Best of LinkedIn: Venture Capital CW 23/ 24

00:00:00: provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about venture capital from CW-Twenty Three in Twenty Four.

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00:00:26: Yeah And we are really excited to get into this one today

00:00:29: Definitely.

00:00:29: I mean when most of us picture venture capital, you know You kind of imagine this high stakes casino right?

00:00:35: You place thirty bets on the roulette table.

00:00:37: twenty-nine Of them go to absolute zero but that one winning chip basically pays for the whole building.

00:00:42: Right, The classic game of probability!

00:00:44: Exactly.

00:00:45: but looking at the curated intelligence we're diving into today and this is specifically for those of you navigating M&A private equity VC And consulting that casino Is going through a massive structural renovation right now?

00:00:57: It really does...the ground just shifting completely

00:00:59: It is.

00:01:00: So today we're giving you a really focused, no fluff deep dive into how deals are actually getting done right now.

00:01:06: We'll unpack the market momentum How funds are radically changing their operations The new playbook founders are having to use And some of the glaring arbitrages in global ecosystems

00:01:18: To understand the strategies Founders and Funds are using.

00:01:20: Right Now We have start by looking at the macro reality.

00:01:23: Where's money flowing?

00:01:28: Really extreme ways right now.

00:01:29: Yeah,

00:01:29: let's dive straight into that capital concentration theme because honestly it's staggering And it's being driven entirely by just the absolute dominance of AI.

00:01:38: Oh,

00:01:38: It's wild!

00:01:39: The numbers are incredibly sobering If you look at the data shared by Felix Spillman and Ryan Baird.

00:01:45: Q one twenty-twenty six Just set this unprecedented record.

00:01:48: We're talking somewhere between two hundred ninety seven billion and three hundred and thirty billion dollars in global VC deal value.

00:01:55: Wait depending on their report up to three hundred thirty billion and one quarter.

00:01:58: Yeah

00:01:58: exactly.

00:01:59: But here is catch that capital not being spread around all.

00:02:03: I counted for fifty seven percent of that three hundred thirty billion.

00:02:07: That is, i mean four rounds capturing over half the global capital?

00:02:10: That's insane!

00:02:11: Right and overall a full eighty percent of venture capitol Is now flowing straight into AI so that leaves you know The other five thousand plus startups to basically fight To the death over the remaining twenty percent.

00:02:22: Wow yeah the underlying mechanism here is just pure FOMO.

00:02:25: right fear Of missing out combined with this perceived winner takes all dynamic of foundational models.

00:02:33: VCs are just terrified of missing the next major paradigm shift.

00:02:37: Which means that, you know... The traditional spray-and-pray strategy where a fund just writes fifty small checks hoping one pops.

00:02:44: That's effectively dead now.

00:02:45: Oh completely dead?

00:02:46: Right!

00:02:46: The power law is just sharpening to erasers edge right

00:02:49: and we're seeing traditional sauce founders who easily raised a series B. maybe couple years ago They were hitting a brick wall trying to raise a Series C. today

00:02:58: Yeah..the capital for them has basically evaporated.

00:03:00: It's like AI.

00:03:01: is this gravitational black hole just sucking all the capital oxygen right out of the software room.

00:03:07: But that actually raises an immediate question for me, if AI is consuming all the software capital where are the non-AI investors rotating their dry powder?

00:03:18: So what's really fascinating here is they're rotating back to the physical world and going back to atoms instead of bits.

00:03:24: Interesting.

00:03:24: Yeah.

00:03:25: If we look at the analysis from Peter Walker and Abhishek Bali They were looking at CARDA data The capital invested in physical world sectors like hardware, deep tech energy.

00:03:35: It has grown substantially.

00:03:36: back in Q one twenty seventeen it was about eighteen percent of deployed Capital but in q-one twenty twenty six its up to forty one percent.

00:03:44: Okay wait I have pushback on that a little bit because Hardware is notoriously cash intensive right?

00:03:48: It's terrible margins compared the software and We've all seen the supply chain nightmares over the past few years.

00:03:55: Are VCs really willing to take on deep supply chain risks and like capital intensive factories just to avoid AI software competition?

00:04:02: They absolutely are, and honestly it all comes down to defensibility.

00:04:06: Software modes are declining so rapidly in the age of AI.

00:04:10: Oh because the code is easier to write?

00:04:12: Exactly!

00:04:12: Think about if an AI agent can essentially replicate your SaaS platform's core code over a weekend... Your competitive advantage drops to basically zero.

00:04:22: That's

00:04:22: great point

00:04:23: But building in the physical world is incredibly hard.

00:04:27: Yes, it requires factories and logistics and raw materials but that friction Is exactly what creates a defensible moat right now.

00:04:34: once you build A physical supply chain an AI model just cannot easily replicate It.

00:04:39: yeah That makes a lot of sense.

00:04:40: like The Friction is the feature.

00:04:41: not to bug but This intense concentration of capital at very top combined with the fact that traditional exit markets you know, IPO's major acquisitions are essentially frozen.

00:04:52: That creates a severe bottleneck right?

00:04:54: A massive bottleneck

00:04:55: and limited partners the LPs who actually supply the money to the VC funds.

00:04:59: they're looking at these dynamics and aggressively shifting their demands

00:05:03: Right which is in turn forcing The general partners the GPs running the funds To radically rethink how they operate.

00:05:11: like How big should their funds Actually be And how do They actually prove Their worth to those LPs today?

00:05:16: Yeah, so let's talk about the metric driving all of this which is DPI distributions to paid-in capital.

00:05:21: So basically actual cash return to investors as opposed to TV PI Which it just you know.

00:05:27: paper markups?

00:05:28: If your an LP or if you advise one in private equity You know you cannot eat IRR.

00:05:33: LPs are just screaming for cash.

00:05:35: right now

00:05:35: They are and Courtney Russell McCrea highlighted This deeply concerning metric.

00:05:39: there Is three point two trillion dollars In unrealized value Just sitting

00:05:44: trapped

00:05:45: in global VC funds.

00:05:46: Trillion

00:05:46: into the T

00:05:47: trillion with a t. since twenty-twenty two funds have drawn one hundred ninety six point nine billion dollars more from LPs than they've actually returned.

00:05:54: she points out that you know five billion dollar fund needs exit outcomes at this current market simply has not produced.

00:06:00: yeah and Patrick Ryan echoed this perfectly.

00:06:02: he said The industry just has to focus on distributed cash returns, relying on TV PI markups where a VC marks up a company's value.

00:06:12: Just because some other investor paid higher price in the new round.

00:06:15: it hides real performance.

00:06:17: It creates this dangerous illusion of success without generating single dollar of actual liquidity

00:06:23: Exactly.

00:06:24: So, GPs are having to adapt and they're doing it by actually rolling up their sleeves to save their portfolios.

00:06:29: like Myrtle Lollacos in Mark Kleiner pointed out that value add is moving from just being marketing fluff on a website To hardcore operational requirement.

00:06:38: Right!

00:06:38: They actually have work for now.

00:06:40: Yeah

00:06:40: Top PCs that have structured portfolio platform functions are actually seeing an eleven percent higher net IRR.

00:06:46: and we're not just talking about like handing out a list of discounted software tools.

00:06:50: We're talking about dedicated internal teams providing real operational support building out executive hiring pipelines Introducing founders to Fortune five hundred enterprise customers, and physically helping them scale.

00:07:01: And we were also seeing entirely new financial infrastructure stepping in to solve this cash crunch for GPs right?

00:07:09: Like Mike Hurst's Turbine Finance just launched NAV loans for VC funds.

00:07:14: Yeah, which is a brilliant structural evolution!

00:07:17: It really is.

00:07:18: Normally if a fund needs to return cash to angry LPs they might be forced to sell their best performing startup prematurely.

00:07:25: but an NAV loan or net asset value loan allows the fund essentially borrow against its existing portfolio

00:07:33: Right.

00:07:33: So they can generate immediate liquidity for their LPs while keeping their equity in the top performing winners, it lets them compound over time without needing to spin up complex special purpose vehicles or SPVs?

00:07:44: Exactly!

00:07:45: But if LPs want actual cash distributions and highly structured value creation our traditional multi-billion dollar VC funds are really only way of playing this game anymore.

00:07:56: Not at all.

00:07:57: And that's where landscape is fracturing.

00:08:00: As the traditional model struggles with DPI, alternative structures are becoming highly attractive.

00:08:06: For instance Matthew Burris points out that Venture Studios is a great alternative but they're often mismanaged because LPs treat their overhead like traditional VC admin costs.

00:08:16: Oh interesting how so?

00:08:17: Well in Aventure Studio... The Overhead Is The Actual Production Line.

00:08:22: It's the salaries of engineers, designers and product managers who are physically building companies from scratch.

00:08:28: You simply cannot run a factory on standard two percent management fee.

00:08:32: Right you have to actually fund production line itself

00:08:35: Precisely!

00:08:36: We're also seeing rise in emerging managers and family offices stepping into this void.

00:08:41: as Alejandra Cremades noted Family offices invest like VCs but without rigid ten-year fun life cycle pressure so they can afford be way more patient.

00:08:51: That makes sense

00:08:52: Yeah, and furthermore Nathan Bucci brought up Start Funds which is this new legal structure that makes micro funds viable for as little as a hundred fifty thousand dollars.

00:09:02: By stripping out the exorbitant legal and administrative overhead that usually kills small funds.

00:09:07: it really democratizes who gets to be a capital allocator.

00:09:11: And speaking of Who Gets To Allocate Capital?

00:09:14: That actually brings us into a really profound structural flaw in the ecosystem that directly impacts these new funding vehicles.

00:09:22: Sharon Maroon and Ari Salafia highlighted how wealth managers systematically advise female LPs to play defense with their capital.

00:09:30: Yeah, this is a huge systemic issue rooted in historical biases within wealth management risk profiling questionnaires.

00:09:37: They basically steer women toward capital preservation You know bonds and low yield assets while men are actively taught to play offense and invest In high-yield asymmetric assets like venture capital

00:09:46: right?

00:09:47: And the downstream effects of that?

00:09:48: or just devastating.

00:09:49: When you deprive the LP base of female capital allocators, it directly starves emerging managers and diverse founders of capital.

00:09:56: because well people tend to fund what they understand.

00:09:59: And the irony is painful because as Salafia points out in the data women founders generate seventy-eight cents of revenue per VC dollar invested compared to just thirty one cents for men.

00:10:10: that efficiency gap is just profound!

00:10:14: Right now Efficiency is literally everything.

00:10:16: Because LPs are tightening the screws on GPs to produce cash, The GP's are passing that exact same scrutiny straight down to the founders.

00:10:25: The bar for getting funded has fundamentally changed.

00:10:28: Yeah it is a completely new reality For pre-C and seed Founders like A charismatic pitch in a slide deck full of category defining vision That used get you a term sheet But now Ideas just no longer enough.

00:10:40: No

00:10:40: not at all.

00:10:41: Several strategists including Emily Goh And Leon Eisen broke this down beautifully.

00:10:45: Investors just don't want loud buzzwords anymore.

00:10:48: They demand raw traction, early customer revenue and what Eisen calls an icy ready proof

00:10:52: stack.".

00:10:53: Yeah let's explain what that means because that Icy Ready part is so vital.

00:10:57: it refers to the investment committee The junior partner or principal who actually champions your deal.

00:11:02: they have to take your metrics into a room full of highly skeptical senior partners.

00:11:06: Right, the ones who actually hold the purse strings.

00:11:08: Exactly so.

00:11:09: The Crew Stack means your data Your retention cohorts Your customer acquisition costs Your sales cycles.

00:11:16: It must be so undeniable that the junior partner can defend a deal without You, the charismatic founder.

00:11:22: Yeah even being in the room to sell it

00:11:24: which completely shifts how founders must structure their rounds.

00:11:27: It's not just you know taking money from whoever offers it anymore.

00:11:30: It requires really intentional round architecture like Cyan Ibalmek shared a brilliant case study of a founder closing A two million dollar seed round In just eleven weeks by intentionally mixing four specific investor types.

00:11:44: Okay wait

00:11:45: Four types.

00:11:46: Yeah, and each served a distinct mechanical purpose.

00:11:49: She used a micro VC to actually price the round and set the institutional terms.

00:11:53: Then she brought in domain expert angel specifically for targeted enterprise customer introductions.

00:11:59: She added a family office for patient capital with zero exit pressure And finally she uses syndicate spv To fill the

00:12:05: rest.

00:12:06: That's brilliant.

00:12:06: yeah.

00:12:07: For those of you navigating early stage m&a You know exactly why that SPV is so critical.

00:12:12: instead putting Fifty individual angel investors on your cap table, which just becomes an absolute nightmare during an acquisition and SPV rolls them all up into a single line item.

00:12:22: It keeps the cap table perfectly clean

00:12:24: exactly And Stefan Nesser noted that you can start that whole chain reaction with just a well-connected five K Angel check.

00:12:32: You basically hijack their authority and they're network fills the rest of around.

00:12:36: it's a highly engineered process.

00:12:38: Okay.

00:12:39: So let's say a founder executes this right?

00:12:41: They orchestrate perfect Trojan horse of a round.

00:12:44: They finally get the term sheet in their inbox, The hard part is over they sign it and they can just pop this champagne right?

00:12:51: I would strongly advise against popping any Champagne at that moment citing Ebrahim Elshamy exclusivity Is the one binding clause In a standard term sheet.

00:13:00: the second a founder signs It there are locked into A thirty to sixty day window where There legally prohibited from talking To other investors.

00:13:07: VC the VC Can walk away At anytime during due diligence without penalty.

00:13:12: The founder's lever is just vanishes instantly.

00:13:14: Yeah, and if founders or you know the consultants advising them don't read the fine print... ...the mechanics get so much worse.

00:13:21: Clinton O'Khi warned of five wealth-destroying clauses that are perfectly legal but just devastating to a founder's equity.

00:13:29: And If You Were Advising A Founder On An M&A Exit Right Now This Is The Exact Trap You Need To Look For In Their Historical Term Sheets The Two X Liquidation Preference Combined With.

00:13:41: Let's actually walk through the math on that waterfall because it is crucial to understand just how toxic.

00:13:59: twice, so that's ten million dollars pulled straight off the top before anyone else sees a single dime.

00:14:04: Right leaving only five million dollars left for everyone else.

00:14:07: but it doesn't stop there right?

00:14:08: If they have participating preferred on top of that preference they essentially get to double dip!

00:14:12: So they take their ten million off-the-top and then they still take their ownership percentage of the remaining five million...so if they own say a third of the company They take another roughly one point six million.

00:14:23: The VC walks away with almost twelve million out and the founder who spent six years bleeding to build a company is just splitting the scraps with their employees.

00:14:34: It's a brutal wealth transfer mechanism, an Anatoly-Lavriks data provides really sobering reality check on how equity degrades over time even without those toxic terms.

00:14:44: Just by raising a standard Series A median Founder ownership drops.

00:14:50: By the time a startup reaches series C, The employee option pool actually eclipses the original founders ownership entirely.

00:14:56: Wow so the founder essentially becomes a minority employee in company they built?

00:15:00: Basically yeah

00:15:01: man.

00:15:02: well this intense dilution combined with the lack of liquidity we discussed earlier it's really pushing investors to look for geographic arbitrage like if the US market is clogged with trapped cap tables and toxic terms.

00:15:14: investors are naturally looking elsewhere which kind of brings us to the European ecosystem

00:15:19: Right, and Europe has some incredibly unique structural challenges right now.

00:15:23: Rishi Chhada shared some striking data ahead of VivaTech.

00:15:26: AI now captures sixty-two point one percent of all European VC deal value.

00:15:32: But there is this profound tension here.

00:15:34: There's a twenty-four X valuation gap between the top ten European AI IPO candidates which are valued at around sixty five point five billion euros and their US equivalents,

00:15:49: That's just wild.

00:15:50: The exit market in Europe simply isn't robust enough to absorb these enormous AI bets and a big part of that is just structural fragmentation, right?

00:15:57: Like Dima Robanov has running this impartial campaign for something called the EU INC because Right now if you start a company in Austria And want to raise capital from her French investor and need to hire engineers in Germany You are navigating three or four entirely different legal employment and tax systems.

00:16:10: It is an absolute administrative nightmare.

00:16:12: it really is and it slows everything down While the European startup is, you know paying lawyers to figure out cross-border tax compliance their US competitor incorporated in Delaware and one day standardized all their employee contracts.

00:16:26: And it's already raising a series B.

00:16:28: right.

00:16:29: but I have to ask as a campaign like EU INC actually realistic?

00:16:33: I mean navigating different sovereign legal systems too higher and raise across borders seems like an entrenched bureaucratic feature of Europe not just some bug that can be easily patched by lobbying campaign.

00:16:44: It is incredibly difficult, which is why it hasn't been solved yet.

00:16:47: but for investors who are willing to navigate that bureaucracy the upside of this substantial valuation arbitrage like Nicholas Schlopsten pointed out Italy as a deeply overlooked market because world-class Italian engineering and tech talent has historically lacked domestic venture funding prices.

00:17:04: stay really honest there's no hyperinflated bidding

00:17:07: war.

00:17:07: right now average startup valuations in Italy roughly one-tenth the price of their US counterparts.

00:17:13: Wait, a ninety percent discount for that exact same caliber.

00:17:32: rather than just chasing immediate markups.

00:17:34: Like Paolo Denadi, just closed a fifty-eight million dollar series C for his travel community we rode back by Airbnb and Alberto Onetti recently achieved a successful exit with Phenomball.

00:17:47: but here's the kicker that exit came after two decades of building.

00:17:51: Wow!

00:17:51: Twenty years?

00:17:52: Yeah surviving through multiple global market crashes in funding cycles.

00:17:56: And what's vital about Onetti story is that it contrasts so sharply with the standard US model, proves that patience and long-term alignment with your investors sometimes completely trumps the rapid hyperdilutive eighteen month funding cycles.

00:18:09: That lead to those toxic term sheets we discussed earlier

00:18:12: exactly which brings us to a final thought for you to ponder as you look at your own strategies investments or advisory roles.

00:18:18: this week We've talked a lot about the severe pressure on cash returns, The danger of toxic term sheets and this constant dilution treadmill.

00:18:27: If the future of venture capital genuinely relies on extreme capital efficiency Smaller but highly repeatable cash exits Which is actually model we see working beautifully in biotech right now And strict discipline on valuations.

00:18:41: Perhaps the traditional Silicon Valley hunt for the cash burning billion-dollar unicorn has Actually become the most dangerous game in town for both founders and investors.

00:18:50: It certainly seems like the precision factor was starting to permanently

00:19:05: outperform.