They have always explicitly said they modeled themselves after the agency CAA, which was more than just a rep because leveraged their network/roster of talent synergistically. Not sure it needed another analogy.
Also the capital + services model is an interesting theory, but I haven't heard any stories of it living up to the marketing hype from portfolio companies. Don't think it is anywhere close to top of mind when you are comparing term sheets against other top firms.
I haven’t worked with A16z, but will say in the case of First Round Capital, their services are truly amazing, and would be material to me in considering term sheets, or even in choosing an early stage start up to join. So I think the capital + services model can be legit.
Honestly it seems like what they did right, more than anything, was realize that to be successful VCs they had to make a ton of noise and build a super media-focused brand.
I dunno. Andreessen’s service layer may make sense for some startups in some industries, but for other companies a check from the likes of Tiger might be better. And how far down the road will those services become rent?
> Airbnb, on the other hand, operates a website and app and has zero involvement in operating or designing physical assets
Not entirely true. There's Airbnb Plus, in which they have, to quote what the article says about Hilton, "strict guidelines on how its [homes] are ... maintained."
I've heard of other VC firms with similar models of having a lot of support services baked into their business. Does anyone know if what A16Z doing is actually unique, or if they're just branding/publicizing an existing model?
I had a company funded by a smaller VC 6+ years ago that offered services like this. The reality was that it was a real pain. They offered "discounted" services but the discounted rate was far more expensive than what we could find for ourselves. And we had to deal with the pressure of their soft sales pitch for everything. Our in house bookkeepers are only $50 an hour, use out legal firm for $500/hr. Our tax accountant, on and on. Honestly, I didn't want them to have their fingers in so much detail even though they are investors and as someone who has been doing this for a good while, I already have contacts that will do a better job for cheaper.
If they're trying to make money off of the services, that's a key problem. It's one thing if it's "Hey, we have a relationship with this random uniquely qualified individual who is expensive, and that's between you and them" and maybe there's a friend and family discount. It's a very different thing when they are trying to get you to book services thay they get revenue from.
The author made a ton of mistakes in the article, one of which is apparently failing to grasp that there can be matters of macro and micro strategy involved in operating similar businesses.
Two burger franchises can both be in the business of selling burgers and fries and how they prepare/arrange that food can be very different (never frozen vs frozen; etc). Thus according to the author doing things differently is only strategy if it's at some arbitrarily high enough macro level. The author is wrong of course, it is strategy.
The whole premise of the article collapses upon that issue however. So if the author had reconciled their rather enormous contradiction, it would have torpedoed the article.
Before, VC money was precious and merely being a VC was enough to get deal flow.
Now, so much money has been printed and sovereign wealth / pension funds are legally obligated make 8% annual returns that their only option is to go far out the risk curve, which includes venture capital.
As a consequence, VC firms are a dime a dozen and the existing ones have more capital than ever. It’s still an accomplishment to raise money, but from the VC perspective there are still only so many hot deals per year and they need to be hyper aggressive to win those most promising deals.
Put another way, the very top-tier startups now have their pick of VCs, can raise a lot more money on better terms, and for a VC to truly be an automatic “yes” for the founders they need to check a lot of boxes. This includes all of the usual stuff like industry contacts but as government has become far more aggressive in tech a legal / lobbying arm also makes sense.
Some state systems are required by law to remain solvent, and are empower to enforce that. For example, New York requires municipalities and other entities to make payments to cover lower returns within a year or two by law.
Other states, like most infamously Illinois, have no such requirement and their systems are essentially insolvent, barring the Federal government bailing them out.
Taxpayer funded defined benefit pension funds assume 6% to 8% returns. Non taxpayer funded defined benefit pension funds are required to use high grade corporate bond yield curves, in the 3% to 4% range. Roughly 1% change in the assumption of return on assets results in 15% of change in liabilities.
NY is an outlier in terms of its defined benefit pension governance, but the way most taxpayer funded pensions currently work, they are vehicles for pushing 30%+ of today’s defined benefit costs onto future taxpayers.
This is really what it will come down to. Real interest rates are falling to 0. The fed can prop the markets up to guarantee any paper return or simply let pensions etc go bust.
At some point the economy will need to rebalance assets in order for interest rates to rise, but there is no preordained condition that requires this to occur.
Classifying a pension fund’s expected return on assets to be a legal obligation to earn that much is a stretch.
The pension fund’s board could just as easily use a lower expected return on assets, but you are correct that using a higher than reasonable return assumption transfers debt from yesterday’s taxpayer to tomorrow’s taxpayer, and that is by design since future taxpayers are not particularly strong voting blocks. And it does cause pension fund managers to gamble on riskier and riskier “investments”, since the alternative is raising taxes and lowering return assumptions to make up for the shortfall and who likes that.
You act as if reducing the rate of return is a simple maneuver. This is politically fraught as it automatically requires employees to contribute more money.
It is relatively simple, as in no laws need to be passed or anything. The pension board could decide to match the PPA 2006 standards the government requires for non taxpayer funded DB pensions anytime it wants.
They will not though, since that would increase their own taxes, and of course start a political firestorm.
I disagree in classifying it as a legal mandate, because that makes it seem like there is some type of law forcing pension fund boards to invest in risky assets. I am not aware of any state law that says the pension fund has to use excessively high return on investment assumptions. State law might say that taxpayers have to prioritize defined benefit pension benefits in the event the pension fund run out.
Ironically, the only law about return on investment assumptions is on non taxpayer funded pension plans via ERISA and PPA 2006. I cannot help but think the only reason taxpayer funded pensions have different rules is so future taxpayers can be fleeced.
The distinction is important, because the reason the pension fund boards invest in risky assets is not due to the law (aka legal mandate), but rather today’s taxpayers wanting to push today’s labor costs onto future taxpayers while not stating it on official reports so that the responsible actors can maintain plausible deniability.
Also the capital + services model is an interesting theory, but I haven't heard any stories of it living up to the marketing hype from portfolio companies. Don't think it is anywhere close to top of mind when you are comparing term sheets against other top firms.
1. https://a16z-live.simplecast.com/episodes/beating-the-incumb...