I mentioned in a recent post the “barbell” strategy of Andreeson Horowitz, which has been followed by some other venture firms, notably including Kleiner Perkins. The barbell strategy is to invest early like a super-angel, and to jump in late like an accelerator fund in pre-IPO deals like Facebook. This week the WSJ celebrated the audacity of Marc Andreessen to have lept into Skype and worked his way into Facebook, Groupon and Zynga. He was initially criticized for this, but soon other firms raced in after him.
Marc had the insight that with the dearth of IPOs, it was a smart move to buy into the pre-IPO winners at what would previously have been the IPO price. (With LinkedIn pricing at $3B valuation, the prices Marc paid for Skype, Twitter and Groupon, of around $3-5B, fit this model.)
Coincidently, this week, Bill Quigley of Clearstone put out a great report on the state of venture capital, and in it he shows how the Sarbanes-Oxley law has radically changed the equation for venture investors. By making IPOs difficult, and pushing out when the best companies go public, the retail investor is left out, and much more value accrues to the venture investor:
Two implications follow:
- Marc jumped on one, the value of buying in at what would have been the old IPO price, and riding the growth that would normally accrue to public investors
- The second is to be prepared to sell into the secondary market when valuations get into those ranges, providing faster returns at levels that match what IPOs in the ’90s would have delivered venture investors
[...] take on this is best captured in a recent post on the Barbell Strategy: the death of the small tech IPO has resulted in much more value accreting to insider investors [...]
[...] them out entirely. As you can see in this chart, by the time the high-fliers go public today, most of the value has been accreted by insiders. Put simply, would you rather have bought Amazon at $440M market cap, later capturing its 100x [...]
Taleb’s rationale is that if you park 85 percent of your wealth in cash then you can lose at most 15 percent. It is hard to argue with that logic and one strengthens his result by noting that if you persist with this strategy for thirty years you will be sure to keep one percent of your original wealth, or almost one per cent anyway. Indeed if we assume you start off with one hundred and thirty one times as much money as you intend to retire on, and inflation is zero, you will have little to worry about.
I’ve posted a refutation of the bar-bell nonsense here, for those who care:
http://quantapology.blogspot.com/2011/10/bar-humbug-debunking-bar-bell-portfolio.html