he'd become a billionaire whilst everyone else's pensions would take the hit, and even having failed he walks away a billionaire.
Is that so? When do you imagine Adam Neumann hatched this scheme? At the very conception of WeWork in 2010 when nobody would invest? Truly a supervillain.
Or perhaps four years later when WeWork was "the fastest-growing lessee of new office space in New York" and was on track to become "the fastest-growing lessee of new space in America." By which point everybody was calling him a genius visionary? I don't recall anybody complaining at that point that this company is doomed to fail or anything like that. It appeared to be on an upwards trajectory.
Perhaps he turned to the dark side when SoftBank showed up and demanded they grow the company even faster by throwing money at them? And what was Masayoshi's plan when he invested?
> and even having failed he walks away a billionaire.
What did he fail at specifically? Masayoshi tried to squeeze him out of his own company and Adam called his bluff. So Masayoshi got the press to drag him through the mud and trashed the valuation further in the process. Then covid happened. Had Masayoshi succeeded nothing would change except SoftBank owning a larger percentage. I don't see why you favor one party over the other.
My pension was never invested in any of this and neither was yours. This is as you noted, Saudis, Chinese, Koreans, and JPMorgan attempting to simply buy their way into what seemed at the time a very promising market with their overwhelming cash firepower.
Why you should feel sorry for them is beyond my comprehension.
> What did he fail at specifically?
It's wild that you seem to be giving Neumann a free pass here. He was the founder and CEO of a company that lost 10s of billions of dollars and was eventually forced out for non-performance (and borderline fraudulent activity) so the adults could step in and salvage what was left of the company.
I don't feel sorry for his investors either. You are needlessly painting this situation as one side "good" one side "bad" when "all sides bad" is much more honest.
It's wild that you seem to be giving Neumann a free pass here. He was the founder and CEO of a company that lost 10s of billions of dollars and was eventually forced out for non-performance (and borderline fraudulent activity) so the adults could step in and salvage what was left of the company.
I don't feel sorry for his investors either. You are needlessly painting this situation as one side "good" one side "bad" when "all sides bad" is much more honest.
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> By which point everybody was calling him a genius visionary? I don't recall anybody complaining at that point that this company is doomed to fail or anything like that. It appeared to be on an upwards trajectory.
I recall quite a bit of skepticism at the value add of a middleman leasing and then subletting commercial office space, something with zero network benefits and no barrier to entry. Especially on HN, I would even go so far as to say it was widely expected to fail.
I recall quite a bit of skepticism at the value add of a middleman leasing and then subletting commercial office space, something with zero network benefits and no barrier to entry. Especially on HN, I would even go so far as to say it was widely expected to fail.
> Or perhaps four years later when WeWork was "the fastest-growing lessee of new office space in New York" and was on track to become "the fastest-growing lessee of new space in America."
Any company can grow very quickly if they give away dollars for fifty cents and have a shitload of dollars.
Any company can grow very quickly if they give away dollars for fifty cents and have a shitload of dollars.
>What did he fail at specifically?
At running the god damn company. Honestly, are we going insane here? He took tens of billions of dollars and created a company that was worth maybe $5Bn. Yes! It grew incredibly quickly, it's amazing how many customers you can acquire and deals you can sign when you're overpaying for leases and renting out space at a loss. He created a terrible business that was burning through cash, desperately hoped he could dump it on unsuspecting pension funds and when he couldn't the whole thing blew up in his face. But not before lining his own pockets every step of the way. Even, once the company was going bankrupt, he insisted on a generous payout to walk away from the company he mismanaged into failure. He wasn't rewarded for success, he was paid out because he had controlling shares, and once again, he had those shares because he was running the business more as a scam than an ongoing concern.
At running the god damn company. Honestly, are we going insane here? He took tens of billions of dollars and created a company that was worth maybe $5Bn. Yes! It grew incredibly quickly, it's amazing how many customers you can acquire and deals you can sign when you're overpaying for leases and renting out space at a loss. He created a terrible business that was burning through cash, desperately hoped he could dump it on unsuspecting pension funds and when he couldn't the whole thing blew up in his face. But not before lining his own pockets every step of the way. Even, once the company was going bankrupt, he insisted on a generous payout to walk away from the company he mismanaged into failure. He wasn't rewarded for success, he was paid out because he had controlling shares, and once again, he had those shares because he was running the business more as a scam than an ongoing concern.
The self-dealing underwrites his entire company. I am amazed that A16z is back in.
Exactly. Listening to Marc's discussion about this reminds me of him wanting to jump into the space and see this calculation playing out in his head where cheap-money >> Adam's self-dealing. No surprise this deal happened right at the time when the high-interest environment was starting to kick in.
I don't agree with your analysis about the relative culpability of Masayoshi and Neumann, although I agree that both are culpable, but you are missing the point.
I am not talking about WeWork going from a large valuation to a small one, where you might argue, not that value was destroyed (by WeWork management or whoever), but simply that the large valuation was erroneous, and the later, smaller valuation reflected the true value all along, and so no value was destroyed.
Rather, the actual money paid into the company by investors in cash, was much larger than the later valuation of the whole company.
If investors, including Son, paid WeWork large amounts of money, for good or bad reasons, it was always 100% within the CEO's control what that money was spent on. Neumann could have hoarded that money as a war chest, or could have spent it buying something valuable or building something which could be sold profitably. Instead it was wasted (much of it before Softbank's involvement). There is literally no way of blaming investors for this.
I am not talking about WeWork going from a large valuation to a small one, where you might argue, not that value was destroyed (by WeWork management or whoever), but simply that the large valuation was erroneous, and the later, smaller valuation reflected the true value all along, and so no value was destroyed.
Rather, the actual money paid into the company by investors in cash, was much larger than the later valuation of the whole company.
If investors, including Son, paid WeWork large amounts of money, for good or bad reasons, it was always 100% within the CEO's control what that money was spent on. Neumann could have hoarded that money as a war chest, or could have spent it buying something valuable or building something which could be sold profitably. Instead it was wasted (much of it before Softbank's involvement). There is literally no way of blaming investors for this.
> it was always 100% within the CEO's control what that money was spent on. Neumann could have hoarded that money as a war chest, or could have spent it buying something valuable or building something which could be sold profitably. Instead it was wasted (much of it before Softbank's involvement). There is literally no way of blaming investors for this.
I can see how you might think that if it was some normal functioning tech company. As a matter of fact here it is simply not true. This was a real estate play and everybody involved who invested knew exactly what he is going to do with the money -- which is to expand further and faster -- in fact they demanded this and conditioned their investments on it.
No "war chest" was possible here, ha. All of these people though the same as with Uber: grow as quickly as possible even if it means bleeding money, corner the market, IPO as the winner, hope retail investors prop it up long enough for the company to start eeking out profits and pay down the accumulated debts.
From the founders perspective it was like taking money from a loan shark essentially. The only surprising thing about it all is that he made a deal with the devil knowing he was getting played and managed to end up with anything.
I can see how you might think that if it was some normal functioning tech company. As a matter of fact here it is simply not true. This was a real estate play and everybody involved who invested knew exactly what he is going to do with the money -- which is to expand further and faster -- in fact they demanded this and conditioned their investments on it.
No "war chest" was possible here, ha. All of these people though the same as with Uber: grow as quickly as possible even if it means bleeding money, corner the market, IPO as the winner, hope retail investors prop it up long enough for the company to start eeking out profits and pay down the accumulated debts.
From the founders perspective it was like taking money from a loan shark essentially. The only surprising thing about it all is that he made a deal with the devil knowing he was getting played and managed to end up with anything.
Uber received a total of just over $25 billion in funding, and has a market cap of nearly $68 billion.
WeWork received just over $22 billion in funding, and has a market cap of just over $1 billion.
Please tell me how these are in any way equivalent again.
WeWork received just over $22 billion in funding, and has a market cap of just over $1 billion.
Please tell me how these are in any way equivalent again.
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...
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.
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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.
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.
Sad to see a name like A16Z reduced to this.
> 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.
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.
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.
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.
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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?
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.
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.
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.
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.
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.
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)
In my city, they lured in drivers with fat incentives, then encouraged them to buy new cars - even partnering up with lenders to offer loans with low/zero down payment. Of course, the incentives dried up and drivers were left with expensive cars they couldn't pay for unless they worked 12-14 hour shifts.
I have zero sympathy for this godawful exploitative company. If the world didn't see them with the rose-tinted tech shades, they would have the same reputation something like Nestle has - a greedy, reckless, and exploitative corporation.
I have zero sympathy for this godawful exploitative company. If the world didn't see them with the rose-tinted tech shades, they would have the same reputation something like Nestle has - a greedy, reckless, and exploitative corporation.
I agree they are a greedy, reckless, exploitative corporation. I do think though their product is a net positive to society, even a net positive to the drivers class in general (taxi is basically mafia around here and Uber driving was used as a sort of safety job fallback for people that would be otherwise unemployed).
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
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
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.
In San Francisco, Uber was a mobility revolution!
Lyft was! At the cost of public infrastructure, job security for drivers and increased emissions! But is it ever convenient.
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.
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.
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.
Whats the real return on a 4% treasury when inflation is running 4-6%.
Its negative.
Its negative.
TIPS have a real return of around 1.5% right now
But you can only put in $10K
You can only put 10k into I bonds (current rate 6.89%)
You can put massive amounts into TIPS
You can put massive amounts into TIPS
You get 4% on some deposit accounts. You get about 5% on 1 year treasuries.
Now 5%!
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.
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.
Subsidies are a powerful drug, with serious withdrawal symptoms
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.
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.
> 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
Isn't it also dependent on inflation? Higher inflation = higher bond yields
It's unsurprisingly a bit more complex than that, but yes. The mechanism is something like
general price level increase accelerates (inflation overshoots the target) -> central banks act to cool the economy (they conduct open market operations to remove liquidity, increase various knobs like interest-paid-on-reserves, basically the opposite of "quantitative easing") -> this has a knock on effect on corporate and governmental bond auctions -> bond interest rates go up
but this is a "closed loop" because the end result is that "inflation creeps back down to/below target level", and then bond yields go back to where they were and it seems that's mostly a function of the appetite for safe assets.
of course this might all be irrelevant if central banks basically switch to "nominal GDP targeting"
and one more small but very interesting piece in this puzzle (the jargon is not important, the "bonds stay on the balance sheet, so they are inconvenient" part is): https://libertystreeteconomics.newyorkfed.org/2023/02/unders...
general price level increase accelerates (inflation overshoots the target) -> central banks act to cool the economy (they conduct open market operations to remove liquidity, increase various knobs like interest-paid-on-reserves, basically the opposite of "quantitative easing") -> this has a knock on effect on corporate and governmental bond auctions -> bond interest rates go up
but this is a "closed loop" because the end result is that "inflation creeps back down to/below target level", and then bond yields go back to where they were and it seems that's mostly a function of the appetite for safe assets.
of course this might all be irrelevant if central banks basically switch to "nominal GDP targeting"
and one more small but very interesting piece in this puzzle (the jargon is not important, the "bonds stay on the balance sheet, so they are inconvenient" part is): https://libertystreeteconomics.newyorkfed.org/2023/02/unders...
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".
TBH Andreessen Horowitz has been the redest of flags for a long time, spouting all their nonsense about crypto and "web3".
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.
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.
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.
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.
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.
> 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...
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...
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.
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.
I saw a few reteweeted Andreessen tweets over last week and I hope he's just joking around because he genuinely sounded like a lunatic if he was being sincere.
What was he saying, in particular?
[deleted]
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.
So a lot of the "dry powder" left in VC is not so dry.
yes - prepare for the era of the normalization of down rounds
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.
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.
Are they profitable? Were they ever profitable since being founded?
> 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
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
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?
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?
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.
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.
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.
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.
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).
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).
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.
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.
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.
The valuation on all their equity was speculation, it is not based on earnings.
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.
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.
>what exactly happens to the billions in equity [...]
Same thing that happened with FTX/FTT, they sublimate.
Same thing that happened with FTX/FTT, they sublimate.
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?
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.
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.
"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.
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.
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.
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?
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?
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.
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.
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.
You missed the "fiercely skewed" part. The VCs have to be participating to begin with. Even one of these deals can make or break a portfolio, so they have to cast a wide net -- but the capital reserve is drier now. This disproportionately (and negatively) impacts VC returns -- it's not the difference between $10 billion and $9 billion, it's the difference between $10 billion and $100 million.
Additionally, higher risk-free rates of return mean that investors demand results _today_. If the risk-free rate is ~0%, the market is content to wait; capital today is about as valuable as capital ten years from now. But if it's, say, 6%, then investors need bigger returns and sooner from your VC funds to beat the market at large. But the cost of building the company hasn't changed, so this makes VCs have a harder time.
Additionally, higher risk-free rates of return mean that investors demand results _today_. If the risk-free rate is ~0%, the market is content to wait; capital today is about as valuable as capital ten years from now. But if it's, say, 6%, then investors need bigger returns and sooner from your VC funds to beat the market at large. But the cost of building the company hasn't changed, so this makes VCs have a harder time.
I suspect you're overestimating the impact of bond rates on VC or IPOs. What does the data say? IPOs have declined during a period of low rates, and at first glance there doesn't appear to be any clear correlation between inflation-adjusted IPO size and interest rates. Know of data that says otherwise?
This study finds that low rates were correlated with less IPOs, not more: https://www.researchgate.net/publication/5184917_Interest_Ra...
Even A16Z lists a bunch reasons IPOs are declining (in a period of low rates), none of which seem related to bond rates: https://a16z.com/2017/06/19/ipos/
This study finds that low rates were correlated with less IPOs, not more: https://www.researchgate.net/publication/5184917_Interest_Ra...
Even A16Z lists a bunch reasons IPOs are declining (in a period of low rates), none of which seem related to bond rates: https://a16z.com/2017/06/19/ipos/
> IPOs have declined during a period of low rates
That is the expected result. Firms can take longer to pay off because the cost of capital is lower, and VCs are under less pressure to deliver. What you'd want to see research on is IPO returns accrued to investors.
That is the expected result. Firms can take longer to pay off because the cost of capital is lower, and VCs are under less pressure to deliver. What you'd want to see research on is IPO returns accrued to investors.
[deleted]
> the VC get $9 billion instead of $10
Andreessen has been raising massive funds (because they can since investors were flush due to low interest rates) which need to write large cheques.
They aren’t doing traditional venture capital as much as late-stage growth equity. Since no quality company will sell half of itself to Andreessen, this almost necessitates writing a big cheque into a multibillion-dollar round at $30bn valuations, or medium-sized cheques into terrible ones. The former go public at $10bn, the latter go bust.
Andreessen has been raising massive funds (because they can since investors were flush due to low interest rates) which need to write large cheques.
They aren’t doing traditional venture capital as much as late-stage growth equity. Since no quality company will sell half of itself to Andreessen, this almost necessitates writing a big cheque into a multibillion-dollar round at $30bn valuations, or medium-sized cheques into terrible ones. The former go public at $10bn, the latter go bust.
Right, but if interest rates are high they can still go public at a large valuation...
> if interest rates are high they can still go public at a large valuation
Not as large as previously. And critically, smaller than where they invested. Going public at $10bn when you bought for $30bn isn’t a good deal.
Not as large as previously. And critically, smaller than where they invested. Going public at $10bn when you bought for $30bn isn’t a good deal.
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.
> 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.
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.
These are equivalent ways of looking at the same thing. On one hand you could say that money today is worth 5% more than money next year, and then figure the return net of the risk free rate. Alternately, you could say that VC money must provide returns in excess of the risk free rate and say that startups now are expected to provide higher returns. Both are mathematically equivalent.
The broader point is that the current need to provide higher returns than before is more acute for a company that isn’t going to produce big profits for 10 years because of all of the compounding over that time.
The broader point is that the current need to provide higher returns than before is more acute for a company that isn’t going to produce big profits for 10 years because of all of the compounding over that time.
The difference is that the bond return is (to first order) riskless and risk has a cost.
What is the variance on the VC return (and is $9 a realistic mean of the distribution to begin with?).
What is the variance on the VC return (and is $9 a realistic mean of the distribution to begin with?).
Right, but that doesn't change the return. It would only change the amount of money being invested in VC or IPOs versus bonds. And the total money chasing stocks isn't evenly distributed amongst stocks, so less money in the stock market doesn't necessarily mean a lower valuation for a particular company (such as the big winner in a VC portfolio).
The risk free return is an opportunity cost. If I invest $10 and get back $11, the net is $1 regardless of whether bonds yielded 0% or 100%.
The risk free return is an opportunity cost. If I invest $10 and get back $11, the net is $1 regardless of whether bonds yielded 0% or 100%.
And that cost is taken into account when people value the merits of a particular investment/company.
If bonds yield 100% p/a then an investment with even a decent potential payout in 10 years time will be seen as worthless.
But one that is likely to pay out a dividend tomorrow may not be.
That’s the whole premise behind discounted cashflow analysis: mechanistically taking into account the opportunity cost of the risk-free interest rate to derive a valuation.
If bonds yield 100% p/a then an investment with even a decent potential payout in 10 years time will be seen as worthless.
But one that is likely to pay out a dividend tomorrow may not be.
That’s the whole premise behind discounted cashflow analysis: mechanistically taking into account the opportunity cost of the risk-free interest rate to derive a valuation.
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.
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.
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?
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.
This thread would be way, way more interesting with a mention of a single date in the future.
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.
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.
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.”
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.”
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.
-- 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.
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.
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.
Previous high interest rate environments were accompanied by population growth and increases in labor productivity. I don't think there is any historical comparison to a high rate, no population/productivity growth scenario. I think at the very least those conditions won't provide for GDP increases but I also think capital re-allocation throughout the economy seems necessary to return to "healthy" growth conditions.
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.
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.
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).
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".
[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".
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?
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
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
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).
The legal ponzi is the systemic one
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.
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.
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.
We'll be back to zero and negative is coming folks.
In what time frame?
Back to zero by end of year. Negative in response to deflationary bust next year.
This has to be a joke. If you truly believe that you can make a killing by betting on it.
No, its not a joke. The fed can screw up and cause inflation but they can't screw up the other way and cause a deflationary death spiral?
It will be the single biggest fight ever of every central bank to stop the death spiral that shows up on the back of their forced recession in the name of fighting inflation.
They will go negative and QE much larger than pandemic.
It will be the single biggest fight ever of every central bank to stop the death spiral that shows up on the back of their forced recession in the name of fighting inflation.
They will go negative and QE much larger than pandemic.
Serious question. Do you feel then that all of these layoffs are a wink wink nudge nudge 'aye aye captain' gesture to fall in line with the Fed?
Or do you(and they) think a recession is coming, and that in turn will drive rates down?
It's hard to me to imagine it all, with inflation having been so bad the last two years. But I'm not versed enough I feel to propose any kind of argument either way.
Or do you(and they) think a recession is coming, and that in turn will drive rates down?
It's hard to me to imagine it all, with inflation having been so bad the last two years. But I'm not versed enough I feel to propose any kind of argument either way.
You can't sustain high government debt and high interest at the same time. "Federal government current expenditures: interest payments" are now at 0.9 trillion dollars annually. If inflation increases tax revenue fast enough then ok no big deal but that would still mean the interest rate has to be lower than inflation and if inflation has a downward trend then I would expect the interest rate to follow it with a huge lag.
I believe the layoffs were in response to the stock prices and the general market sentiment that the fed caused.
The rates will come down at first because inflation has been beat. Then it will come down more when it becomes clear that the fed screwed up both ways and now has to try to fix the economy.
Then the consumer will stop buying things because prices are going the other way fast. AKA a deflationary bust which can be much worse than anything we have seen in our lifetimes.
The rates will come down at first because inflation has been beat. Then it will come down more when it becomes clear that the fed screwed up both ways and now has to try to fix the economy.
Then the consumer will stop buying things because prices are going the other way fast. AKA a deflationary bust which can be much worse than anything we have seen in our lifetimes.
> zero by end of year
This is what the stock market is betting, and being continuously disappointed, on. It’s a hell of a bet, and I think it’s dead wrong.
This is what the stock market is betting, and being continuously disappointed, on. It’s a hell of a bet, and I think it’s dead wrong.
Market double bottomed June/Oct at 3600. Now 4100. Not seeing the disappointment. Mr. Market has you right where it wants you, on the sidelines or short.
> Now 4100. Not seeing the disappointment
Yes, when rates are cut valuations go up. This is finance 101.
American stocks are rich because a recession and low rates are priced in. If that doesn’t happen, if rates go where the Fed forecasts, the market needs to drop.
You’re in good company, by the way. Prominent managers are long equities and quality credit [1] on the hypothesis that rate cuts will keep valuations buoyed. (It’s also why the curve is inverted [2].) This is the dominant financial debate du jour. The market (specifically: professional money managers) are fighting the Fed. (My belief is this is more tied to fees and AUM than a fundamental read on the economy.)
[1] https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b...
[2] https://www.bloomberg.com/news/articles/2023-02-09/treasury-...
Yes, when rates are cut valuations go up. This is finance 101.
American stocks are rich because a recession and low rates are priced in. If that doesn’t happen, if rates go where the Fed forecasts, the market needs to drop.
You’re in good company, by the way. Prominent managers are long equities and quality credit [1] on the hypothesis that rate cuts will keep valuations buoyed. (It’s also why the curve is inverted [2].) This is the dominant financial debate du jour. The market (specifically: professional money managers) are fighting the Fed. (My belief is this is more tied to fees and AUM than a fundamental read on the economy.)
[1] https://www.ft.com/content/e3d5ee33-5cc6-4be5-bf68-fcd92a75b...
[2] https://www.bloomberg.com/news/articles/2023-02-09/treasury-...
Slightly OT but related to your links, can you say that the FT has maintained its "impartiality" (for lack of a better word) in its finance and economics section?
I'm asking because I used to read the FT on and off for 15 years going on 20 now, but the last couple of years have been really dire in terms of their biases and their lack of impartiality (especially in the politics and the international sections). At the same time your links made me miss their finance pieces, which I agree most of the times might have looked very "dry" but for a person outside finance (like I am) they were illuminating nonetheless. I'd go back to reading the FT again just for those.
I'm asking because I used to read the FT on and off for 15 years going on 20 now, but the last couple of years have been really dire in terms of their biases and their lack of impartiality (especially in the politics and the international sections). At the same time your links made me miss their finance pieces, which I agree most of the times might have looked very "dry" but for a person outside finance (like I am) they were illuminating nonetheless. I'd go back to reading the FT again just for those.
> especially in the politics and the international sections
Most British coverage of American politics is abysmal. For international, the FT has biases, but they tend to get the facts straight. (Definitely Eurocentric.)
Most British coverage of American politics is abysmal. For international, the FT has biases, but they tend to get the facts straight. (Definitely Eurocentric.)
No one is betting on this. The implied interest rate for end of year based on market data is 5%
While that’s not 0 that does seem low given the fed has said they are setting it higher than that.
The market has been undershooting the whole time the fed has been raising rates. It’s a little strange frankly.
The market has been undershooting the whole time the fed has been raising rates. It’s a little strange frankly.
The expectation is to go higher and then lower, for example after the September meeting it’s around 5.5%
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
Source for Fed stating they are setting fed funds rate higher than 5%?
5% and 0% are already world apart given the last two decades.
5% and 0% are already world apart given the last two decades.
Good point, maybe the 'inflation is transitory' crowd can chime in as well
I truly believe this. I do not think the people in charge have the guts to blitz through a forced recession.
Well he might be right however I believe we have to start a recession first before they fully pivot and start cutting
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.
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
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
How are they unprecedented?
https://fred.stlouisfed.org/series/fedfunds
The latter half of the 90s was >5%.
https://fred.stlouisfed.org/series/fedfunds
The latter half of the 90s was >5%.
Low, not high. They're talking about 0 and <0.
And simply live with high inflation? Sound great, I'm sure the poor will have a great time.
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.
Rent, food and energy gets more expensive with higher inflation. That's not a picnic for poor people with low incomes.
The rich are affected as well but not in any way that actually hurts their lifestyle. Instead of having X million dollars they will have 0.8X million dollars.
[deleted]
Wages also go up with higher inflation.
Not as fast. Also unemployment goes up, and if we're talking about the poor (which I am) there's a lot of unemployment.
I think both those claims are significantly at odds with the overwhelming consensus of both mainstream and heterodox economic thought.
That's interesting actually, everyone I read says inflation is worst for the poor (is this surprising?). Where are you getting this from?
The definition of inflation is a deterioration of the value of money. Nothing about this requires or suggests that it affects the prices of some goods more than others, or prices more than wages. If there is relative movement between distinct prices, or between prices and wages, this is an orthogonal phenomenon to "inflation", by definition.
The idea that inflation and unemployment move inversely and (broadly speaking) represent a policy trade-off is literally the first chapter of Macro 101. With all respect, I see it as very difficult to discuss economics on any serious level with someone who is not aware of this notion, or who believes the opposite is true (as opposed to someone who has a critique or a nuanced view of it).
The idea that inflation and unemployment move inversely and (broadly speaking) represent a policy trade-off is literally the first chapter of Macro 101. With all respect, I see it as very difficult to discuss economics on any serious level with someone who is not aware of this notion, or who believes the opposite is true (as opposed to someone who has a critique or a nuanced view of it).
I have only two points, both are very well supported.
1) Inflation (high, not the good kind of 2%) hurts the poor more than the rich https://www.dallasfed.org/research/economics/2023/0110#:~:te....
2) To tame high inflation central banks need to raise interest rates, thus creating unemployment and economic slowdown in general https://rsmus.com/insights/economics/how-high-must-unemploym.... That's also much worse for the poor than the rich (who can afford not to work a few years without being thrown to the streets)
But honestly, you're right, we are talking past each other here there is nothing to be gained.
1) Inflation (high, not the good kind of 2%) hurts the poor more than the rich https://www.dallasfed.org/research/economics/2023/0110#:~:te....
2) To tame high inflation central banks need to raise interest rates, thus creating unemployment and economic slowdown in general https://rsmus.com/insights/economics/how-high-must-unemploym.... That's also much worse for the poor than the rich (who can afford not to work a few years without being thrown to the streets)
But honestly, you're right, we are talking past each other here there is nothing to be gained.
I believe deflation death spiral is coming due to the fed drastically over tightening. It will be worse for the poor than inflation.
I agree with you that's worse. Hopefully these are not our only two options.
Anyway in the first signs of a true depression (which we are nowhere near at as unemployment is at a historic low) the Fed will likely lower interest rates.
But I agree things are difficult. There's a huge amount of debt in the system, the highest its ever been, and growth is low and inflation is rather high.
Seems like every generation insists on leaving the young with higher debt and worse off ecological ecosystem. We'll likely do the same to our kids until something truly collapses.
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.
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.
> you’re still getting it at zero percent
What?
What?
So basically, you should build something real, raise less money but keep more shares.
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.