Best of LinkedIn: Venture Capital CW 39/ 40

00:00:00: Provided by Thomas Allgaier and Freeness, based on the most relevant LinkedIn posts about venture capital in calendar weeks thirty-nine and forty.

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00:00:25: Right.

00:00:26: so today's deep dive is all the absolute top venture capital trends we are seeing across LinkedIn right now.

00:00:32: Yeah, and we're tailoring this specifically for those of you working in strategy M&A investments?

00:00:39: Exactly!

00:00:39: We want to keep it natural smart no fluff just a really focused look at where money is actually moving how these fund structures are totally changing

00:00:50: because that impacts anyone evaluating or dissecting a cap table today.

00:00:55: so start us off.

00:00:58: Let's look at the sheer concentration of capital we're seeing.

00:01:00: I mean, it is completely reshaping the power law in venture capital.

00:01:04: It really does like Yerma floor pointed out this huge move by Bessemer recently.

00:01:08: Oh right that massive fund that just closed.

00:01:11: Yeah a five point seven five billion dollar Fund.

00:01:14: and they are carving out one point seventy-five billion for seed And then putting a staggering four billion toward growth

00:01:20: Which Is Just A Wild Amount Of Capital For A Single Sector Bet.

00:01:23: Right I mean, they are basically taking their classic SaaS playbook.

00:01:27: The exact one that built so many reliable software companies and going all in on AI.

00:01:32: And the thing is it's not even just traditional VCs writing these massive checks anymore.

00:01:37: No...the players of the board are totally different now.

00:01:39: Yeah Sebastian Vossen shared some crazy data showing that NVIDIA has actually become the most active investor globally for rounds over a hundred million dollars.

00:01:48: Wait..NVIDIA?

00:01:50: Over Andreessen Horowitz.

00:01:52: In just the first eight months of this year, NVIDIA joined fifty-three of these mega rounds.

00:01:57: They completely beat A-sixteen Z who only had forty four.

00:02:00: That

00:02:01: is insane.

00:02:02: Yeah I mean if you look back at the twenty-twenty one bull run Tiger Global and Softbank were the ones doing hundreds Of These Rounds

00:02:08: Exactly.

00:02:09: And This Here they're Barely Hitting Double Digits.

00:02:12: NVIDia Is Basically Running The Table.

00:02:14: But Wait Let Me Just Play Devil's Advocate here for a Second.

00:02:17: Go For It.

00:02:17: If NVIDIA is funding the exact same AI startups that are turning around and taking that cash to buy NVIDia chips, isn't it just a closed loop financial system?

00:02:28: Oh

00:02:28: absolutely.

00:02:28: It is!

00:02:29: Rahul Pandey actually broke this down brilliantly when he looked at Anthropics' cap table.

00:02:34: Oh yeah I saw that

00:02:35: Amazon has like uh... seventeen percent of them right?

00:02:38: Yeah Amazon is at seventeen percent Google's at fourteen And The Seven Co-Founders hold these tiny stakes Like around one per cent each

00:02:46: Right.

00:02:47: So a ton of that big tech investment money just round trips straight back to AWS and Google cloud in the form Of compute payments which makes it look A lot less like traditional venture capital And way more Like vendor financing Just you know heavily disguised as equity.

00:03:02: Yeah, and That completely warps The market because when Big Tech pumps up these rounds just To secure compute contracts It Makes valuing the true underlying company Incredibly difficult for any independent M&A professional

00:03:15: Because the valuations are just totally distorted all the way down to the seed stage.

00:03:19: Like, Jenny Fielding mentioned that a hundred million dollar post-money valuation for a seed round is basically normalized now in AI

00:03:26: Which is just terrifying math when you think about it.

00:03:28: I mean if a VC buys ten percent at one hundred million post money and they have five hundred million dollars fund They have to return their LPs.

00:03:37: That single startup has to have multi billion dollar exit.

00:03:41: Just move the needle.

00:03:42: Exactly.

00:03:43: The pie doesn't just have to get bigger, the exit expectations are astronomical.

00:03:48: And it creates this crazy pricing dynamic!

00:03:51: Peter Harris spotted this wild trend with Sequoia recently...

00:03:55: Oh what did they do?

00:03:56: Well They had a run of seven deals where their entry valuation was around one hundred and ten million dollars.

00:04:01: Okay that tracks with new seed numbers

00:04:04: Right.

00:04:04: but then those exact same startups raised a subsequent round.

00:04:07: weeks later It was priced at an average three point four billion dollars.

00:04:12: Wait What?

00:04:13: That's a thirty one X markup in less than a month.

00:04:17: Yes, thirty-one times more valuable basically overnight.

00:04:21: I mean they didn't just invent A new physics engine and twenty one days They didn't.

00:04:26: it is pure brand name signaling.

00:04:28: later stage investors are basically Just outsourcing their due diligence to the tier One VCs.

00:04:33: So they see a Brand like sequoia step in assume The math Is good And just flood In driving the price up

00:04:39: Exactly So if you are an M&A pro listening to this and trying to value a target, You have to realize these valuations Are totally divorced from fundamental revenue multiples.

00:04:50: Hamza Shah had shared Carter's Q-II report.

00:04:52: that really highlights This bifurcation.

00:04:54: Right looking at the internal rates of return across different fund vintages

00:04:58: Yeah The twenty twenty two to twenty twenty four Vintages are seeing These massive AI driven paper markups.

00:05:05: Meanwhile, the actual realized returns for the twenty-seventeen to twenty nineteen vintages are just steadily falling.

00:05:12: The goalpost completely moved!

00:05:14: The old standard of a one billion dollar unicorn is basically obsolete.

00:05:18: now they need a one trillion dollar outcome.

00:05:21: But look we have to acknowledge that reality here.

00:05:23: if That's what the top one percent of AI deals looks like?

00:05:26: The situation for the other ninety nine percent startups Is completely different.

00:05:30: Oh For sure.

00:05:30: The capital market has literally split in two.

00:05:34: Andrew Ovid pointed out that the gap between venture capital and growth equity had never been wider.

00:05:39: Yeah, the operating plan now is essentially deck-a-corner bust.

00:05:44: You need ten X year over your growth to even be considered for traditional VC right now.

00:05:49: Katie McReynolds shared a takeaway from recent investor panel put hard numbers on this new reality At series A stage.

00:05:56: it hinges almost entirely ungrowth.

00:05:58: velocity

00:06:00: Absolute revenue matters way less than acceleration.

00:06:02: They want two point five to three million in ARR, but growing at four X or more.

00:06:08: Okay so let me challenge this from the perspective of an M&A scout.

00:06:12: say you find a highly profitable B-to-B software company.

00:06:15: they have great margins ,they dominate their niche and they are growing it really healthy.

00:06:21: two Xs year

00:06:22: In normal market.

00:06:23: that's phenomenal business.

00:06:25: But in this current environment, is taking venture capital actually a toxic move for that company?

00:06:31: Honestly.

00:06:31: Yes it absolutely can be toxic because the moment you take that venture check You legally bind your operating plan to that DecaCorn trajectory

00:06:39: Your force to burn cash To try and force growth from two X-to ten

00:06:43: X Exactly And you could easily break A perfectly good profitable business doing That.

00:06:47: Gail Wilkinson gave some brilliant advice on This exact scenario.

00:06:51: What was her take?

00:06:52: She said, if a founder can bootstrap their business to a million in ARR and still grow quickly they should just delay raising VC or avoid it entirely.

00:07:00: Because VC isn't a success milestone It's high risk financial tool.

00:07:04: Right Keep your options open And this is especially true If you factor into the geographic differences that Max Hans de Villepan brought up.

00:07:11: Oh right The difference of how US and European investors view risk.

00:07:15: Yeah this intense, risk-on upside obsessed mentality is very American.

00:07:20: European investors operate with completely different mechanics.

00:07:23: they focus way more on downside protection.

00:07:26: so They are haggling over valuations and demanding highly detailed five year forecasts at the seed stage

00:07:31: exactly.

00:07:32: So if you are acquiring a european startup You're going to see much more conservative cap table And operating history compared

00:07:40: Before we unpack how VC funds themselves are physically restructuring.

00:07:43: to deal with all this, I just want to casually mention if you're enjoying the deep dive.

00:07:48: make sure hit subscribe so that you catch our future additions.

00:07:52: So looking at the funds because of the bar for startups shifted so drastically into a Decacorner bust model VCs can't operate like they did ten years ago?

00:08:01: No!

00:08:01: The fund structures are rapidly evolving.

00:08:04: Siddharth Pai did this fascinating structural analysis and recent Horowitz to illustrate it.

00:08:10: Oh yeah, how they grew from a three hundred million dollar fund in two thousand nine to a fifteen billion dollar behemoth.

00:08:16: Right and the key was their realization that in modern venture The network is the actual product.

00:08:23: meaning what exactly?

00:08:24: Meaning that actually picking the right startup as maybe ten percent of a VC's job Finding the deal and winning the allocation convincing the founder to take your money Is the other ninety percent.

00:08:36: So they built massive internal infrastructure around the founders, in-house talent agencies marketing teams.

00:08:42: Exactly so.

00:08:44: when a hot AI deal comes up The founder chooses A-Sixteen Z because of all the services attached to the money.

00:08:50: But then you have emerging managers innovating in these entirely different almost contrarian ways.

00:08:56: Mike Chan shared a wild example of this with Snowpoint Ventures.

00:09:00: Oh man that defense tech fund?

00:09:01: Yeah

00:09:02: They just close at four hundred and eleven million dollar.

00:09:04: fund Their strategy.

00:09:06: They are going to invest in exactly ten dual-use defense tech companies.

00:09:10: Ten companies for a four hundred million dollar fund is an incredible level of concentration!

00:09:16: But here IS the structural innovation.

00:09:18: that's truly crazy, they took out one hundred and twenty five million dollars loan through a DOD and SBA initiative actually make these investments

00:09:27: Which completely subverts traditional venture mechanics.

00:09:31: Normally you don't sit on a pile of cash.

00:09:33: You do a capital call when find it deal

00:09:35: Right.

00:09:36: Taking on debt to invest in highly illiquid long duration deep tech is a massive structural risk.

00:09:42: Yeah, if those defense contracts don't hit You can just pivot a hardware company like you Canada's software app.

00:09:49: But on the complete opposite end of the spectrum we are seeing this massive democratization of early-stage funds.

00:09:55: Oh, like the friction to launch a fund is just dropping the zero.

00:09:58: Adeo Resi from Start Funds lowered first closed threshold for BC funds to just one hundred thousand dollars.

00:10:04: Meaning your manager does need two years lining up ten million before writing check.

00:10:08: they can start investing.

00:10:10: Exactly

00:10:11: and Nathan Bucci noted that angel investors could now launch full VC funds with basically zero upfront set-up costs.

00:10:18: But doesn't lower barrier to entry risk flooding cap tables Tourist capital.

00:10:24: Yes, absolutely and that is exactly the risk Elizabeth Kostin McCluskey warned about especially with corporate VCs or CVC's

00:10:30: Because strategic money is great for distribution but tourists chasing an AI trend can ruin a cap table

00:10:36: Right because they ask for non-standard restrictive rights The most dangerous one being a rougher right of first refusal

00:10:43: Which is a nightmare for M&A?

00:10:45: Total nightmare.

00:10:46: if you are in m&a pro looking to acquire a target And you see a roffer on the cap table You might just walk.

00:10:52: No one wants to spend three months doing due diligence just to have the deal sniped at The Last Second by an incumbent.

00:10:57: Yeah, it chills future acquisition potential entirely and this is exactly why the mechanics of these deals are so critical right now.

00:11:05: because the structural friction of actually doing the deals Is disappearing everywhere?

00:11:10: yeah like Henry Ward at CARTA launching fixed fee legal venture financings for seed rounds.

00:11:14: Right!

00:11:15: One legal team runs around from the term sheet To the close For a flat rate And Usman Ghoul at Metal launched that unified investor relations intelligence layer.

00:11:23: So founders can manage their entire raise and updates in one dashboard, the actual infrastructure of raising VCs being productized.

00:11:30: But this flood-of cheap fast infrastructure creates a new trap.

00:11:34: When money is THIS easy to get The single most dangerous decision a founder makes Is figuring out whose money it's actually safe to take.

00:11:42: Oh without a doubt.

00:11:43: And this brings us to the brutal math of investor alignment.

00:11:46: Sefi Shapira laid out so clearly, for every one million dollars a VC invests they collect roughly two hundred thousand dollars in guaranteed management fees over the life.

00:12:11: Because bad VCs don't just say no.

00:12:14: Chris Topman shared that post highlighting Michael Bloomberg's famous warning about this,

00:12:18: Oh!

00:12:18: That bad VC says yes and then spend five years killing what makes the business unique?

00:12:23: The most expensive advice you will ever get is the advice that arrives after the check clears.

00:12:29: Once a VC has board seat they have voting rights on your budget Your hires And your exit.

00:12:35: Money Is Just Money Until It Comes With A Board Seat.

00:12:38: And if you want the ultimate cautionary tale of how bad investor misalignment can get, look at the drama Stefan Nasser highlighted.

00:12:45: Oh with Kostla Ventures?

00:12:46: Yeah they actually backed two direct AI competitors Factory AI and Cognition.

00:12:51: And it resulted in Vinod Kosla publicly attacking factory AI as a struggling second tier competitor.

00:12:58: Well another partner from his exact same firm took the opposite position to public.

00:13:03: Imagine your own lead investor using their platform to attack your reputation.

00:13:07: It's like picking a spouse after one coffee date, as Chris Ellis noted in his lessons on raising capital.

00:13:13: You are legally bound to these people for a decade.

00:13:17: so bringing this all together how should strategy and M&A professionals view this landscape when they're evaluating at Target's cap table today?

00:13:26: you really have to scrutinize.

00:13:27: the cap table.

00:13:27: is map of companies future constraints.

00:13:30: big tier-one funds bring brand value but as Peter Walker noted They might treat small check just an option.

00:13:36: call

00:13:37: Right, it doesn't mean they have high conviction.

00:13:39: It just buys them a front row seat to the data room and if They decide not to lead the series A sends a massive negative signal to market

00:13:47: exactly.

00:13:48: And on the flip side emerging managers offer great attention But Mike as pointed out they often come with restrictive government LP mandates

00:13:55: like requiring a certain headcount in this specific city Which is a massive headache during an acquisition.

00:14:01: you really?

00:14:01: Have to know what strings are attached to the equity.

00:14:03: If you enjoyed this episode, new episodes drop every two weeks.

00:14:07: Also check out our other editions on PE Fundraising, PE Exit Strategies, PE Value Creation, Strategy and Consulting...and M&A!

00:14:15: Yeah

00:14:15: thanks for joining us.

00:14:17: And just to leave with a final thought them all over if big tech is funding the very AI startups that are buying their compute?

00:14:25: And top tier VCs or marking up deals by thirty one X in single month Just For Their Brand Name.

00:14:31: Are we looking at genuine unprecedented innovation, or just a highly sophisticated financial feedback loop.

00:14:39: Think about the mechanics behind valuation next time you review a deal?

00:14:42: Make sure your subscribed and we will catch on in our next deep dive!