Best of LinkedIn: Venture Capital CW 43/ 44

00:00:00: provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about venture capital in CW, forty three and forty four.

00:00:08: 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: Our focus today is really synthesizing the most crucial insights and top venture capital trends we saw circulating on LinkedIn during calendar weeks, forty three and forty

00:00:28: four.

00:00:28: Yeah.

00:00:28: And we're aiming this squarely at professionals like you across MNA, private equity, VC and consulting.

00:00:34: The mission is simple.

00:00:36: Cut through the noise, deliver the key signals.

00:00:38: We want to unpack what's driving this while massive urgency and capital deployment right now.

00:00:42: Exactly.

00:00:43: and why AI is still, you know, the dominant theme, plus how LPs and founders are navigating this frankly pretty pressurized environment.

00:00:50: Okay, so let's dive into that core conflict first, the tension around the capital clock and LP dynamics.

00:00:54: The starting point is just the sheer scale of dry powder.

00:00:57: Right.

00:00:57: VCs are sitting on a staggering five hundred and eighty billion dollars that needs to find a home.

00:01:02: That number is just huge.

00:01:04: And it's not sitting comfortably, is it?

00:01:06: Kevin Jiang pointed out something crucial.

00:01:09: Those funds raised back in say, twenty nineteen to twenty twenty one, they're now hitting that critical five to seven year window.

00:01:17: He calls it the deploy or die territory.

00:01:20: Yeah, bluntly put, but accurate.

00:01:22: If you can't get that capital committed, you risk having to return it.

00:01:25: Which is death for raising your next fund, basically.

00:01:28: Absolutely.

00:01:29: And that pressure cooker environment directly informs the rigor we're seeing from LPs now.

00:01:35: Tumas El and he put in really well.

00:01:36: How so?

00:01:37: He said LPs aren't giving capital to VCs for safety.

00:01:40: They're not looking for stability here.

00:01:42: They demand asymmetric, really outsized returns.

00:01:44: Okay.

00:01:45: So if a fund is underwriting an early stage deal, the minimum expectation, the floor, is now a three X net return.

00:01:52: Wait, three X net minimum.

00:01:54: That's significant.

00:01:55: How does that actually change the investment strategy on the ground?

00:01:58: Doesn't that force VCs to chase only the absolute moon shots?

00:02:01: It

00:02:02: absolutely does.

00:02:02: It just reinforces that VCs fundamentally about hitting home runs, not singles or doubles.

00:02:08: If your fund isn't structured to capture those massive outliers, you're just not going to meet that LP mandate.

00:02:13: It means maybe passing on deals that look merely safe or incrementally profitable.

00:02:17: OK, and speaking of rigor.

00:02:19: There was that crucial point from Arshad Chowdhury about safeguards.

00:02:23: It reflects this kind of high stakes, maybe slightly wary environment.

00:02:28: What was that?

00:02:29: LPs are demanding direct unfiltered conversations with the general partners.

00:02:34: really validating the strategy, but also screening for any potential fraud signals.

00:02:39: Yeah, exactly.

00:02:40: And even the smallest detail can apparently trigger deep skepticism now.

00:02:45: Chattery mentioned LPs getting highly suspicious about any changes to recipient bank account details for wire transfers.

00:02:51: Ah, interesting.

00:02:52: Like, even if there's a legitimate reason.

00:02:54: Apparently so.

00:02:55: The due diligence is just tightening up everywhere, making sure the money flows exactly where the GP says it will.

00:03:00: Okay.

00:03:01: But despite all that, regular capital is flowing.

00:03:03: particularly in certain places, right?

00:03:06: Europe seemed to lead in October.

00:03:08: That's right.

00:03:08: Europe saw about ten billion dollars raised in October.

00:03:11: And interestingly, the lion's share of that went into the very earliest stages, pre-seed and seed.

00:03:16: Okay.

00:03:16: So still appetite for early risk.

00:03:18: Definitely.

00:03:18: And we saw some major fund closes that confirmed that institutional confidence is still there for, you know, specific proven teams.

00:03:26: Sequoia closed an early stage vehicle at seven hundred and fifty million dollars.

00:03:30: Wow.

00:03:31: Box Group raised five hundred and fifty million dollars across two funds.

00:03:35: And Lifeline Ventures, the Finnish firm, they secured.

00:03:38: So the money's concentrated, it's selective, but it's definitely ready to move for the right managers.

00:03:43: Right.

00:03:44: Okay, let's shift gears a bit then.

00:03:46: Moving from the flow of capital to the structure of the VC firms themselves.

00:03:50: This is especially relevant for aspiring managers launching their first funds.

00:03:54: Ritalolico's outlined some critical pieces often overlooked.

00:03:58: Yeah, she really emphasized things beyond just sourcing deals and doing diligence.

00:04:02: You absolutely must define your LP base clearly.

00:04:05: And ensure... Total strategic alignment.

00:04:08: So if you're building, say, a specialized FinTech fund, every angel deal you've done, every blog post you write, your entire pipeline has to scream FinTech.

00:04:18: So LPs, look at you and think, OK, they are the obvious choice for this niche.

00:04:22: Precisely.

00:04:23: It's about focus.

00:04:24: And that structural part, setting up the fund, that's actually getting cheaper, which I found fascinating.

00:04:30: Lollicos noted the cost has dropped dramatically.

00:04:32: Yeah, from maybe fifty thousand to one hundred and fifty thousand dollars previously, down to only about five thousand dollars today to get the basic infrastructure up.

00:04:40: Which

00:04:40: sounds great, but...

00:04:41: But it's a double-edged sword, right?

00:04:43: Easier entry means way more competition for that limited LP capital.

00:04:47: And that makes the next hurdle she mentioned attribution even more critical.

00:04:50: Ah, attribution rights.

00:04:52: This seems to blindside so many new GPs coming out of established firms.

00:04:56: Can you unpack why that's such a big deal?

00:04:57: It's

00:04:58: basically a legal and, well, financial roadblock.

00:05:01: You can't legally claim your track record or reference those successful deals from your previous firm when you're talking to LPs.

00:05:07: Well,

00:05:07: you can't even mention them.

00:05:08: Not unless you specifically negotiated attribution rights when you joined that firm or, more likely, when you left.

00:05:14: That track record, it belongs to the firm, not the individual VC, legally speaking.

00:05:20: So without those rights, you're essentially starting from zero in terms of provable institutional history.

00:05:26: You have to rely solely on maybe your proprietary deal flow, your angel investments, your network.

00:05:31: That really highlights the power dynamic within those big firms.

00:05:34: Okay, so this kind of sets the stage for that persistent debate, spray and pray versus conviction investing.

00:05:40: Ruben Dominguez, Ibar and Peter Walker actually brought data to this.

00:05:44: Right, using simulations.

00:05:46: Comparing a high volume diversified approach, lots of small checks versus a concentrated one, fewer bigger bets.

00:05:52: And what do the simulations show?

00:05:54: Well, the data suggested diversification generally wins out.

00:05:57: The portfolio with, say, a hundred startups getting four hundred thousand dollars each consistently outperformed the one with twenty startups getting two million dollars

00:06:05: each.

00:06:05: In terms of returns.

00:06:06: Yeah, higher average and median fund multiples.

00:06:09: The diversified approach showed a two point six X mean multiple versus two point one X for the concentrated one in their simulation.

00:06:16: And crucially, what about downside protection?

00:06:18: Capital preservation.

00:06:20: significantly better with diversification.

00:06:23: The simulated diversified fund had like a ninety-nine point seven percent chance of returning at least one X capital.

00:06:29: So the data points towards diversification being the safer, more reliable path for most

00:06:33: funds.

00:06:34: Okay, so the numbers lean towards spreading bets.

00:06:36: They do.

00:06:37: As they put it, venture isn't a picking game, it's a portfolio game.

00:06:40: Concentration, according to the data, only really pays off if you happen to be in that elite top five percent of all funds.

00:06:47: Which raises that fascinating question about VC ego, doesn't it?

00:06:50: Dan G called it the illusion of skill.

00:06:52: If the math favors diversification for ninety-five percent of funds, why do so many VCs still push the narrative of concentrated high-conviction bets?

00:07:00: That's the million-dollar question, isn't it?

00:07:02: Is it truly about optimizing LP returns or is it more about building a personal narrative of being the genius outlier picker?

00:07:09: Hmm,

00:07:09: yeah.

00:07:10: seems like a potential misalignment.

00:07:13: It's almost like self-sabotage for the average GP if they follow that concentrated path without being truly exceptional.

00:07:19: And Corey Epstein offered a maybe more philosophical take on why so many funds fail.

00:07:24: He suggested it's because many VCs lack deep, genuine industry expertise.

00:07:29: So they invest in what they know.

00:07:31: or think they know.

00:07:32: Exactly.

00:07:33: They gravitate towards founders who kind of mirror their own blind spots, confirming their existing level of understanding.

00:07:39: And that leads them to pass on the truly complex, maybe contrarian ideas they just don't get.

00:07:44: Okay, interesting.

00:07:45: Let's pivot then to the founders themselves.

00:07:47: Theme three, guidance in pitching discipline.

00:07:50: The big shift seems to be resilience over just pure polish.

00:07:54: Raymond Kim emphasized founder market fit being paramount now.

00:07:57: Absolutely.

00:07:58: VCs are scrutinizing the jockey much more than just the horse.

00:08:01: They're looking for those intrinsic qualities, grit, you know, genuine resilience.

00:08:05: A unique, maybe non-consensus insight into the market, deeply held beliefs, and critically a real unfair advantage.

00:08:14: Why are you and your team uniquely capable of weathering the storm and winning?

00:08:18: And that resilience, that insight, It has to stand up under some pretty intense scrutiny during the pitch, right?

00:08:24: Haram Chodari shared a fascinating story about using an AI investor simulation tool.

00:08:29: Yeah, that was interesting.

00:08:30: Tell me more.

00:08:31: So this founder used a tool that basically simulated different investor types, Angel, VC, corporate, and adapted its questions accordingly.

00:08:39: Wow.

00:08:39: Oh, OK.

00:08:40: And what happened?

00:08:41: It provided immediate, almost brutal clarity.

00:08:44: The simulated angel investor is zeroed in on some questionable market research, the VC simulation.

00:08:49: It drilled right into the unit economics and instantly flagged that the cash-y LTV ratio was, well, broken.

00:08:55: They'd lose money as they scaled.

00:08:57: Ouch.

00:08:57: The classic scaling problem.

00:08:59: And the corporate investor, Sam, asked the most practical thing.

00:09:01: How does this shiny new thing actually integrate with existing messy enterprise workflows?

00:09:06: The killer question for B to B.

00:09:08: Exactly.

00:09:09: And the founder apparently didn't have a good answer.

00:09:11: The tool generated like, twelve pages of red flags.

00:09:14: It just shows how specialized and deep the diligence is getting.

00:09:17: And that ties perfectly into the three key red flags that Richard Stroup highlighted, citing Juan Carlos Pacheco.

00:09:24: The immediate fundraise killers.

00:09:26: Which are?

00:09:26: One, arrogance.

00:09:28: Yeah.

00:09:28: Kills the partnership potential instantly.

00:09:31: Two, weak command of the numbers.

00:09:34: Signals operational chaos.

00:09:36: Three, saying you have no competition.

00:09:38: OK, arrogance, weak numbers, those make sense.

00:09:41: OK.

00:09:41: Arrogance, poisons.

00:09:42: Well, weak numbers mean you don't know your business.

00:09:45: But why is saying no competition such a huge red flag?

00:09:48: Isn't that good?

00:09:49: It's actually a sign of market naivety.

00:09:51: If a founder genuinely thinks there's zero competition, it usually means one of two things.

00:09:56: Either they haven't researched the market deeply enough, or they're defining their market way too narrowly.

00:10:01: Often, competition is actually proof that a market exists and that customers are willing to pay.

00:10:05: It's validation, not just a threat.

00:10:07: Ah, OK, that makes sense.

00:10:09: So switching slightly, let's talk access, getting in the door.

00:10:12: Patrick Casey shared some hard numbers confirming what we probably all suspect.

00:10:16: Warm intros still rule.

00:10:18: Massively.

00:10:19: Response rates jump to sixty percent plus with a warm introduction compared to maybe one percent to five percent for cold emails.

00:10:26: The network is still absolutely dominating the top of the funnel.

00:10:30: But that reliance on warm intros, it inherently brings up the flip side.

00:10:35: the pedigree bias that Shreme Ha called out.

00:10:38: Right, he shared that anecdote.

00:10:39: Yeah, the viral story about the founder who got ignored then created a fake profile IIT in Stanford credentials and boom!

00:10:46: Suddenly, top VCs who'd ignored his actual idea were falling over themselves to talk to the fake profile.

00:10:51: Oof,

00:10:52: that story is depressing.

00:10:54: but really instructive about initial screening.

00:10:56: It absolutely signals that bias is still deeply embedded, right?

00:10:59: Whether it's automated filters or just human pattern matching.

00:11:02: While VCs should counter this, respond to every credible outreach regardless of source, the reality is that bias toward perceived elite backgrounds still exists, especially at that first gate.

00:11:12: Okay, let's move to our final theme then.

00:11:15: Market focus and the enduring AI thesis.

00:11:18: No surprises here, AI is still running the show largely.

00:11:21: Evelina Deneva and Agatha Theory confirmed its dominance in Europe.

00:11:25: Yeah, over thirty-five percent of recent European funding rounds were AI related, and Sun Choy really captured the prevailing Silicon Valley view on why.

00:11:35: He called AI a multi-leveraged structure.

00:11:38: Stress that the real motes aren't just clever algorithms anymore, it's about massive infrastructure, huge data scale, and Frankly, deep pockets.

00:11:47: That dynamic makes it incredibly tough for smaller players to build truly defensible AI platforms.

00:11:52: That makes sense for pure play AI.

00:11:55: But we're also seeing a really interesting strategic rotation of capital, which feels even more significant, maybe.

00:12:00: Russell Sean Langodoc highlighted that huge Apollo eight VC partnership.

00:12:04: Ah, yeah, deploying billions into industrial infrastructure, real assets, buildings, logistics.

00:12:08: Exactly.

00:12:08: And the argument there, as Langodoc put it, is that AI becomes the competitive moat in these non tech businesses.

00:12:14: Right.

00:12:14: Not by being the product itself, but by optimizing legacy processes.

00:12:19: Procurement find thirty percent plus savings there through AI.

00:12:22: That's massive, immediate EBIT gain in previously unsexy industry.

00:12:27: And that's

00:12:28: where the real leverage shifts, potentially.

00:12:30: Okay, but let's temper all this enthusiasm with the harsh reality of founder outcomes.

00:12:35: Valuations have been high, right?

00:12:37: Chris Topman shared CARTA data.

00:12:38: Yeah.

00:12:39: high benchmarks, seed median around nineteen million dollars, Series A seventy-fifth percentile nudging a hundred million dollars on paper, especially for anything AI related.

00:12:48: But paper value isn't cash in the bank for founders.

00:12:51: Exactly.

00:12:51: And that's where the grim financial math kicks in.

00:12:54: Ruedos Santos shared that sobering anecdote.

00:12:57: The

00:12:57: one billion dollar exit.

00:12:58: That one.

00:12:59: Founder sells the company for a billion dollars, a huge success by any measure.

00:13:03: Yet the founder personally walked away with less than ten million dollars.

00:13:06: Less

00:13:07: than one percent of the sale price.

00:13:08: How How does that even happen?

00:13:10: Layers and layers of dilution for multiple funding rounds coupled with powerful liquidation preferences held by later siege investors.

00:13:16: Ah,

00:13:16: the preferences.

00:13:17: If VCs have, say, two X or three X liquidation preferences, they get two or three times their investment back before the founder and often all the common shareholders see a single penny.

00:13:28: In anything other than a truly spectacular exit, those preferences can just wipe out the founder's equity entirely.

00:13:35: So a high valuation today can mean a high risk of zero pay out tomorrow if things don't go perfectly.

00:13:40: Precisely.

00:13:41: It's a crucial lesson in cap table management and understanding deal terms.

00:13:45: Okay, one last quick tactical tip for founders.

00:13:47: From Harry Stebbings.

00:13:49: He advised seed stage founders.

00:13:51: What

00:13:51: was it?

00:13:51: Avoid bringing co-founders to those very first VC pitch calls.

00:13:56: Keep that initial meeting strictly one point one.

00:13:59: Focus on building that personal relationship first.

00:14:01: Interesting.

00:14:02: Makes sense.

00:14:02: Keep it focused early on.

00:14:04: Alright, so maybe a final provocative thought for you, our listeners, to chew on.

00:14:08: Lay it on us.

00:14:09: Given the statistical data we discussed, showing diversification generally outperforms concentration for, you know, the vast majority of funds.

00:14:16: Is the prevailing VC ego that illusion of skill Dan G mentioned?

00:14:21: Is it truly optimized for maximizing LP returns and overall fun success?

00:14:25: Or does it maybe prioritize creating a personal narrative, the story of being that elite outlier spotting genius?

00:14:31: Something to think about.

00:14:33: If you enjoy this deep dive, new episodes drop every two weeks.

00:14:36: Also, check out our other editions on private equity, M&A, and strategy and consulting.

00:14:40: Thank you for joining us as we unpack the VC landscape of calendar weeks forty-three and forty-four.

00:14:45: Hit that subscribe button so you don't miss our next analysis.