Economics Homework Help

Case study. (I will provide notes for the case)

Answer the questions.

• Was the capital an attractive industry to enter in 2009? What entrepreneurial opportunity did Andreessen Horowitz see?
• “ to succeed as a VC you have to do three things really well: source, pick, and win”(case p.8). what does a traditional VC firm do to source pick and win? How does a16z approach these key success factors differently than other VC firms?
• If you were a first-time founder of a tech startup seeking Series A positive investors, would you find a16z’s value proposition attractive?
• Is a16z’s big investment in its operating team likely to yield a positive return? Should other top-tier VC firms copy this approach?
• Evaluate the following a16z organizational policies and practices: a) criteria for hiring General Partners: b) compensation approach for GP’s: and c) co-founders’ governance rights. How important will each be to the firm’s success?
• Should a16z seek to double its assets under management over the next two years? If you support rapid expansion, would you diversify into other sectors (eg. Life-sciences, clean tech)and/or geographies (e.g. China, New York)
• To understand the potential financial impact of doubling assets under management, estimate a16z’s “steady-state” annual revenue and its costs before GP compensation using the following assumptions:

• a16z raises a new $1.5 billion fud every 3.33 years; fund life averages 10 years. So, in steady state, a16z would have $4.5 billion in total committed capital- 1.7x its current scale-and would invest $450 million per year.
• Across its entire portfolio, exit proceeds average 2.5-3x capital invested, consistent with successful VC fund performance.
• Management fees equal 2.5% of committed capital and carry equals 25% of capital gains. Ignore thresholds that boost the carry to 30% and the fact that management fees on parallel fuds are paid on invested rather than the committed capital.
• To calculate costs, estimate average annual cash compensation per non-GP employee. Then increase that figure to reflect additional expenses for benefits, rent, travel, professional services, etc. finally, estimate the number of non-GP employees a16z would require to support a 1.7x increase in scale to$4.5 billion in committed capital. Note that a16z currently has 74 non-GP employees, 43 of whom are operating team professionals.

As you consider Question#6, not that four of the top VC firms listed in Exhibit 9- Bessemer, Kleiner Perkins, NEA, and Sequoia – invest across info tech, life services, and clean tech; the other five firms focus solely or very heavily on info tech.

Also, with respect to Exhibit-6, note that the investment tally for a given year includes many follow-on rounds for startups in which a16z made an earlier investment. For 2003, for example, of 49 rounds not classified as “seed,” 22 were follow-on rounds and 27 were firs-time investments for a16z. Further note that a 16z does not provide all of the capital in a given round. It typically co-invests with other venture capital firms. In analyzing Exhibit 6, assume that a16z’s share of total round proceeds averages 50%. This is just a guess: a 16z does not disclose its actual share of funding rounds.