Mad or Bad? What are they Thinking?

By?Keith Teare ???Issue #323

$350m for the man who lost most of $20 billion. The world has not gone mad. Read why Marc Andreessen (@pmarca) did it. Plus @ReidHoffman on AI, Josh Nicholson on Science and AI, @BrianSolis on Web3 marketing@Alexoppenheimer on valuing companies, and much more

Contents

Mad or Bad, What are they Thinking?

• A16z is betting big on Adam Neumann’s new real estate startup – Protocol @RyanDDeff
• The Rise of The Cash Man – @KWHarrison13
• Investing in Flow – @Pmarca

Essays of the Week

• The Revenue Multiple – @Alexoppenheimer
• When Low Valuations are Good – @Squire
• Why Web 3.0 will rewrite the concept of marketing – @Briansolis
• How to Build a GPT-3 for Science – @joshmnicholson
• Uniquity: DALL-E, NFTs, and the emergence of limited-edition abundance – @reidhoffman
• China’s Growing Trade Dominance in Latin America @visualcapitalist

Substack Week

• How I Built and Sold a Newsletter for 5 Figures – Jason Kelley
• Now piloting: Substack Threads – Substack
• Threads questions answered

News of the Week

• U.S. Streaming Tops Cable TV Viewing for First Time
• Apple tells staff to come into the office for at least three days a week – Variety
• Global private equity, venture capital deal value falls 63% in July
• Public Stock Held by Sequoia Capital, Andreessen and Bessemer Fell 44% in Second Quarter?– The Information
• Tesla’s Shanghai Gigafactory made its millionth car

Startup of the Week

• Optic – NFT Validation
• Stride Ventures
• Ethereum (ENS) names

Tweet of the Week

Editorial

There was much surprise this week when Marc Andreessen announced his firm’s $350m investment into Flow, Adam Neumann’s newest venture. The details of the business model have not been fully revealed but it seems to be another real-estate-based idea, except this time it focuses not on offices but on residential property.

Neuman’s infamy, after taking WeWork from startup to multi-billion dollars in value, only to see it shrink again, is of course huge. Most reactions are questioning the sanity of any venture fund, never mind one with as good a reputation as A16Z, to back him again.

In explaining the decision Andreessen says:

“We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned,”

So this week I want to take a step back and ask whether the investment is mad or bad (in the Michael Jackson meaning of the word).

The answer depends a lot on understanding how venture capital works. Many of the readers here understand that so I won’t belabor the point. Suffice it to say that venture investors need to make large multiples on large investments in order to deliver the returns that their investors are looking for. Unless an investment could theoretically return 100x or more a venture fund really has no business thinking about putting money to work in it. 100x on $350m is $35 billion. And A16Zs share is probably between 15% and 30%. So for the plan to work the company must become worth between $120 billion and $230 billion.

Is this possible?

Well to answer that you have to look at the market being addressed, the cost of execution, and the likely upside. You also have to think about timing.

Residential real estate is a very large market. It is dominated by mortgage-backed lending and rental income. The market is clearly large enough to imagine revenues in the billions of dollars, and possibly a lot larger.

The rate of growth of Flow and its ultimate size over time will be part of the equation. But, on the back of an envelope, if it can get to $10 billion in revenue in 10 years then it is not impossible that it can achieve growth-driven multiples of 10-20x. That would certainly achieve the goals of A16z.

So let’s start by saying this investment could make sense.

But there is more. In this sector, the numbers are astoundingly high. If Flow can disrupt rents and mortgages then trillions of dollars are available. And if it can move debt-based financing to a new model of ownership, then it can be hundreds of trillions.

These are scary numbers to most startup founders. But not to Neumann. He thinks big and has shown a prior ability to deliver. In this world, A16Z gets to 1000x or maybe more.

So what is the lesson here? There is no shortage of ideas. But there is a shortage of big ideas delivered by big thinkers who can be trusted to really try to execute them. Whatever you may think about Neumann’s past. He qualifies. And as in baseball, hitting and missing is all part of the sport. You only have to hit once to deliver a home run.

There are fabulous articles below covering valuation, Flow, and A16Zs motivation.

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