So I agree with the sentiment that marks are not useful however you can do an analysis of the "non-realized gains" and the age of each fund then compare that to benchmarks of other funds of the same year.
That's basically a backend way of figuring out how much of their returns are pie in the sky. One other thing to keep in mind to give a16z the benefit of the doubt is their funds are MASSIVE. Putting that amount of capital to work is hard- and relatively harder than Bessemer and the other funds they are compared to.
That said, the % of Fund III in particular that is non realized is fairly scary. I'd take a wager that it does not return capital. Note also A16z pretty quickly raised a new fund before a lot of these returns for 3 become clearer. That's just guessing on my part but I'd def bet III is not gonna be good. That said I still love a16z and the partners and their approach...I actually hope I'm dead wrong.
From the original WSJ article: "Since its founding through last year, Andreessen Horowitz had returned a total of $1.2 billion in cash to investors, net of fees. Sequoia returned more money on WhatsApp alone."
Unlike the blog states, it seems that WSJ is, in fact, using "actual, realized returns" as evidence.
http://www.wsj.com/articles/andreessen-horowitzs-returns-tra...
I read the title and I thought "mark" as in "the target of a scam". I was super excited to read a post about how VCs scam founders but get away with it because they're, well, VCs, and on a VC blog, no less! Imagine my disappointment on clicking the link...
One thing that the article doesn't really elaborate on is why different valuation strategies exist (and are allowed to exist) within GAAP.
Accounting should be done in a way that maximizes the usefulness of financial reporting for strategic and management decisions. In some cases, firms are required by regulators to adopt specific practices, but there is a fair bit of freedom given to the CFO.
VC firms must make wise financial decisions and satisfy their LPs with some degree of transparency. The accounting strategy chosen must accomplish both goals.
In many cases, it makes sense to be very pessimistic about valuations, and doing so often reduces tax liabilities.
On a side note, the whole "mark to market" scandal from the 2008 financial crisis was a case where firms typically marked assets in a way that matched their management goals, but at times failed to reflect short-term price fluctuations.
Regulators thought that forcing firms to mark assets to a known market price would result in better financial reporting. The problem was that the balance sheets containing those assets were also used as underwriting capital. So a market price increase (or bubble) in the assets was suddenly leveraged into a lot more risk capital by the firm (whereas before the rule, the CFO would not likely have wanted to mark the assets that high).
This resulted in industry-wide increases in risk capital for "free" because of asset price spikes, and following that it led to increased investment. The problem was, when the price fell back down, the firms were over-leveraged. It's generally a bad idea to use highly volatile assets as underwriting capital.
So while "mark to market" sounds good, it can enhance natural fluctuations (minor boom/bust cycles) in a destabilizing way.
The art of being the CFO of a VC firm is likely a very interesting thing, and it would be fascinating to learn more about how this happens across the industry.
The big takeaway from the journal article is a16z charges 30% of profits.
Top hedge funds are known for 2 & 20, and Berkshire Hathaway doesn't charge anything.
30% is murder. Scrutiny is justifiable.
From the title, I was expecting this story to be about the con-trick use of the work "mark" (sucker, target).
Cash is king. Interim metrics are a necessary evil.
I find the OPM method interesting. Has anyone here used this? Is it always more conservative? Is it a better predictor of realized value?
"Mark" as in "mark-to-market"
The lady doth protest too much, methinks.
"does nothing to tell an LP what a company’s ultimate value at exit will be"
"nothing" is the wrong word here. My experience is that the "marks" are indeed quite helpful and for the most part, reasonably accurate.
My experience is also that many portfolio company valuations are not particularly sophisticated.
The hedge fund comparison is odd since many hedge funds investments are as illiquid or more.
Holy hell what a terrible title.
I don't buy it. They assign value when then invest (which of course is a very rough estimate). What's so hard about assigning a value a few months or years down they road when they presumably have a lot more info about the biz than they did on day 0 (the initial investment/mark).
With all the talk about a16z money, important to remember that partners give half their earnings to charity: http://fortune.com/2012/04/25/andreessen-horowitz-to-give-ha...
I dunno. Whenever I mention "mark to market" to anybody involved with swaps, their blood runs cold, black people turn white, etc.
Rare for a Finance Analyst at the WSJ to make such a simple mistake, but is it so surprising that a media outlet would overlook accounting details in the chase of a headline?
When you try to 'mark read' the hacker news rss feed and 20 minutes later the same stories are re-posted 3 or 4 times..
zing!
Vaguely condescending blog posts by founders of financial firms about why top-tier financial reporters are underestimating their returns is a leading indicator that actual returns will be even worse than the reporting implies.