Best of LinkedIn: Venture Capital CW 09/ 10

00:00:00: Provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about venture capital from CW nine to ten.

00:00:07: Frenness specializes in BDB market research for venture capital teams providing landscape screenings and startup segmentations with a strong focus

00:00:17: Right.

00:00:18: And for today's deep dive, we are really getting into the top venture capital trends seen across LinkedIn over the past couple of weeks.

00:00:25: Okay let's unpack this because if you're an LP a GP founder or even a consultant right now You were navigating a landscape that is just shifting incredibly fast.

00:00:36: Oh absolutely.

00:00:36: and If you just skimmed the recent headlines you might think Hey!

00:00:40: Venture Capital Is Back

00:00:41: Because deployment numbers are up.

00:00:43: Exactly The Top Line Numbers Look Great.

00:00:46: When you look at the actual data we pulled for this deep dive, that optimistic headline is totally masking what's actually happening underneath.

00:00:52: Yeah

00:00:53: which brings us to our first big theme.

00:00:55: capital is definitely flowing but it is flowing into way way fewer hands.

00:01:00: It really is.

00:01:01: I mean like a John and Kieran Mehta shared some insights that just paint a stark picture.

00:01:06: Ananth called The Current Environment A Power Law on Steroids

00:01:11: A power law on steroids.

00:01:12: wow yeah

00:01:14: I mean, fifty percent of all US VC deal value went into just point zero five percent of completed deals.

00:01:21: Wait half the money into a fraction over percent of deals?

00:01:24: Yes it's extreme concentration and Mether pointed out that over forty percent of VC money is now being deployed to mega rounds of one hundred million dollars or more.

00:01:33: So if you're not in that tiny elite tier Fundraising isn't getting easier It actually gets harder Exactly!

00:01:39: Its like venture capital is an ocean.

00:01:41: The water level is rising, but all the waters rushing into just a handful of massive pools.

00:01:46: That's

00:01:46: a perfect way to look at it.

00:01:47: But

00:01:48: what does this look like on the fund?

00:01:49: Level I mean our LPs doing the exact same thing.

00:01:51: Oh hundred percent.

00:01:52: LPs are totally fleeing-to-safety.

00:01:54: Evelina Dineva shared data from February that proves This VC fundraising hit twenty billion dollars for the month which sounds amazing.

00:02:01: right right

00:02:02: sound super healthy,

00:02:03: but A staggering seventy three percent of It was swallowed by Just Three

00:02:07: mega funds.

00:02:08: just three.

00:02:09: three.

00:02:10: you had Thrive Capital raising ten billion battery ventures at three point two five billion and peak xv At one point.

00:02:18: Three billion

00:02:19: that is wild Yeah, but you know Nathan Beckard brought up a really interesting strategic point for LPs about this.

00:02:25: Oh About the app performance of smaller funds?

00:02:27: yeah

00:02:28: because capital Is flocking to these established managers.

00:02:31: okay A fund for v just for perceived safety.

00:02:34: But betcord showed data Fund Eye vehicles, so first-time funds consistently outperform those mega funds.

00:02:41: Which makes sense right?

00:02:42: I mean they're smaller.

00:02:43: Right there's smaller and the managers have massive skin in the game.

00:02:45: They literally can't afford to pass on unconventional bets.

00:02:48: Yeah,

00:02:48: they don't have a giant management fee to fall back on.

00:02:51: So for you listening if you're working on portfolio construction right now You really ask yourself Are you sacrificing alpha just for the comfort of a big brand name?

00:02:59: that is The million dollar question.

00:03:01: or well ten billion dollar questions thrives case

00:03:03: Exactly, and all of this extreme concentration ties directly into our next theme which is that AI Is just completely dominating the venture investment narrative.

00:03:13: Oh it really does.

00:03:14: It's not even just a sector anymore as you and Lee noted recently Ai essentially is the market right now.

00:03:20: Yeah And the geographic data on this is just mind-blowing As Gratideman highlighted that the SF Bay area captured fifty-two percent of total US VC deal value in twenty-twenty five.

00:03:30: Over

00:03:31: half the country's deal value is one city, right?

00:03:34: But it gets crazier!

00:03:35: Astonishingly, twenty-one of the twenty-five largest USAI deals are headquartered within a five to ten minute driverless ride at each other.

00:03:42: That

00:03:42: isn't same.

00:03:43: Proximity really is destiny.

00:03:45: now It

00:03:45: IS.

00:03:46: But inside that tiny radius, the AI thesis itself is actually splintering isn't

00:03:50: it?

00:03:50: It is.

00:03:50: The smart money knows its not just about LLMs anymore.

00:03:53: Guillermo Floor broke down Jan Lacoon's new startup AMI which just raised.

00:03:58: get this one point zero.

00:03:59: three billion dollars at a three-point five billion dollar valuation.

00:04:03: A billion dollars At the seed stage.

00:04:06: Yes.

00:04:07: And they aren't even building large language models.

00:04:08: They're building world models.

00:04:10: So the industry has heavily hedging That LLM alone Aren't end game.

00:04:15: Right, and then you have the application layer.

00:04:18: Zach Posner pointed out that in vertical software like legal tech The real multiple drivers aren't the underlying models.

00:04:25: No they're commoditized.

00:04:26: now

00:04:26: Exactly Posner says the real value is companies embedding AI deep into these boring, highly proprietary workflows.

00:04:34: Which

00:04:34: is where the actual moat is!

00:04:36: But I have to ask are these seed valuations actually justifiable?

00:04:40: Are funds pricing in a perfect future that might never

00:04:42: arrive?!

00:04:43: The fun math on this is incredibly unforgiving.

00:04:47: Reveed's apir broke down one deal- A sixty million dollar seed round at three hundred million valuation for dev tool startup called Entire.

00:04:56: Okay...three hundred million at seed.

00:04:58: And to return a standard two hundred fifty million dollar fund at those entry prices, accounting for future dilution.

00:05:05: That startup needs a fifteen billion dollar exit.

00:05:07: Fifteen billion wait...for a DevTool company?

00:05:09: Yes!

00:05:10: That's basically hoping Microsoft buys you and regulators just look the other way.

00:05:14: Exactly, And this is exactly why Peter Walker argues that VCs really need to consider selling on the secondary market early.

00:05:21: Oh taking chips off of table?

00:05:22: Right he pointed a case where accompanies valuation jumped ninety two point five X in just twenty-two months.

00:05:29: if You see that you have to sell you can't Just hold forever anymore.

00:05:32: yeah

00:05:32: that totally makes sense.

00:05:34: but outside of This massive AI bubble The rest of the venture world is facing a totally different reality.

00:05:40: A brutal reality check,

00:05:42: which brings us to our third theme.

00:05:45: Venture capital is returning to fundamentals.

00:05:47: we are officially out of the growth at all costs era

00:05:51: We really are.

00:05:52: Rob

00:05:52: McKay observed this shift perfectly.

00:05:55: he pointed that back in twenty-twenty one startups were immediately hiring interim CFOs to prep for hypergrowth right

00:06:00: racing toward an IPO.

00:06:02: But in twenty-twenty six, it's all about cash runway extension and bridge rounds.

00:06:06: The timeline between a Series A and a series B is now stretching to nearly three years...

00:06:11: Three years between rounds?

00:06:13: That is a lifetime of start up years!

00:06:16: And its leading into some really questionable behavior on the fundraising trail.

00:06:21: Absolutely.

00:06:22: Victor Zakharchenko had this incredibly sharp critique Of THE THEATRE of fundraising.

00:06:28: Founders are literally pitching what he calls Vibe Revenue.

00:06:31: Vibe

00:06:32: revenue, I love that term but it is so dangerous!

00:06:35: It's when a founder takes like two-week pilot program and then just annualizes on paper to call it ARR

00:06:42: Which completely falls apart in diligence.

00:06:44: And this exactly why Harry Stebbings & Mitchell Green are pushing the ultimate reality check.

00:06:49: Green said DPI is math while Marx are just opinions.

00:06:53: Yes

00:06:53: distributed to pay it in capital.

00:06:55: Real cash returned.

00:06:56: Exactly, because if a software company has no earnings or EBITDA green notes there's fundamentally No floor to the valuation.

00:07:02: it can just go to zero right.

00:07:04: he even noted that fifty percent of VCs probably add negative value Right now.

00:07:08: ouch Yeah He says gross dollar retention is the only true north star.

00:07:13: It sounds like the industry is waking up from a day trading bender and realizing they have to actually be value investors again.

00:07:19: That's exactly what it is,

00:07:20: And you know Scott Stanford had data on this vintage year effect.

00:07:24: if You try to time the market your returns drop to like four point one percent But If you stay consistently invested through The cycles it yields twenty point six percent.

00:07:33: You win by staying on the water.

00:07:35: You really do, but to actually execute.

00:07:38: that returned fundamentals.

00:07:40: The internal mechanics of VC firms are totally changing which is our final theme.

00:07:45: professionalizing the deal process and infrastructure.

00:07:48: Oh yeah a deoresi had A great point On this.

00:07:51: the generalist VC fund Is basically going extinct?

00:07:54: Totally in twenty-twenty one In five new funds was a generalist.

00:07:58: today it's one in twenty.

00:07:59: The era of the specialist is absolutely here.

00:08:02: It has to be.

00:08:03: and internally, you know just sourcing a deal isn't enough anymore.

00:08:07: Nicole de Tomaso pointed out that junior VCs now have to perfectly package information

00:08:12: right because they're pitching To their own partners

00:08:13: exactly partners who are traumatized by the last few years And our starting there evaluation from absolute zero.

00:08:19: Yeah Zoujiang echoed that too complex financial models are out.

00:08:23: They're being replaced by these super simple brutal reality checks like does the idea work in the real world?

00:08:30: And will customers actually pay for it today.

00:08:32: Right, not in five years but today.

00:08:34: and this professionalization is hitting the back office too.

00:08:38: Maria Mullendorf pointed out that if a VC isn't using top tier end-to-end Back Office tech The partners just ended up becoming project managers.

00:08:45: Yeah managing their own shadow books instead of investing

00:08:48: Exactly!

00:08:49: It's massive operational shift.

00:08:52: So we've talked about extreme capital concentration

00:08:55: A.I.'s

00:08:56: massive dominance and this painful return to fundamentals, but here's a final thought for you to chew on as you navigate this.

00:09:03: Let's hear it.

00:09:04: As you and Lee noted AI agents are allowing founders to build unicorns with tiny-tiny teams.

00:09:10: Now since the entire venture capital business model is predicated on owning a percentage of massive capital requirements Right What happens to the VC industry when the world's best companies simply don't need one hundred million dollar mega rounds?

00:09:22: To scale?

00:09:23: Wow that is definitely something to think about.

00:09:26: If you enjoyed this episode, new episodes drop every two weeks.

00:09:29: also check out our other editions on private equity M&A and strategy in consulting.

00:09:34: thank you so much for joining us.