Best of LinkedIn: Venture Capital CW 21/ 22

00:00:00: Provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about venture capital from CW-Twenty One and Twenty Two.

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00:00:22: You can find more info in the description.

00:00:24: We're really excited to jump into this one.

00:00:26: today we are doing a deep dive into the top Venture capital trends we've seen surfacing across LinkedIn over the last couple of weeks.

00:00:33: Yeah, exactly.

00:00:34: and look if you're operating in M&A private equity VC or strategy consulting consider this deep dive your Your no fluff strategic briefing.

00:00:42: yeah We are cutting right to the core Of what's actually happening in the market right now

00:00:46: because there is a ton of movement I mean?

00:00:49: We're seeing a profound structural rewiring of how risk and capital are distributed.

00:00:53: for a decade The model was broad bets Right just in capital across a bunch of sectors.

00:00:58: The classic spray and pray approach?

00:01:00: It's exactly, assuming the distributed network would yield massive winners.

00:01:05: but based on data compiled recently by Vlad Alexenko that model is effectively dead.

00:01:12: Yeah it's wild.

00:01:12: let me frame like this Imagine baseball team right And they decide to spend like eighty one percent their entire payroll On One Single Player Leaving the rest roster I don't know.

00:01:24: fight over the loose change in the couch cushions.

00:01:27: It sounds absurd when you put it like that, right?

00:01:29: But that is literally what The Global Venture Capital Market did In the first quarter of this year.

00:01:33: Alex Yankel pointed out That Q one twenty-twenty cents was historic.

00:01:36: We saw two hundred and ninety seven billion dollars deployed globally but the crazy part Is that eighty one percent Of that so about two hundred thirty nine billion went exclusively into AI.

00:01:45: And honestly even that eighty One percent figure sort of masks the true level of concentration because if You look inside the AI ecosystem to see where the money has landed It's not going to a thousand different foundational models.

00:01:56: sixty four

00:01:58: percent of all global VC in that quarter went to exactly for mega rounds open AI and thropic XAI and Waymo.

00:02:06: I mean, Four companies just swallowed the entire market

00:02:09: which is just staggering.

00:02:11: And it brings up this really critical structural analysis shared by Javier Avalos.

00:02:16: He calls this current deployment dynamic The barbell effect.

00:02:20: Oh,

00:02:20: yeah the Barbell Effect makes so much sense because if you just look at the raw numbers the average deal sizes Look amazing right exploded from eight million a year ago to thirty nine million today.

00:02:32: Yeah, but Avalos points out that average is just complete statistical illusion because just five companies absorbed sixty percent of all VC primary capital.

00:02:41: so on one end of the barbell you have this tiny fraction of frontier tech company's raising public market size grounds while staying private

00:02:48: right.

00:02:48: and then On The Other End ,the rest Of The Startup Ecosystem Is Just Going Through This Brutal Liquidity Crunch

00:02:53: Exactly.

00:02:54: But I Have To Push Back A Little On The Viability If you're an M&A professional, looking at your pipeline three or four years out.

00:03:01: This barbell effect means the middle market is being starved of the capital it needs to actually mature.

00:03:07: and Is this concentration just happening with companies?

00:03:10: Or is it geographic too?

00:03:12: that is a great question

00:03:13: because It feels like the whole globalized startup ecosystem thing might be reverting back to localized echo chambers.

00:03:19: well The data totally supports that assumption.

00:03:21: Brad Zapp just released a report showing the San Francisco metro area captured in an all-time high of fifty two point four percent.

00:03:29: Of total US VC deal value, we have not seen that level of regional concentration in years.

00:03:36: over half of the value and one city.

00:03:38: Wow yeah.

00:03:38: And zap makes a highly strategic point here.

00:03:41: from an investor's perspective this isn't Just A clustering of talent.

00:03:44: It's a massive systemic risk factor.

00:03:46: When every major fund is chasing the exact same founders in at fifty square mile radius, you trigger rapid valuation inflation way before any business fundamentals are even

00:03:56: established.".

00:03:57: Right it just creates this massive consensus thinking loop so highly capable founders say Detroit or Cincinnati totally ignored because they aren't bumping into the right investors of Coffee Shop and Hayes Valley.

00:04:08: Exactly!

00:04:09: And that flight to Consensus isn't isolated for AI or Silicon Valley either?

00:04:14: Frederick Lund broke down the crypto space recently.

00:04:17: Q-One crypto funding hit six point eight billion dollars, which on paper looks like a massive recovery for this sector.

00:04:24: and

00:04:25: I'm guessing there's catch.

00:04:26: Oh

00:04:26: definitely!

00:04:27: Lunds dug into the mechanics in found deal count actually plummeted forty nine percent year over year.

00:04:32: The volume was propped up by just three deals Kalshi, Polymarket & BVNK.

00:04:38: They counted it for fifty percent of the quarter total.

00:04:41: So, it's the exact same barbell effect just playing out in crypto?

00:04:44: Yep.

00:04:45: But Lunn points that underlying investment thesis has aggressively pivoted back.

00:04:50: in twenty-twenty one investors rewarded narrative momentum you could raise fifty million bucks on a white paper and hype cycle but today investors are demanding demonstrable revenue an intense regulatory safety

00:05:01: which makes sense.

00:05:02: But if that flight to fundamental infrastructure is dictating where the money goes, I feel like we need to reframe how we view AI.

00:05:09: Because AI's no longer just a theme eating up all of capital.

00:05:11: it's actively rewriting the underlying market structure of how startups are actually built.

00:05:16: Yeah!

00:05:16: That is huge shift.

00:05:17: VD Varshith recently highlighted this fascinating move by OpenAI.

00:05:21: They offered two million dollars in API tokens To every single startup In current Y Combinator batch And they structured via an uncapped

00:05:30: Safe.

00:05:31: We really need to pause and unpack that, because it introduces a totally unprecedented risk profile.

00:05:37: Traditionally venture capital is cash right?

00:05:39: Yeah It's fungible liquid vendor agnostic

00:05:42: Exactly.

00:05:43: you spend at wherever you need To

00:05:44: write but what open AI Is doing is investing its own proprietary product value of retail price in exchange for raw equity

00:05:53: which honestly if I'm looking At this through an M&A lens My immediate red flag is vendor lock-in disguised as venture capital.

00:06:00: I mean, having your most critical supplier As you biggest shareholder with an uncapped claim on equity that creates a massive governance conflict?

00:06:07: Oh

00:06:07: absolutely!

00:06:08: Vashith points out several structural threats With this.

00:06:11: First look at the behavior it incentivizes.

00:06:13: If those credits expire which are super common A small lean team Is suddenly pressured to burn through two million dollars of compute in twelve months

00:06:20: Right, which just encourages bloated inefficient development.

00:06:24: Exactly!

00:06:24: Just to capture the quote-unquote value of the investment.

00:06:28: plus open AI controls the unit economics.

00:06:31: if they raise the cost of an API call your actual runway shrinks overnight.

00:06:35: Wow

00:06:36: yeah

00:06:36: but the biggest threat this shift identifies is competitive overlap.

00:06:40: what happens when OpenAI ships a feature that makes you start up redundant?

00:06:44: Your biggest supplier who has granular visibility into your API usage, is suddenly you're direct competitor.

00:06:51: And they are already on your cap

00:06:52: table.".

00:06:53: It's like having your landlord as your biggest shareholder.

00:06:55: but let me introduce a little friction here because if Compute is practically being handed out and the cost to build is plummeting maybe founders shouldn't be taking these VC deals at all?

00:07:05: Dr Antonius Mikhail highlighted a crazy case.

00:07:09: Marsh Lomo built functional AI startup for just ten thousand dollars.

00:07:13: he sold it for eighty million.

00:07:14: within six months He bypassed VC entirely.

00:07:17: That is incredible, and he could do that because the physics of software development have just completely shifted.

00:07:23: Michael notes that API costs have dropped forty to seventy percent.

00:07:28: You can execute production grade AI agent tasks for fractions of a penny.

00:07:33: now

00:07:34: The economic hurdle rate for bootstrapping has totally flipped.

00:07:37: Take Stefan Mays.

00:07:38: He's building an AI enterprise operating system called Hebion.

00:07:42: He is the sole human employee, his entire engineering department is and AI agentic OS that he built himself.

00:07:48: Wait really?

00:07:49: Just him in a AI dev team Yep

00:07:52: And explicitly avoiding massive VC round Only opting for tiny bridge to cover raw cloud compute.

00:07:59: His argument is that hiring a bloated human engineering team right now would actually slow him down.

00:08:03: Which forces an uncomfortable question about the broader VC market, if Human Headcount isn't required to build complex software anymore what's the actual purpose of these massive Series A and B rounds?

00:08:13: Just

00:08:14: to stroke egos!

00:08:15: Well

00:08:15: Alex Fricker made an astute observation on this.

00:08:17: he argues large VC Rounds are no longer product development milestones.

00:08:22: they're just disguised hiring in go-to-market announcements.

00:08:25: That makes sense.

00:08:25: Yeah,

00:08:26: Frick retracts these portfolios and notes that you consistently see aggressive hiring waves hit the market.

00:08:31: sixty to ninety days after one of these mega rounds closes The capital is funding infrastructure expansion in sales pipelines not the core technological build.

00:08:40: Got it.

00:08:41: So if you can build the product yourself for ten grand, raising capital isn't about survival anymore.

00:08:46: It shifts into this pure game of access and strategic positioning which means that traditional advice of polishing your pitch deck or hitting a pavement is breaking down.

00:08:57: Yeah totally breaking down!

00:08:59: Alison Byers provided pretty supering statistic on it.

00:09:02: She pointed out that ninety-six percent of VC deals come from networks.

00:09:06: founders are not already in Ninety-six

00:09:08: percent, that's insane.

00:09:09: Right the allocation of this super concentrated capital is driven heavily by familiarity bias rather than an objective evaluation of merit.

00:09:18: network access Is The first massive hurdle.

00:09:20: but let's say you do get the access even when founders penetrate those networks and secure the money They often don't understand the math they're signing up for.

00:09:28: Ian Saunders brought up a vital point about cap table waterfalls.

00:09:32: Oh the exit modeling.

00:09:34: He showed how a bootstrapped founder, selling at a four point eight X ARR multiple can actually walk away with significantly more cash than a VC backed founders.

00:09:43: Selling out of five point three x ARR

00:09:45: Multiple.

00:09:46: I think we really need to slow down and stress test that math for everyone listening because anyone outside deal structuring That sounds totally counterintuitive.

00:09:55: Walk me through How lower exit multiple yield higher payout.

00:10:00: So it all hinges on the preference stack Specifically, participating preferred liquidation preferences.

00:10:06: Let's use a simple example.

00:10:07: imagine A company gets acquired for fifty million dollars say an investor put in ten million For a twenty percent stake.

00:10:13: okay keeping it simple.

00:10:14: In a standard non-participating deal the investor just chooses between Taking their ten million back or taking Their twenty percent share of the fifty million which is Ten million.

00:10:23: either way clean split

00:10:25: right but with a participating preferred structure.

00:10:28: It's a double dip mechanism

00:10:29: exactly The Double Dip.

00:10:31: That investor takes their ten million initial capital off the top of fifty million exit first, leaving forty million.

00:10:38: And then they still get to participate pro rata in that remaining forty million.

00:10:43: So they take twenty percent of that, another eight million.

00:10:46: Wow!

00:10:46: So Saunders' point is that founders spend months agonizing over the headline valuation but entirely neglect to model the actual payout physics on their cap table?

00:10:56: Yeah and failure-to-model participating preferences can literally evaporate millions of dollars a founder wealth at the exit.

00:11:03: so chasing highest valuation or biggest logo actually act as delayed fuse penalty.

00:11:08: That perfectly aligns with Brock Pellett's advice.

00:11:11: He says, you have to pick a VC like your co-founder.

00:11:13: the headline check size is secondary.

00:11:15: You have diligence their reserve capacity Like if market tightens Do they actually have dry powder To lead bridge round?

00:11:22: Right and reference check boardroom behavior too.

00:11:25: Are level headed thinking partner in crisis or do just panic?

00:11:28: Exactly And we had extend that diligence to corporate VC as well.

00:11:33: Leon Eisen issued really stark warning about quote unquote strategic Corporate capital.

00:11:39: Founders often view a check from major corporate entity as the ultimate market validation.

00:11:48: But Eisen outlines how easily this becomes strategic trap.

00:11:52: From an M&A perspective, Corporate Capital introduces massive roadmap constraints.

00:11:57: If you pivot your product to serve bespoke needs of that specific corporate backer and then they have leadership change Your product is suddenly orphaned.

00:12:06: Plus, any future financial VC looking at that cap table is going to instantly price in severe exit risk.

00:12:12: They'll assume the corporate backer has undocumented influence or their mere presence will scare off rival corporate acquirers — you basically trap your own roadmap!

00:12:20: You really do.

00:12:21: CapTable's structure dictates long-term strategic freedom.

00:12:24: and speaking of positioning, Chris Smith provided a rare look behind scenes at VC Memo scoring – he shared The One To Three Scoring Matrix his investment committee uses…

00:12:33: And what does that matrix actually prioritize?

00:12:36: It perfectly validates Dana Sather Robinson's golden rule.

00:12:39: Investors fund businesses, not products.

00:12:42: That is a distinction that constantly gets lost in pitch meetings.

00:12:46: A founder will spend forty minutes geeking out over their software architecture but the committee isn't marveling at the code.

00:12:52: Nope they're calculating customer acquisition costs churn velocity and total addressable

00:12:57: market.

00:12:58: Brilliant products win hackathons But scalable business models secure term sheets period.

00:13:04: But you know, let's pivot the lens geographically and sectorally for a minute because while Silicon Valley AI mega rounds dominate the headlines there are massive structural blind spots creating opportunities globally.

00:13:15: Yeah

00:13:15: Let's talk about The European Ecosystem.

00:13:17: Apoiaverta highlighted a really stark contrast.

00:13:20: There.

00:13:21: Europe produces twenty four percent of the world's unicorn founders but the european ecosystem captures only six percent Of the resulting commercial value.

00:13:28: Twenty-four percent of Founders but Only Six percent of Value.

00:13:32: Where is Disconnect?

00:13:33: Polya Virta calls it a translation problem.

00:13:35: It's not a lack of engineering talent or early stage capital, its massive friction in the institutional handoffs Moving from a university research lab to an early stage angel network, to corporate integration partner.

00:13:49: It is just riddled with bureaucratic friction.

00:13:52: So founders migrate to the US where the ecosystem handoffs are standardized and greased?

00:13:57: Exactly!

00:13:58: Meanwhile, Mohamed Moudassar shared some data showing The Middle East is quietly building tech empire.

00:14:05: Everyone's watching Sarubras right?

00:14:07: Anticipating it'll be the largest U.S.

00:14:09: tech IPO of twenty-twenty six.

00:14:10: Oh yeah huge anticipation for that

00:14:12: one.

00:14:12: But Moodosa noted that eighty-six percent of Cerebrus' current revenue is generated entirely from the UAE.

00:14:18: Sovereign wealth funds in Riyadh and Abu Dhabi aren't just acting as passive limited partners anymore, they're actively purchasing the raw compute backbone of global AI race.

00:14:27: It's a massive shift where foundational tech has been validated And it not only geographic but sector specific too.

00:14:33: We are seeing top tier VCs finally tackling massive physical heavy industries.

00:14:38: Okay, when you say heavy industries I think of mining defense manufacturing sectors that notoriously hate VC timelines.

00:14:46: Are software investors really trying to apply agile frameworks to industries that operate in decades?

00:14:52: They are but through a very specific framework.

00:14:55: Marina Basilina detailed how the neoprime defense playbook is taking over the mining industry.

00:15:00: Investors like Andreessen Horowitz are backing companies like Mariana Minerals and Cobold to essentially rebuild Western supply chains for critical minerals.

00:15:08: But

00:15:08: how do you apply a software playbook to digging dirt out of the ground?

00:15:12: You can't just A-B test a lithium mine, y'know?

00:15:15: Well The Neo Prime Playbook relies on four pillars forged by companies like SpaceX.

00:15:20: First is aggressive vertical integration.

00:15:22: They want to own entire stack from exploration into refined system.

00:15:26: Second is Software First Design.

00:15:29: Instead of layering software onto hardware as an afterthought, the software actually dictates physical engineering.

00:15:35: Oh I see!

00:15:35: So instead just drilling blindly they use advanced telemetry to surgically pinpoint deposits which drastically reduces the physical footprint and capital expense.

00:15:44: Exactly The third pillar is fixed price discipline absorbing cost overruns internally To force operational efficiency.

00:15:52: And fourth is modular iteration Building small upgradable units instead of waiting ten years for a monolithic project.

00:16:00: Vaslina notes they are applying this precise doctrine to critical mineral exploration right now.

00:16:05: That is brilliant.

00:16:06: But you know, while the US leverages these public-private partnerships for defense and mining, Malte Lindekeit pointed out a staggering blind spot in Europe.

00:16:15: German VCs are almost entirely ignoring The German state as a viable customer base

00:16:20: which is crazy when You think about it?

00:16:22: It Is.

00:16:22: we're talking About a B to G business To government market with five hundred billion euros In purchasing power And zero customer churn and vcs won't touch

00:16:31: who indicates as it's purely structural.

00:16:33: VC is ignored because the public sector sales cycles are too long, It exceeds the rigid ten-year life cycle of a standard venture fund.

00:16:40: so this massive opportunity has just ignored and really highlights how an asset class designed to fund innovation can get completely trapped by its own financial instruments.

00:16:48: We have covered so much ground today from AI barbell effect to uncapped supplier safe fees The reality of participating preferred math And neoprime playbook.

00:16:59: It's a lot to process, but I want to leave you our listeners with one final highly actionable thought to mull over.

00:17:05: Anup Jain did this brilliant analysis on the Indian VC ecosystem and he documented a shift in how institutional limited partners –you know–the endowments of pension funds are doing due

00:17:15: diligence.".

00:17:16: Okay what is changing?

00:17:17: Well historically LPs allocated capital based upon the prestigious brand name But Jane notes that LPs have realized the brand name doesn't generate returns.

00:17:27: Individual partners do, so LPs are now executing rigorous attribution checks.

00:17:32: Oh!

00:17:32: So they're looking for rain makers

00:17:34: Exactly.

00:17:34: They dive into data to see which specific individual partner sourced and managed the unicorn deals.

00:17:40: And when those rainmakers spin out their own boutique funds The massive LPs follow the individual Abandoning the legacy logo.

00:17:47: That completely flips power dynamic.

00:17:49: It does And it forces a question that every founder and CEO listening needs to ask themselves.

00:17:55: If the massive LPs funding The Venture Capital Machine realize that this specific partner matters vastly more than the firm's brand name, shouldn't you be running your own attribution check on the individual investor sitting on board rather then just celebrating?

00:18:11: That is a phenomenal takeaway.

00:18:13: If you enjoyed this episode, new episodes drop every two weeks!

00:18:16: Also check out our other editions on private equity, M&A and strategy in consulting.

00:18:20: Thanks for diving deep with us And we will see you next time.