Defending A16z: Noam Scheiber mistakes a VC portfolio for his 401K

Labor and workforce reporter for the NY Times Noam Scheiber takes on Andreessen Horowitz in this recent piece:

Rather than profiting like Mr. Ovitz and his fellow agents, the venture capitalists may be more like the Hollywood studios — chronically overpaying for projects whose costs they can rarely recoup. Mr. Andreessen and his partners have invested so much in so many start-ups that it would take a remarkable string of successes to make the approach pay off. For all their skill — the firm bought into the likes of Airbnb, Instagram and Pinterest relatively early — their track record suggests it’s unlikely. Already, they’ve suffered a few impressive flameouts, including Fab, on which they are likely to lose tens of millions of dollars.

Even when they pick well, they often bid so much for stars that the return is relatively modest. It’s easier to triple or quadruple your money when you’ve invested $10 million in a $100 million company than when you’ve invested nearly $100 million in a $1 billion company, as they did with the daily deal site Zulily. There are only so many companies that are acquired for billions of dollars or reach that kind of price through an initial public offering. Fewer retain such valuations — Zulily’s stock price has fallen sharply since last year.

Noam doesn't make a data-based argument. He uses an anecdote. Because data would ruin a really good story in this case. He compares Silicon Valley juggernaut Andreessen Horowitz to the excesses of Hollywood and CAA.

There's a big difference here. Let's take Avatar, for instance. It's a film that was made in 2009 for $237 million. It grossed over $2.7 billion worldwide — a roughly 11X return on capital. That's the highest grossing film ever made, and a good proxy for how profitable Hollywood can be at best. 

Let's take another example from Silicon Valley— Facebook. Peter Thiel invested $500,000 in the fledgling company in its first seed round in 2006, and from public records held 22.4 million shares of the stock at IPO. Those shares, if he hadn't sold them, would be worth $1.9B today (at about $74 per share). That's a 3,800X return on capital. 1 

Multi-billion dollar companies happen when non-obvious ideas and huge market needs meet perfect execution. We've seen it before our eyes — Uber, Airbnb, Dropbox, Stripe, Instacart — and when you have the potential for 100X to 4000X returns, it's not about avoiding loss or minimizing downside. A proper venture portfolio is not like your 401K. The only way startup investors truly lose is if they miss the Uber. 

And that, in a nutshell, is why using anecdotes (e.g. Zulily in Sheiber's piece above) as evidence against Andreessen Horowitz makes no sense at all. An individual investment may fail but it's just one in a portfolio. The returns that are possible in early stage technology investing far outweigh anything Hollywood has ever seen or ever will see. Software is eating the world, and the numbers bear it out. 

1 David Hammer suggested a better comparison would be Accel, their Series A partner. Their 10% stake at IPO is now worth $14.8B, so their $12M investment yielded roughly 1100X return.