Best of LinkedIn: Venture Capital CW 31/ 32

00:00:00: Provided by Tana's Allguyer and Frennus, based on the most relevant LinkedIn posts about venture capital in calendar weeks thirty-one and thirty two.

00:00:09: Frenness supports general partners in identifying relevant limited partners across multiple sources researching connection strategies coordinating event attendance an running structured outreach campaigns that turn cold lists into scheduled conversations and committed capital.

00:00:24: you can find more info.

00:00:27: Quote.

00:00:28: so today if you are looking at capital flows or maybe your structuring a deal right now This is what?

00:00:32: You need to know.

00:00:33: we're diving into a market where a company can, you know triple its revenue To nearly half a billion dollars sell for one point three billion and still somehow leave it's founders with absolutely nothing

00:00:45: Right which was just wild.

00:00:46: We're tearing down the current venture landscape Today.

00:00:49: look past all those surface level evaluations to understand the actual structural mechanics that are driving these crazy outcomes.

00:00:55: It's going be a smart, no fluff breakdown of top venture capital trends across

00:01:00: LinkedIn.".

00:01:00: Yeah exactly!

00:01:02: So let's just jump right into the top funnel... you know how founders actually get in the room now because Traditional outreach is totally failing.

00:01:10: There's this massive disconnect, Xavier Medje posted this really harsh reality check out of roughly nineteen thousand six hundred tracked investors fewer than half are actually deploying capital right now.

00:01:24: Yeah if you're the half it's just a landscape littered with zombie funds.

00:01:28: I mean think about it.

00:01:29: A general partner isn't going to put out a press release saying hey we're quietly winding down or that they failing to raise their next vehicle, they keep up the appearance of deploying capital just to preserve their optionality.

00:01:41: Which creates an incredibly noisy environment right?

00:01:44: Are founders using a spray and pray approach like bad marketing campaign or is this landscape intentionally

00:01:50: opaque?".

00:01:51: Well it's definitely intentional filtering mechanism.

00:01:54: Vahid Fokker brought some great data on that.

00:01:56: he looked at thousands cold pitches found only way to bypass noise.

00:02:01: was the warm intro premium Specifically, warm intros from founders who are already backed by that specific VC.

00:02:07: Wait really?

00:02:08: Just being in the portfolio makes THAT much of a difference.

00:02:11: Oh

00:02:11: massively!

00:02:13: His data showed those intros outperform cold emails by three times.

00:02:16: Wow...a

00:02:17: Three X conversion rate.

00:02:18: But I guess if you think about the reputational skin-in-the game it make sense.

00:02:22: like A founder already in the portfolio isn't going to burn their own credibility with their board by bringing in a terrible deal.

00:02:29: Exactly, they act as this decentralized diligence arm for the fund.

00:02:34: and Rain Carby pointed out another huge factor here generic pitches just fail because VC funds operate on these highly specific completely confidential investment strategies right?

00:02:44: Because they have to standout to the limited partners?

00:02:46: Yeah

00:02:47: exactly yeah.

00:02:48: The public website might say oh we invest in BDB sauce but The mandate they sold to their LPs is way narrower.

00:02:54: So a rejected pitch often has literally nothing do with the quality of your startup, it's just about portfolio alignment.

00:03:01: That makes a lot sense.

00:03:02: so once you actually get past that filter and You know A term sheet is on the table?

00:03:06: The mechanics of the ask are changing too.

00:03:08: Peter Dimov noted that rounds should be sized To specific operational milestones now not Just maximizing total proceeds.

00:03:16: right.

00:03:16: the days have just hoarding capital or over.

00:03:18: yeah And Elko could her why?

00:03:20: who goes by?

00:03:21: Abdel on LinkedIn added a fascinating insight here.

00:03:24: VCs are literally underwriting the next funding round before the current one even closes.

00:03:29: Reverse engineering, The Future Cap Table

00:03:31: Exactly!

00:03:32: If they write a Series A check today... They're checking if start-up can actually grow into today's valuation.

00:03:37: to clear a Series B step up in eighteen months.

00:03:44: Which brings us to the math driving The Madness, right?

00:03:46: Because the friction here is just the sheer scale of returns they need.

00:03:50: Jason M Lemkin broke this down recently.

00:03:53: He pointed out that an early-stage seed deal today might get a fifteen X return which sounds amazing!

00:03:58: It sounds like massive win.

00:04:00: Right

00:04:00: But it's not enough.

00:04:01: A SEED investment typically nays a fifty X to one hundred X return To return the entire fund on its own.

00:04:07: And That Is Exactly Why VCs Fund Quote unquote Crazy Ideas.

00:04:13: Richard B. made this observation, only highly scalable to completely crazy ideas can justify that one hundred X outlier math.

00:04:21: I mean you could have a highly profitable lifestyle business but it just doesn't fit the VC model.

00:04:26: so they have to pass on perfectly good businesses.

00:04:28: yeah structurally They are forced too.

00:04:30: That

00:04:30: structural pressure is just wild especially at the top end of market.

00:04:34: Nick Poulos, freeing this incredibly well.

00:04:36: He calls it Venture Capital's Blackstone problem.

00:04:39: these mega platform funds manage so much capital now that they require a hundred billion dollar outcomes just to move the needle.

00:04:46: Yeah The check sizes are getting too big.

00:04:47: It is like Hollywood Studio right?

00:04:49: They have become so bloated That can only afford to green light Billion Dollar Superhero franchises.

00:04:55: Are These Mega Funds Structurally Forced To Overfund AI Just Because They Need A Place To Park These Massive Checks?

00:05:01: Honestly, yes.

00:05:02: When a fund is deploying billions they can't manage fifty different ten million dollar investments.

00:05:08: The administrative overhead is just impossible.

00:05:10: They have to write one hundred million dollar checks Which forces founders to take on unnatural highly dilutive capital Just to absorb the check size.

00:05:19: And the compensation structure just amplifies all of

00:05:21: this.

00:05:22: Oh totally.

00:05:22: Nicole DiTomasso outlined the classic two twenty-structure Two percent management fee twenty percent carry.

00:05:28: But that carry takes, you know seven to ten years to realize yeah which creates aggressive behavioral incentives

00:05:34: right because of the waterfall structures.

00:05:36: Yeah You have The American Waterfall Which is deal by Deal.

00:05:39: If a GP gets A massive early exit They take their Twenty Percent Cut Right.

00:05:43: Then Regardless Of What Happens To The Rest Of The Fund Later

00:05:46: Which Means?

00:05:46: The LP Could End Up Losing Money Overall but The Gp Already Got Rich On Year Three

00:05:51: Exactly which is why institutional LPs are pushing hard for the European waterfall structure.

00:05:56: That net gains and losses across the whole fund before any carry's distributed, it does way more LP friendly.

00:06:03: Speaking of LP-friendly structures this probably a good time to casually remind you if your tracking these market mechanics make sure subscribe.

00:06:12: so don't miss our future deep dives on that stuff.

00:06:15: Definitely subscribe because understanding the fun math only makes sense with exits.

00:06:20: right now The theoretical math from the twenty-twenty one vintage is just slamming into you.

00:06:25: The liquidation reality of today.

00:06:27: Yeah, let's talk about that collision because Erwan Bernard and Itamar Novik discussed a massive market signal recently the air table acquisition.

00:06:35: They sold to bending spoons for one point three billion dollars

00:06:39: which in a vacuum sounds like a huge victory.

00:06:41: A billion dollar exit?

00:06:43: I would think so.

00:06:44: But the shocking part is this was an eighty-one percent discount from their twenty, twenty one valuation.

00:06:49: And the crazy thing is they didn't fail operationally by actually tripled their revenue to four hundred and eighty million dollar ARR

00:06:55: right?

00:06:55: The business was working but a cap table completely consumed the exit.

00:06:59: This exposes the brutal reality of liquidation preference stacks.

00:07:03: So what actually happened to them?

00:07:04: money?

00:07:05: well the late stage investors who funded that peak valuation.

00:07:08: They weren't buying common equity They had aggressive, preferred shares.

00:07:12: So when the exit price dropped to one point three billion those late stage investors recovered their capital plus interest first

00:07:19: leaving nothing for everyone else.

00:07:20: exactly The early employees the founders of common shareholders who actually built this massive revenue engine.

00:07:27: they were totally wiped out.

00:07:28: They got nothing.

00:07:29: That is just brutal and it leads directly into what Marius Miners was talking about.

00:07:34: regarding fund performance metrics, you know DPI versus TV PI.

00:07:37: yes

00:07:38: cash vs paper.

00:07:39: right for a decade paper markups tvpi made these funds look incredible to LPs.

00:07:44: but as air table just proved paper means nothing.

00:07:47: Cash distributions, DPI are the only reliable measure for real performance.

00:07:51: The shift from TV PI to DPI is destroying track records right now.

00:07:56: So

00:07:56: if equity in these preference stacks or this dangerous for founders Are we seeing alternative deal structures emerge because it feels broken?

00:08:04: Oh absolutely.

00:08:05: But the alternatives are at complete opposite extremes of the spectrum.

00:08:09: Take China for example, Bohan Liu highlighted this.

00:08:12: Over there founders are routinely signing term sheets.

00:08:15: that makes them personally liable if the company doesn't return to capital in like six or eight years.

00:08:20: Wait!

00:08:20: Personally liable?

00:08:21: That is terrifying.

00:08:23: It's driving a frantic rush of forced IPOs because founders are on their hook for venture debt.

00:08:31: That's the punitive extreme, but then you have to complete opposite approach.

00:08:35: Oh

00:08:35: yeah I saw GammaFloor's note on this David Beckham brand IM-Eight.

00:08:39: they raised a billion dollars from General Catalysts customer value fund But it was a repayable revenue link facility.

00:08:46: Zero equity dilution.

00:08:48: None,

00:08:48: they bypass the preference stack entirely.

00:08:51: Once the agreed upon return is hit revenue stream just reverts back to the company.

00:08:55: No board seats lost no toxic liquidation preferences.

00:08:58: That is incredible for a consumer brand with predictable acquisition costs.

00:09:01: it completely avoids The air table scenario.

00:09:04: but despite these alternatives I mean traditional capital still flowing at record levels It's just highly concentrated.

00:09:09: yeah that concentration of real story right now.

00:09:11: Spencer Chanley and Evelina Dineva shared data from July, twenty-twenty six.

00:09:16: Over fifty eight billion dollars was raised across major fund closes.

00:09:19: but

00:09:20: that number is a bit deceptive isn't it?

00:09:21: It

00:09:22: totally is because out of that fifty eight million dollars massive forty nine billion dollars with just one single sovereign backed AI infrastructure fund by MGX

00:09:32: One Fund taking almost all the capital Exactly!

00:09:34: And even looking at the rest twelve billion dollars were raise to cross thirty eight new funds But Just five firms accounted for sixty-two percent of that capital.

00:09:43: Allison Byers pointed out this concentration extends to demographics, too.

00:09:47: In Q two four US cities captured eighty seven percent Of all VC dollars.

00:09:51: might be guess the usual hubs

00:09:53: Yep The Bay Area New York LA and Boston.

00:09:55: And even worse All female founding teams Captured just point seven percent of total funding.

00:10:00: Wow

00:10:00: It's an aggressive flight To perceive safety.

00:10:02: But outside the u.s.. Hubs Europe is actually seeing massive movement.

00:10:05: Glenn Waters noted that UK Venture Funding hit seventeen billion dollars in the first half of twenty-twenty six and AI captured seventy four percent.

00:10:12: And France is right there too, Right?

00:10:14: Yeah.

00:10:14: Dilip Moria highlighted that France has becoming EU's second largest A.I market.

00:10:19: they pulled in six point two billion dollars.

00:10:21: it

00:10:22: all a I everywhere.

00:10:23: But it's not just software anymore.

00:10:25: Dr.

00:10:25: Terheva Polatij pointed out something really fascinating, European green transition startups raised seven point one billion dollars in the first half of the year.

00:10:34: that's up sixty five percent your over-year

00:10:36: and you'd think this is environmental sentiment

00:10:39: exactly.

00:10:39: but its'nt driven heavily by AI massive energy demands.

00:10:44: The models need so much power.

00:10:46: datacenters are stalling out.

00:10:47: AI physically cannot scale without a massive upgrade to the energy grid.

00:10:52: So AI is basically subsidizing the green transition.

00:10:54: That is wild!

00:10:55: It really is, and The final piece of this capital flow shift Is the defense sector.

00:11:00: Olivier Covignon noted that Defense Primes like Lockheed Martin Airbus have participated in OM-Hundred and forty venture deals since twenty twenty four.

00:11:07: Wow They're realizing they can't build drone and cybertech fast enough internally.

00:11:12: Right,

00:11:12: so they are stepping up!

00:11:13: Deal values reached four point one billion dollars in twenty-twenty six alone just from deals involving defense primes.

00:11:20: it's totally altering the exit landscape.

00:11:22: It is a total reengineering of market across the board.

00:11:26: Well if you enjoyed this episode new episodes drop over two weeks.

00:11:29: Also check out our other editions on PE Fundraising PE, Exit Strategies PE Value Creation Strategy and Consulting and M&A.

00:11:38: Yeah thank you so much for joining us.

00:11:40: don't forget to subscribe and follow the show.

00:11:44: And we just want to leave you with a final thought to mull over.

00:11:47: If mega funds are structurally forced to deploy massive checks into AI, just to justify their fund size and later stage investors are protected by aggressive liquidation preferences even when the company sells for a billion dollars?

00:12:01: Are we engineering generation of startups built entirely to satisfy cap table math rather than actual market demand?

00:12:07: See ya next time!