Best of LinkedIn: Venture Capital CW 03/ 04

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

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.

00:00:16: So it's the end of January, twenty twenty six and, you know, When you look at the landscape, there's this really deceptive signal in the market.

00:00:24: Well, if you just scan the headlines, you see these massive rounds, huge AI announcements, and you might think, okay, we're back.

00:00:31: The bull run is on.

00:00:33: But the data we've pulled from the last couple of weeks, it tells a totally different story.

00:00:37: It feels like we're looking at a barbell market.

00:00:41: That's a perfect way to put it.

00:00:42: On one end, you have this massive heavy capital concentration, billion dollar checks just flying into infrastructure.

00:00:48: And then on the other end, for, well, for everyone else, it's a disciplined grinding reality.

00:00:53: Exactly.

00:00:53: It's a story of extreme divergence.

00:00:55: Yeah.

00:00:56: So our mission for this deep dive is really to unpack that gap.

00:00:59: We're going to look at the macro view, the haves and have nots.

00:01:01: Right.

00:01:02: Then we'll dig into the distortion field that AI is creating.

00:01:06: And finally, the new playbook for founders and fund managers.

00:01:10: Because the rules of the game have fundamentally changed.

00:01:13: Okay,

00:01:13: let's start with that macro picture.

00:01:14: You mentioned divergence.

00:01:16: Thomas Algar had a great analysis of this.

00:01:18: He said capital isn't accelerating broadly.

00:01:20: It's just concentrating.

00:01:22: it is.

00:01:23: the whole gravitational pull of the market has shifted and the most brutal illustration of this is the chasm opening up between the US and Europe.

00:01:31: Oh,

00:01:32: I saw this Greg Batby's number.

00:01:34: They're shocking right.

00:01:35: for twenty twenty five the US market hit roughly three hundred forty billion dollars in deal value.

00:01:41: Which is a healthy number.

00:01:42: It is.

00:01:42: A very healthy number.

00:01:43: But then you look at Europe, about twenty three billion euros.

00:01:46: Wait,

00:01:46: hold on.

00:01:47: Three hundred and forty billion versus twenty three?

00:01:49: That's not just a gap.

00:01:50: That's a rounding error.

00:01:51: It's a whole order of magnitude difference.

00:01:53: It is.

00:01:53: And we have to ask why.

00:01:55: Bappy points out that in volatile markets, LPs, the folks who fund the VCs, they flake to safety.

00:02:01: Sure, that makes sense.

00:02:02: But in venture, safety isn't bonds.

00:02:05: It's liquidity.

00:02:06: It's predictability.

00:02:07: The U.S.

00:02:08: market offers a clear path to an exit M&A, IPOs.

00:02:12: Europe is still struggling with that depth.

00:02:14: If you're an LP and you can't sell how you get your money out,

00:02:17: you don't put it in in the first place.

00:02:19: A liquidity trap.

00:02:20: Exactly.

00:02:21: But it's not just Europe, right?

00:02:23: I saw that post from Steve Torso about the Australian market.

00:02:25: He's the word that really stuck with me.

00:02:27: Hibernation.

00:02:28: Yes, and that context is so important.

00:02:31: While San Francisco is partying like it's twenty twenty one, local ecosystems like Australia have seen early stage funding drop by almost fifty percent.

00:02:40: Wow.

00:02:40: It creates this this total bifurcation.

00:02:42: If you're a founder in a regional hub, you just can't look at the global headlines and think they apply to you.

00:02:47: You're in a different economic weather system.

00:02:50: But there is a third player.

00:02:51: Kind of entering the Chad, isn't there?

00:02:53: If the U.S.

00:02:53: is booming and Europe is freezing, the Middle East seems to be building its own gravity.

00:02:58: Right.

00:02:58: Said Abdujabbar and Mudit Sharma were talking about record deployment in Saudi Arabia.

00:03:03: And this is that fascinating shift all guys are hinted at.

00:03:06: Saudi Arabia saw one point seven two billion dollars deployed in twenty twenty five.

00:03:11: But the real story isn't just the dollar amount, it's the concentration.

00:03:15: Forty-five percent of all VC funding in the entire MENA region is now flowing specifically into Saudi Arabia.

00:03:22: Nearly half the capital for a whole region going to one country.

00:03:25: That sounds incredibly aggressive, but is it, you know, sustainable?

00:03:30: We've seen regions try to buy an ecosystem before.

00:03:33: And

00:03:33: usually the startups leave when the subsidies dry up.

00:03:35: Exactly.

00:03:36: Well, that's the skepticism Mudit Sharma addresses.

00:03:38: He argues this isn't cyclical, it's It's all driven by vision.

00:03:43: It's a sovereign mandate.

00:03:45: So unlike a European BC who's nervous about their next fundraise, Saudi capital is policy aligned.

00:03:50: They're building an economy, not just a portfolio.

00:03:52: So if you're a deep tech founder, starving for capital in Berlin, Riyadh is becoming a primary lifeline.

00:03:57: It

00:03:57: is.

00:03:57: And we should briefly mention China.

00:03:59: Dennis Kalinin flagged that they've rebounded in a big way, actually surpassing Europe in deal count now.

00:04:04: And that's driven by what?

00:04:05: Deep tech?

00:04:06: Heavily.

00:04:07: Robotics and deep tech.

00:04:09: So the map is getting clearer.

00:04:11: The US and China are powering ahead.

00:04:13: Saudi Arabia is rising as a structural capital hub and everyone else, well, they're fighting for scraps.

00:04:19: Let's zoom in on that US surge because obviously the engine room there is AI.

00:04:24: But the term AI boom feels a little misleading.

00:04:27: It's not broad-based, is it?

00:04:29: Not at all.

00:04:30: And Peter Walker share a metric that basically defines the entire market right now.

00:04:34: He said AI ate forty-four percent of all invested capital.

00:04:38: But here's the kicker.

00:04:39: If you look just at software startups, that number jumps to sixty-one percent.

00:04:43: Sixty-one percent.

00:04:44: So almost two-thirds of every single dollar invested in software is going into AI.

00:04:49: Correct.

00:04:50: Which means if you're building a traditional SaaS platform, a marketplace, anything else, you are fighting for a shrinking slice of the pie.

00:04:56: You're playing on hard mode.

00:04:57: And

00:04:57: even within AI, the money's not spread out.

00:05:00: Chase Aldridge made a really important distinction.

00:05:02: The capital isn't chasing the chat GPT rappers anymore.

00:05:05: No.

00:05:06: That hype cycle is over.

00:05:07: It's dead.

00:05:08: Aldrich says the capital is chasing picks and shovels.

00:05:11: It's infrastructure.

00:05:12: It's agents that can actually execute work.

00:05:15: I mean, look at XAI raising twenty billion dollars.

00:05:17: That wasn't for a better user interface.

00:05:18: It was for compute cluster.

00:05:20: All

00:05:20: for compute.

00:05:22: And Herwig Springer connected this to NVIDIA's strategy.

00:05:25: Right.

00:05:25: They back the companies that consume their product.

00:05:28: It's a brilliant self-reinforcing loop.

00:05:30: The winners are building the rails.

00:05:31: the AI economy runs on.

00:05:34: But this creates a massive distortion field.

00:05:37: The FOMO.

00:05:38: The fear of missing out on this one specific layer is so intense, it's actually breaking the unwritten rules of venture capital.

00:05:44: You're talking about the Itamar Novik post about Sequoia.

00:05:47: I am.

00:05:48: This one really surprised me.

00:05:49: Novik appointed out Sequoia capital backed Anthropic.

00:05:52: But Sequoia is also a major backer of open AI.

00:05:56: A direct head-to-head competitor.

00:05:58: I thought that was the golden rule.

00:05:59: You pick one horse in the race, you don't bet on the Yankees and the Red Sox, it's a huge conflict of interest.

00:06:04: Historically, yes.

00:06:05: In the ride-sharing wars, you backed Uber or Lyft.

00:06:09: Not both.

00:06:10: You're on the board.

00:06:10: You have sensitive info.

00:06:12: But Novik's analysis is crucial here.

00:06:15: The fact that Sequoia is willing to breach that protocol, it signals one thing.

00:06:19: What's that?

00:06:20: Panic.

00:06:21: Panic, really?

00:06:22: Panic about vintage risk.

00:06:25: The feeling is, the winner-take-all dynamic in AI models is so strong, and the capital needs are so high that if you miss the winner, you miss the entire return for the decade.

00:06:36: So if VCs are terrified of having zero exposure, and they're throwing the governance rulebook out the window to make sure they have a seat at every table.

00:06:43: So FOMO

00:06:44: is overriding governance.

00:06:45: That's honestly a little terrifying.

00:06:47: It shows how desperate the smart money is to get into that infrastructure layer.

00:06:50: Okay,

00:06:50: so let's bring this down to Earth.

00:06:51: If you're not Sam Altman raising twenty billion, how do you survive?

00:06:54: You need a new playbook.

00:06:55: And we actually had some very tactical advice on this.

00:06:58: Matan Hasanov had a great post about the anti-sales

00:07:01: pitch.

00:07:01: I love this.

00:07:02: He basically said, stop trying to sell me.

00:07:04: It sounds so counterintuitive, right?

00:07:06: Founders are trained to be hype men.

00:07:08: But Hasanov's point is that VCs see hundreds of pitches.

00:07:12: They have incredibly sensitive BS detectors.

00:07:15: When a founder comes in acting like they don't need the money or creating artificial scarcity, it just feels performative.

00:07:22: So what's the alternative?

00:07:23: Transparency.

00:07:25: Hasanov says, admitting, here's where we're stuck, and here's how this capital unlocks the next stage.

00:07:31: That's far more compelling.

00:07:32: It builds trust.

00:07:33: And in a tight market, trust is the only currency that matters.

00:07:37: Speaking of trust, Harry Stebbings dropped a list of killers for seed rounds.

00:07:41: And these are painfully specific.

00:07:43: His first one, don't bring more than one founder to the first call.

00:07:47: This one creates so much debate, but he's right.

00:07:49: The first call is about building a psychological hook.

00:07:52: A rapport.

00:07:53: If you have three co-founders on a Zoom, the energy is just diluted.

00:07:57: You can't fall in love with the committee.

00:07:59: That makes sense.

00:07:59: It's about intimacy.

00:08:00: But his second point, this is the one that really stood out.

00:08:03: He said, do not bring a financial model to a seed pitch.

00:08:07: Yeah.

00:08:07: This is the one that gives every NBA a heart attack.

00:08:10: Right.

00:08:10: Don't you want to show you have a plan?

00:08:12: You've thought about the numbers.

00:08:13: You want to show you have a vision, not a fantasy.

00:08:16: Stebbings is brutal here.

00:08:17: He says projecting revenue for twenty thirty is total BS.

00:08:21: And he's right.

00:08:22: At the seed stage, you don't know if your product will even exist in twenty twenty eight.

00:08:26: Let alone

00:08:27: what your churn rate will be.

00:08:29: Exactly.

00:08:30: So bringing the spreadsheet actually hurts you.

00:08:32: It signals you're focused on the wrong things.

00:08:34: It destroys credibility because the investor knows you're just making it up.

00:08:38: When you present it with confidence, you just look delusional.

00:08:41: It's a trust test.

00:08:42: He also said, don't talk about an exit strategy.

00:08:44: Same

00:08:44: logic.

00:08:45: If you're already talking about who buys you, you're not thinking big enough.

00:08:48: You're a flipper, not a builder.

00:08:51: VCs need those hundred X returns, and flippers don't generate that.

00:08:54: Okay, so you nail the pitch.

00:08:56: Authentic, came alone, no spreadsheets.

00:08:59: Then, silence.

00:09:01: The ghosting.

00:09:02: Yasmin Morrison had some brilliant tactical advice here.

00:09:05: The network push.

00:09:06: It's so clever.

00:09:07: We all know that just checking in email is the most pathetic email in business.

00:09:11: It just never works.

00:09:12: It reeks of desperation.

00:09:14: Totally.

00:09:14: So Morrison says you never send that email.

00:09:17: Instead, you orchestrate a ping from the side.

00:09:19: You have a mutual contact dimension to the VC that your deal is moving fast.

00:09:24: So the VC hears it from a peer, not from you.

00:09:26: Correct.

00:09:27: It triggers their competitive instinct.

00:09:29: Suddenly, they find time to reply.

00:09:31: It's social engineering one-on-one, but it works.

00:09:34: Or, she says, just ask for the no.

00:09:36: Demand the rejection.

00:09:37: After ten days.

00:09:38: Yes.

00:09:39: I assume this isn't the fit, so I'm closing the file.

00:09:41: It shows confidence, and it often gets them to respond because they respect the time management.

00:09:45: Let's talk about the deal itself.

00:09:47: Nathan Beckord looked at the data and it seems the safe fee is now the undisputed king.

00:09:52: It's the default.

00:09:53: Something like sixty-four percent of rounds are on safes.

00:09:55: It's fast.

00:09:56: It's cheap.

00:09:57: It kicks the valuation can down the road.

00:09:59: But Beckord also noted that while valuations are holding up, median pre-money seed is still around sixteen million dollars.

00:10:04: The

00:10:04: funnel to get there is much tighter.

00:10:06: Much tighter.

00:10:07: But there's a darker side to this, especially for employees.

00:10:11: Peter Walker pointed out a stat that every job seeker needs to hear.

00:10:14: The average new hire is getting fifty percent less equity today than in twenty twenty two.

00:10:19: Fifty percent less.

00:10:21: That's a massive pay cut, effectively.

00:10:23: It's a huge shift in leverage.

00:10:25: In twenty twenty one, talent was scarce.

00:10:28: Founders threw equity at people.

00:10:29: Now the capital is scarce.

00:10:31: There have been layoffs.

00:10:32: The employer holds the cards.

00:10:34: The gold rush packages of the pandemic are gone.

00:10:37: Unless you're an AI researcher, I assume.

00:10:39: Well, yes.

00:10:40: If you know how to train an LLM, you can name your price.

00:10:43: But for a VP of marketing, the market has corrected.

00:10:47: There's one last trap for founders we need to cover.

00:10:49: Branislav Zagorsek made a distinction I think causes so much pain.

00:10:53: The difference between a good business and a venture-backable business.

00:10:56: This

00:10:57: is the hardest conversation.

00:10:58: You can build a company that does ten million dollars in revenue, makes two million dollars in profit, grows fifteen percent a year.

00:11:04: That is a wonderful business.

00:11:05: It will make you rich.

00:11:07: But Zagorsek points out it's uninvestable for a VC.

00:11:10: because it doesn't have the rocket fuel.

00:11:12: Because VC math needs decoupled growth.

00:11:14: They need revenue to grow exponentially while costs grow linearly.

00:11:18: If your growth is tied to headcount like a consulting firm, you can't generate the fifty X or a hundred X return they need.

00:11:24: So founders waste months pitching VCs who will never invest.

00:11:27: Revenue alone doesn't guarantee a check.

00:11:30: That's a tough pill to swallow.

00:11:31: It

00:11:31: is.

00:11:32: But realizing you're a good business might save you a year of your life.

00:11:36: Go to a bank, go to PE, bootstrap it.

00:11:39: Just don't pitch Sequoia.

00:11:41: We've talked a lot about founders, but let's flip the table.

00:11:43: What about the GPs, the people writing the checks?

00:11:46: Because from what I'm reading, they're sweating just as much as the founders.

00:11:49: Oh,

00:11:49: absolutely.

00:11:50: The fundraising environment for VCs is brutal.

00:11:54: Adeo Resi shared a story that is, frankly, a cautionary tale.

00:11:58: He knows a manager who returned twenty two X on their first fund.

00:12:02: Twenty two X. That's Hall of Fame.

00:12:03: That's that's retire on a yacht numbers.

00:12:06: They should be able to get a check for fun to from anywhere.

00:12:08: You'd think.

00:12:10: But they are struggling to raise fund too.

00:12:12: How does that even make sense?

00:12:13: If the product, the return is that good, why aren't LPs buying?

00:12:18: Because LPs don't just buy the result, they buy the process and the person.

00:12:22: Bresci's point is that institutional relationships have to be built before you have the returns.

00:12:27: It's a three to four year game of dinners, updates and invites.

00:12:31: So you can't just show up at the finish line with a winning ticket?

00:12:34: No.

00:12:34: If they don't know you, and you show them a twenty-two X return, they don't think genius.

00:12:40: They think lucky.

00:12:41: They think one hit wonder.

00:12:43: Without relationship equity, the financial equity just isn't enough.

00:12:47: That's fascinating.

00:12:48: It's not a transaction.

00:12:49: It's a marriage.

00:12:51: And speaking of marriage, LPs are asking for a much more detailed prenup now.

00:12:55: Myrtle Lollacos and Nicole DiTomasso were talking about the new ILPA due diligence questionnaire.

00:13:01: This sounds dry, but it's the new reality.

00:13:03: The era of move fast and break things is over for the fund managers themselves.

00:13:09: LPs are looking under the hood.

00:13:10: They're not just reading your thesis.

00:13:11: They're auditing your back office, your compliance, your tax filings.

00:13:14: Because one operational screw up can just blow up the whole fund.

00:13:17: Exactly.

00:13:18: One botched K-one tax form can ruin your reputation.

00:13:21: The bar for operational excellence has just risen dramatically.

00:13:24: You can't run a fifty million dollar fund on a spreadsheet anymore.

00:13:27: So operations matter.

00:13:28: And so does team size.

00:13:30: Reuben Dominguez Ibar cited a Ben Horowitz rule that I think applies everywhere.

00:13:34: Keep your investment team the size of a basketball starting five.

00:13:38: Five people.

00:13:38: Why five?

00:13:39: Why not ten?

00:13:40: Because of the politics of consensus.

00:13:43: Horowitz's theory is that once you hit ten or more people, decision quality just drops off a cliff.

00:13:48: You start trading favors.

00:13:50: I'll vote for your sauce deal if you vote for my crypto deal.

00:13:53: Ah, the log rolling.

00:13:55: Exactly.

00:13:56: Or you just regress to the mean.

00:13:59: Large groups kill the weird controversial ideas that usually become the biggest winners.

00:14:04: They vote for the safe consensus bet.

00:14:07: Small teams fight, they debate, and they decide with conviction.

00:14:11: And in this market, conviction is the only thing that generates alpha.

00:14:15: Okay, let's bring this all together.

00:14:17: We started with the barbell, massive concentration at the top

00:14:20: U.S.,

00:14:20: AI infrastructure, Saudi mandates, and extreme discipline everywhere else.

00:14:25: The market has matured.

00:14:26: That's the headline.

00:14:27: The tourists are gone.

00:14:28: Policy noted this about crypto, but it applies everywhere.

00:14:30: The easy money has left the building.

00:14:33: So whether you're a founder in Riyadh, a fund manager in London, or an AI engineer in San Francisco, the bar for quality has effectively been moved into the clouds.

00:14:40: It

00:14:41: has.

00:14:41: It's data-driven, it's concentrated, and it is ruthless.

00:14:45: Which brings us to a final question.

00:14:47: We see sixty-one percent of software capital going to AI, specifically AI infrastructure.

00:14:54: the chips, the data centers, the foundation models.

00:14:57: Right.

00:14:57: And here's the provocative thought I want to leave you with.

00:15:00: We are pouring billions into the roads and bridges of AI, the infrastructure.

00:15:07: But are we funding the cars?

00:15:09: Meaning what?

00:15:10: If everyone is chasing the picks and shovels, are we creating a massive innovation void in the application layer?

00:15:15: Meaning we get to twenty-twenty-eight, we have all this incredible compute power, but nobody has survived long enough to build the tools that actually use it.

00:15:23: Exactly.

00:15:24: We might be starving the very ecosystem that makes all this infrastructure valuable in the first place.

00:15:29: It's a risk that I don't think the market has fully priced in yet.

00:15:32: That's a scary thought, but definitely something to watch.

00:15:35: We are going to wrap it up there.

00:15:36: If you enjoyed this episode, new episodes drop every two weeks.

00:15:39: Also, check out our other editions on private equity, M&A, and strategy and consulting.

00:15:43: Thanks for listening.

00:15:44: Don't forget to subscribe.