Best of LinkedIn: Venture Capital CW 37/ 38

00:00:00: provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about venture capital and CW, thirty seven and thirty eight.

00:00:07: Frennus specializes in BDB market research for venture capital teams, providing landscape screenings and startup segmentations with a strong focus on the tech space.

00:00:17: Welcome to the deep dive.

00:00:18: If you are operating in M&A, private equity, or venture capital, well, the last two weeks on LinkedIn, delivered a pretty crucial set of insights.

00:00:26: We're not just talking about what's being funded, but really how the structure of capital itself seems to be changing.

00:00:32: So our mission today is simple.

00:00:34: Give you a shortcut to those most actionable takeaways.

00:00:36: Yeah, what we're seeing is this highly focused momentum.

00:00:39: The sources really confirm that the name of the game now is Disciplined Execution and, you know, measurable customer outcomes.

00:00:46: all driven by a tight liquidity constrained market.

00:00:49: So we're gonna try and dissect these structural shifts impacting LPs and GPs and then maybe look at the required new playbooks for founders who are navigating this high scrutiny environment.

00:00:58: Okay, let's unpack this then.

00:01:00: Starting right at the foundation, how the money actually moves.

00:01:04: Nicole DiTomasso had this brilliant observation saying something like, ninety nine percent of people in VC interviews can't explain how money actually flows through a fund.

00:01:14: So let's get you into that top one percent.

00:01:17: What's the simplest way to understand the capital waterfall?

00:01:20: It really comes down to the hierarchy, you know.

00:01:22: Who gets paid first?

00:01:24: And it's pretty non-negotiable.

00:01:26: You've got LPs, pension funds, endowments, those types.

00:01:29: They commit the capital, but crucially, they don't wire it all up front.

00:01:33: The fund makes what they call capital calls over time, basically as needed for investments.

00:01:37: And it's important to remember, While the general partners, the GTs, manage the fund, the fund itself, not the firm, actually owns the equity.

00:01:44: Right.

00:01:45: And then when an exit happens, say a sale or an IPO, the proceeds come back.

00:01:49: That's the really critical distribution moment, isn't it?

00:01:51: Exactly.

00:01:52: That's when the hierarchy kicks in.

00:01:54: When that money returns, the LPs get their capital back first, plus a preferred return, often called the hurdle rate.

00:02:01: Only once the LPs have cleared that hurdle, meaning they've got their original investment back, plus that defined profit, Only then did the GP start earning their carry, their share of the profits.

00:02:11: Which is why DPI is so key.

00:02:13: Precisely.

00:02:14: DPI, distribution to paid in capital, it's the ultimate metric.

00:02:17: If LPs aren't getting that preferred return, well, the GPs don't really make money.

00:02:21: Simple as that.

00:02:22: Okay, so that clarity on capital flow, that directly informs how, say, emerging managers even get off the ground.

00:02:29: Myrtle-Lalaco has sort of outlined the path for fun die.

00:02:32: It's like a tiered approach, right?

00:02:33: You don't just start with the big institutions.

00:02:35: No, you definitely don't.

00:02:36: You start where you can find a speed to first close.

00:02:39: That usually means HNWI's high net worth individuals.

00:02:42: They're the foundation.

00:02:42: Apparently they make up about fifty seven percent of LPs in these new funds, average checks around what, three hundred thousand dollars.

00:02:49: Next up, you kind of graduate to family offices.

00:02:52: They're about thirty two percent of LPs, bigger checks, maybe three point eight million dollars on average.

00:02:57: The really large institutional players like funds of funds, they typically wait.

00:03:01: They only represent about eleven percent of LPs in a brand new fund.

00:03:04: They often prefer to see that manager succeed first, you know, before committing to fund two or fund three.

00:03:09: Right.

00:03:09: Makes sense.

00:03:10: And this brings us to maybe the most vital recent data point.

00:03:13: Liquidity.

00:03:14: Adam Marcik, Ruben Dominguez Ayatbar, Marc Gaye Peritor, they all highlighted that card of data from Q-TOO in twenty twenty five.

00:03:20: It shows LPs are finally getting some liquidity back.

00:03:23: That jump in DPI distribution to pay it in capital, that's like the oxygen the market desperately needed, isn't it?

00:03:28: It really is.

00:03:29: It feels like the critical inflection point we've sort of been waiting for.

00:03:33: The percentage of funds returning capital, it jumped noticeably.

00:03:36: and across different vintages too, from twenty seventeen right up to twenty twenty three.

00:03:41: We're seeing numbers like eighty five percent of twenty seventeen vintage funds are now generating DCI.

00:03:47: And even, get this, fifteen percent of the twenty-twenty-three vintage funds showed DPI after just six quarters.

00:03:53: Wow, that's fast for a recent vintage.

00:03:55: It is.

00:03:56: And that validates the whole exit-focused strategy of VCs, right?

00:04:00: It confirms the asset class for LPs, and, maybe most importantly, it unlocks that institutional capital for the next round of commitments.

00:04:06: The cycle starts moving again.

00:04:08: So, okay, the system's showing signs of, maybe, recovery.

00:04:11: But that same pressure for liquidity is forcing VCs to make some pretty existential choices, which feeds directly into this massive polarization trend we're seeing.

00:04:21: Alberto Onetti captured it well.

00:04:22: after that Nordic fund SNO announced he wouldn't raise a third fund.

00:04:25: Yeah, that was a big signal.

00:04:27: The mid-market generalist VC seems to be in a bit of a crisis.

00:04:31: As Magni Upman from SNO highlighted, the risk is being caught in the middle.

00:04:35: You're, quote, too small to compete with the large firms and too large to be flexible and fast-moving.

00:04:40: So the market's really bifurcating.

00:04:42: Splitting into two extremes.

00:04:44: You've got these highly specialized, nimble, niche funds on one end.

00:04:48: Super focused.

00:04:49: Exactly.

00:04:49: And then on the other end, you have the global mega funds with practically unlimited capital reach.

00:04:55: If you're a mid-sized fund right now, you have got to define your defensible edge and quickly.

00:05:01: That's structural pressure then.

00:05:02: It translates immediately to the founder playbook.

00:05:05: I mean, if investors are being this disciplined about their own funds, you can bet they'll be Pretty brutal in diligence.

00:05:11: Oh, absolutely.

00:05:12: Prashant Jain laid out this really clear investor checklist for any VC or PE deal.

00:05:17: He stresses five non-negotiables.

00:05:19: First, promoter pedigree and track record, basically.

00:05:22: Who are you and have you done this before?

00:05:24: Second, clean related party transactions, no messy internal stuff.

00:05:27: Third, promoter exclusivity.

00:05:29: Are they fully focused on

00:05:30: this?

00:05:30: Full time commitment.

00:05:31: Right.

00:05:32: Fourth, a strong management team beyond the promoter.

00:05:35: It can't be a one-person show.

00:05:37: And finally, ESOP pool alignment.

00:05:39: is the whole team properly incentivized for growth.

00:05:43: Okay, so alignment and transparency, those are just the baselines.

00:05:46: Now let's talk execution in maybe the most critical environment, that first meeting.

00:05:52: Emma Reeves broke down how founders just constantly waste that pivotal thirty minute pitch.

00:05:57: It sounds like it's about being really prescriptive with time.

00:05:59: Yeah.

00:06:00: It's pure structure.

00:06:01: She points out most founders lose maybe eight to ten minutes just on small talk or fumbling with the screen share.

00:06:06: Then they just monologue the entire deck.

00:06:09: Reeves recommends a really strict allocation.

00:06:11: Zero to five minutes build rapport.

00:06:13: Five to fifteen minutes crisp pitch.

00:06:15: Fifteen to twenty minutes Q&A.

00:06:16: And here's the crucial part.

00:06:18: twenty to twenty-five minutes, lock in clear next steps, and the close.

00:06:22: The goal isn't to demo everything.

00:06:23: No.

00:06:24: The goal is the second meeting, not impressing them with every single feature slide.

00:06:28: Okay.

00:06:28: But even when founders are structured, they can run into that dreaded investor ghosting issue.

00:06:34: Paul Munch tackled that one.

00:06:36: We know VCs are time-scarers, okay, but what tactical steps can a founder actually take to stop that relationship just going silent?

00:06:43: Yeah, ghosting.

00:06:44: It often happens just because VCs, well, they prefer silence over delivering bad news sometimes.

00:06:49: Paul made his advice on strategic communication is pretty sharp.

00:06:53: First, focus only on funds actively investing in your exact space.

00:06:56: Don't waste time.

00:06:57: Second, always, always get a warm intro.

00:07:01: Kirdermitha hammered this home too from a backed founder or someone respected.

00:07:04: Cold outreach is tough.

00:07:06: Very tough.

00:07:07: Third, lock in clear next steps before you end any conversation.

00:07:10: Don't leave it vague.

00:07:11: And crucially, he says, multi-thread relationships within the firm.

00:07:15: Don't rely on just one contact

00:07:16: point.

00:07:16: Makes sense.

00:07:17: Spreading the risk.

00:07:18: Now, SirDMakesManko and Chris Topman offered some pretty tough love regarding what VCs actually fund, especially at the pre-seed stage.

00:07:27: It really sounds like the market has just done funding aspiration.

00:07:30: I think that's fair.

00:07:31: Sergey Maksimenko says pre-seed failure isn't usually about being too early.

00:07:35: It's about failing to build what he calls a credibility loop.

00:07:39: Founders need to stop, well, maybe exaggerating their traction.

00:07:43: Be explicit about what they need and be bold.

00:07:45: Chris Totman really reinforces this.

00:07:48: VCs don't fund ideas, they fund proof.

00:07:50: A proof.

00:07:51: Meaning what exactly?

00:07:51: Meaning

00:07:52: real user evidence, measurable market demand, economics that actually demonstrates scalable revenue.

00:07:58: The serious conversation, Totman says, it only starts after you've nailed the proof of concept and you've got your first real paying customers.

00:08:06: Okay, so let's say a founder manages to clear all those hurdles.

00:08:10: They're actually negotiating around.

00:08:11: Rob Faryon argued that CEOs need to Stop negotiating like an operator and start negotiating like a VC.

00:08:18: What does adopting that investor mindset actually look like at the deal table?

00:08:21: Well, VC's structure deals to protect their downside while optimizing for, you know, potentially unlimited upside.

00:08:26: And that changes the structure.

00:08:28: Farion suggests CEOs should use things like milestone based tranches instead of just demanding one huge check upfront.

00:08:33: This spreads the risk for the VC.

00:08:35: Sure.

00:08:36: But doesn't that just shift most of the operational risk onto the founder?

00:08:40: Or does it actually enforce that disciplined execution we talked about earlier?

00:08:43: I think it enforces discipline.

00:08:45: Look, VCs obsess over predictability metrics, and CEOs need to start doing that too.

00:08:49: Faryon noted VCs are looking hard at metrics like net revenue retention, gross margin expansion, because those are the primary drivers of the really high valuation multiples, you know, above ten X. So you secure the best terms by structuring the deal around demonstrating measurable predictability.

00:09:06: Okay, predictability, got it.

00:09:08: Let's talk about the elephant or maybe the AI dominating the sector.

00:09:13: Valerie Noelle and Rhea Paulson confirm AI is the primary engineer of global VC investment.

00:09:19: But how worried should we actually be about the bubble dynamics?

00:09:23: Daniel Howard and Jack Selby are raising some serious flags.

00:09:26: The worry seems justified mainly because the data presents this clear contradiction.

00:09:31: Valerie Noelle showed, yeah, sixty three percent of all VC deals in North America are now AI or machine learning.

00:09:38: Huge number.

00:09:39: Yet Daniel Howard reports that this record high in funding coincides with maybe half of those startups lacking a viable revenue model.

00:09:47: He literally called it dot com deja vu.

00:09:50: The funding volume feels disconnected from proof of monetization.

00:09:53: And Jack Selby added that the geographic concentration is just compounding that risk, right?

00:09:57: Absolutely.

00:09:58: Seventy-five percent.

00:09:59: Three-quarters of all twenty-twenty-four VC dollars are concentrated in just California, New York, and Massachusetts.

00:10:06: Selby described this as a historic coastal AI bubble, suggesting that concentration of capital is bound to lead to inflated valuations and, frankly, overcrowded markets in those specific ecosystems.

00:10:17: Okay, but here's where the PE and M&A folks listening really need to pay attention, I think.

00:10:22: Because AI isn't just about funding new startups.

00:10:24: It seems to be fundamentally changing the calculus for private equity, too.

00:10:28: Guillermo or highlighted general catalyst AI roll-up strategy.

00:10:32: This feels like a whole new class of acquisition target, doesn't it?

00:10:36: It's potentially a complete paradigm shift, yeah.

00:10:38: Championed by Hemant Taneja at GC.

00:10:42: The thesis is basically that AI allows traditional service businesses, think law firms, call centers, accounting firms to achieve sauce-like margins.

00:10:52: How?

00:10:53: By applying AI agents and really transforming them from within.

00:10:57: So General Catalyst is actually acquiring these established service firms and then transforming them into AI native businesses that could command much higher valuation multiples.

00:11:06: Wow.

00:11:06: So for PE funds, you're not just looking for the next hot software startup anymore.

00:11:10: You're looking for these sort of operational service businesses that you can scale and transform through internal AI application.

00:11:17: That feels genuinely disruptive.

00:11:18: It is.

00:11:19: And it connects directly to the playbook needed for deep tech, too, which often resists those normal sauce metrics we talked about.

00:11:25: Danji argued that the current VC structure actually structurally fails most innovative ideas precisely because the standard playbook just doesn't fit.

00:11:33: So what is the right traction metric then if your pilot takes, say, twelve to eighteen months, which is pretty common in deep tech?

00:11:39: Anna Marie Pino had a great conversation with VC Queer and Hers that provided some clarity here.

00:11:45: Traction in deep tech isn't really about MRR, not initially anyway.

00:11:49: It's about how binding your conversations are.

00:11:51: VCs look for signals like which institutions are involved, are major players actually participating, are those partners allocating dedicated budget, or are they just, you know, window shopping?

00:12:02: Commitment signals.

00:12:03: Exactly.

00:12:04: And critically, how well does the solution actually match their future capability gaps?

00:12:09: The technical specs?

00:12:10: Yeah, they're necessary, but hers called them hygiene factors.

00:12:13: The commitment signal is really everything.

00:12:16: And we are seeing dedicated capital trying to bridge some of these complex gaps, particularly in climate tech.

00:12:21: Kylian O'Connor pointed to that new three hundred million dollar value of death fund launched by the all aboard fund.

00:12:27: Yeah, that fund specifically targets the commercial deployment gap.

00:12:30: It's designed to help later stage climate companies scale past that initial promise, you know, into true commercial viability.

00:12:37: And this focus is global too.

00:12:39: One Pablo Orlov highlighted that despite holding something like forty percent of global biodiversity, Latin America and the Caribbean currently attracts less than one percent of climate tech VC funding.

00:12:49: Huge mismatch.

00:12:50: Huge.

00:12:50: But the region apparently offers a five to ten X R&D talent cost advantage and its position as a prime market for actually scaling these kinds of solutions.

00:12:59: Big opportunity there.

00:13:00: Okay, finally, let's look at how VCs themselves are having to adapt their own operational models.

00:13:05: Adeo Reci made this pretty provocative claim, the traditional ten-year VC apprenticeship is dead.

00:13:11: and largely killed by AI.

00:13:12: Well, that certainly raises a huge question about the future career path in venture capital, doesn't it?

00:13:17: Resi argues that the kind of work that traditionally took years to master building complex Excel models, synthesizing market research, processing deal memos, it's now automated by AI, done in minutes or hours, which means that institutional gatekeeping, it's weakening.

00:13:33: And that's why, he argues, younger managers can now compete more directly with seasoned managing partners purely on insight and speed.

00:13:41: Interesting.

00:13:42: And that automation plus the need for high-speed execution, that seems to be fueling another mass of structural change, the growth of venture studios.

00:13:49: What's the evidence that LPs are actually shifting their bets towards this model?

00:13:53: The data from Ade Oresi is pretty compelling.

00:13:56: Venture Studios apparently grew from just three percent to thirteen percent of new VC funds in only three years.

00:14:01: And they raised nearly three times more money in their first year than traditional VCs, even though they often have lower targets.

00:14:07: As Patricia Jamilska noted, the appeal seems to be that studios show LPs actual company building, real execution, which makes them an attractive, maybe de-risked model in these unpredictable markets.

00:14:18: And this studio model isn't just theoretical.

00:14:21: Matthew VanHapperen detailed how it's playing out geographically, specifically with Switzerland kind of emerging as a hub.

00:14:27: Yeah, quietly, Switzerland seems to be becoming the health tech venture studio capital of Europe.

00:14:33: We're seeing these really focused builders dedicated to specific verticals.

00:14:37: Like Longevity, you've got Maximon, Centenara Labs, Neuro and Deep Digital Health, there's Eveline, Weiss, Geneva, and biotech firms like MedExcel, Swiss Rockets.

00:14:47: Peter Swasek also confirmed this shift towards deep tech in Switzerland, emphasizing that focus on execution and defensible IP, which again, is exactly what the studio model is built to provide.

00:14:57: So yeah, we've covered a tremendous amount of ground today, the critical importance of Elki liquidity and DPI getting moving again, the really high stakes execution playbooks that are now required for founders, those warning signs in the sort of coastal AI bubble, and of course the structural evolution of the VC model itself driven by studios and AI automation.

00:15:15: It seems really clear that capital isn't just scarce.

00:15:19: It's become highly intelligent and extremely targeted.

00:15:22: The sources all seem to confirm that clear storytelling, quantifiable traction defined by those predictability metrics, and disciplined, verifiable execution.

00:15:31: Well, they remain the strongest determinants of venture outcomes.

00:15:35: The era of just funding ambition alone.

00:15:38: That feels definitely over.

00:15:39: So here's maybe a final thought.

00:15:41: Given that the market is polarizing into these giants and niche specialists, and the data shows older vintages generally outperform newer ones, maybe due to patient returns.

00:15:51: What role will that shrinking midsize generalist fund play in capturing the next wave of liquidity?

00:15:58: Especially if AI continues to make general technical expertise, well, more of commodity.

00:16:03: That's the really big question.

00:16:04: I think founders and VCs stuck in the middle need to be answering right

00:16:19: now.