Best of LinkedIn: Venture Capital CW 11/ 12

00:00:00:

00:00:22: Right, so imagine locking your money in a bank vault.

00:00:25: for ten years, and you finally open it a full decade later.

00:00:28: And you find exactly what you put in like.

00:00:30: not a single penny more?

00:00:32: That's

00:00:32: yeah that's painful

00:00:33: It is but that Is the brutal unforgiving reality right now For A massive portion of venture capital funds.

00:00:40: I mean The old magic of VC.

00:00:43: You know that gut instinct talent scout spotting a unicorn In the wild thats basically dead.

00:00:49: Today we're essentially looking at the

00:00:53: autopsy Because if you're listening to this deep dive, whether your an M&A consultant or sitting in private equity working at a VC fund.

00:01:02: Or even building a startup yourself You really need understand the structural earthquake happening beneath your feet right now.

00:01:09: Absolutely.

00:01:10: We've combed through most critical insights shared across LinkedIn over past two weeks and The industry has fundamentally shifted.

00:01:17: They have gone from being art critics judging beautiful painting.

00:01:22: Structural engineers stress testing a bridge.

00:01:25: Yeah, that's a great way to put it.

00:01:26: They don't care how pretty the vision is anymore

00:01:28: right.

00:01:28: they only care at what exact load bearing weight your unit economics collapse.

00:01:32: Exactly so.

00:01:34: today we're gonna break down How this structural squeeze is completely rewriting?

00:01:37: The rules of the game will explore how fundraising has morphed from you know selling A visionary narrative into this demand for ruthless operational precision.

00:01:46: From there, we'll look at the frankly wild new mechanics of deal flow and how AI is just overhauling due diligence.

00:01:53: And then finally will examine why the traditional VC fund model itself is cracking under immense macroeconomic pressure?

00:02:00: Okay what's unpacked?

00:02:00: this?

00:02:01: because raising capital right now it completely unrecognizable from even a few years ago.

00:02:06: Oh total!

00:02:06: You can't walk into room on Sand Hill Road with napkin sketch in a bunch of charisma anymore.

00:02:11: There's brilliant insight from million Eric Ridkowski that really grounds this new reality.

00:02:17: He warns founders that venture operations, and by

00:02:30: which is a massive paradigm shift.

00:02:32: It really

00:02:32: is

00:02:33: founders used to treat that as you know later stage administrative paperwork like oh i'll just hand that off to a lawyer when we reach our series b

00:02:39: exactly.

00:02:40: but redkowski points out that today messy cap tables with too many small uncoordinated stakeholders or and this is a big one verbal equity promises that aren't legally documented those are absolute immediate deal kills.

00:02:55: Oh

00:02:56: for sure!

00:02:56: I mean think about it from the perspective of an M&A advisor or a late-stage investor.

00:03:00: listening to this, if they look at a target's cap table and see verbal equity giving to a cousin three years ago...

00:03:07: That is a nightmare.

00:03:08: It IS A lawsuit waiting to happen.

00:03:10: The legal diligence to clean that up costs more than initial investment.

00:03:14: Great ideas don't fail in market.

00:03:16: Bad legal structures do

00:03:18: And the underlying reason this structural perfection matters more than ever is that VCs today are actively looking for reasons to say no.

00:03:25: Yeah, they're hunting for red flags

00:03:27: exactly.

00:03:27: it's fiercely a buyer's market.

00:03:29: Jorian Hoover should have really fascinating post-mortem of a startup he was advising.

00:03:34: so this company had five hundred thousand dollars in annual recurring revenue.

00:03:37: okay

00:03:37: half a million ARR.

00:03:39: very solid.

00:03:39: and the founders were Stanford MBAs.

00:03:42: Wow!

00:03:43: So they tick all the boxes

00:03:44: Right.

00:03:45: By every classic early-stage checklist, they were a guaranteed slam dunk.

00:03:50: and yet VCs

00:03:52: completely ignored them!

00:03:53: I actually read that post A Stanford team with half a million in ARR.

00:03:57: getting ghosted is just staggering.

00:04:01: So what was the fetal flaw?

00:04:02: Well Hoover dug into the feedback And realized the pitch failed because it was too generic.

00:04:08: It was vanilla.

00:04:09: It lacked, as he put it, swagger.

00:04:12: but more critically the startup was operating in a specific niche where venture funds had been heavily burned and previous market cycles

00:04:19: So investors have PTSD Exactly.

00:04:21: And founders came in pitching this generic growth story completely failed to address the specific historical risks of their sector.

00:04:30: They didn't show the investors how they had structurally engineered a moat against the exact things that killed The last five companies in their space.

00:04:36: Yeah,

00:04:37: so they basically gave investors an easy excuse to hit delete and an inbox That is just overflowing with other pitches

00:04:43: right?

00:04:44: And here's where it gets really interesting because listening to that you know You have to ask yourself Do founders even need to subject themselves to this gauntlet anymore?

00:04:51: That Is the billion dollar question.

00:04:53: I keep thinking about this analogy building a startup Used to be like building a massive custom house from scratch.

00:05:00: You absolutely needed a massive commercial loan To hire the architects, the specialized builders The plumbers Right.

00:05:07: But now with AI It's like using ultra high-end prefab materials.

00:05:12: One person can operate the crane.

00:05:14: you Can build whole thing With fraction of labor and capital

00:05:17: Which perfectly aligns with Pradeeparazzi concept Of solo unicorn.

00:05:21: Yes.

00:05:21: He points out that we're entering an era where companies are reaching massive market dominating revenue with zero venture capital funding and headcounts of fewer than fifty people.

00:05:32: I mean the minimum viable team required to build a billion dollar.

00:05:34: business is just in free fall right now

00:05:36: And Itamar Novik echoed this exact sentiment.

00:05:39: His advice for twenty-twenty six Is that founders should only raise capital if it will fundamentally drastically alter their trajectory.

00:05:46: Yeah, Only If Its A True Accelerate.

00:05:48: Right because AI is creating a whole new generation of what he calls seedstrap companies.

00:05:53: I mean if you have a marketing team, one who's using AI leverage to do the work for a ten person agency You can reach meaningful revenue completely bootstrapped.

00:06:03: Raising venture capital shouldn't be treated as default milestone success anymore.

00:06:07: It's an expensive tool that only picks up if absolutely has.

00:06:11: That's a critical psychological shift.

00:06:14: But for those who do look at the math and decide they genuinely need external capital to scale, The takeaway is that success is purely systematic.

00:06:24: Diana C pointed this out beautifully.

00:06:27: She noted that fundraising in this climate isn't about luck And it's not even about having the most beautifully designed pitch deck.

00:06:33: It's about running a ruthless B-to-B sales system.

00:06:36: A pipeline

00:06:37: management?

00:06:37: Exactly!

00:06:38: It's pipeline management, you have to build a weekly pipeline.

00:06:41: You have to track every single conversation Every email open Every next step in CRM and she highlighted really harsh reality checks.

00:06:49: Usually only come after two to four persistent structured follow

00:06:53: ups.

00:06:53: Wow Two to Four.

00:06:54: Yeah If a founder just talks with few investors waits politely for replies and stops pushing while their pipeline dies of starvation.

00:07:03: It is a sales process, plain and

00:07:05: simple.".

00:07:06: So if founders are being forced into this hyper-disciplined metric obsessed survival mode what happens to the investors sitting across the table?

00:07:14: because they can't just be vibes based talent scouts anymore either?

00:07:17: They're grounding in these optimized pitches... They

00:07:19: absolutely are!

00:07:20: And the math of venture capital on the deployment side Demitro Goley highlighted the sheer volume reality of deal sourcing today.

00:07:31: Out of one hundred reviewed deals, only an average of one makes it to an actual investment.

00:07:36: One out of a hundred.

00:07:37: that is a one percent conversion rate at the top of the funnel.

00:07:39: It's

00:07:40: wild.

00:07:40: And because that funnel was so impossibly tight West and Jen noted something really crucial about where those deals actually come from.

00:07:47: Seventy percent of VC deals right now are coming from warm intros.

00:07:50: Yep Not cold.

00:07:51: email outreach not inbound website applications.

00:07:55: warm trusted network introductions.

00:07:57: Which completely changes the day-to-day job of a venture capitalist, I mean to get access.

00:08:05: Investors can't just sit in an office waiting for emails.

00:08:09: They have to show up locally and be highly useful long before a founder actually needs their money, they have to be the builder communities hosting dinners contributing to networks helping founders hire talent months or even years in advance.

00:08:21: But let's say that do all of it right?

00:08:23: Do networking get warm intro find start-up.

00:08:26: what happens then?

00:08:27: because this is where the actual evaluation mechanics are completely changing.

00:08:31: What's fascinating here, The heavy analytical lifting of evaluation is basically being outsourced.

00:08:43: To AI?

00:08:44: Exactly!

00:08:44: Peter Dimov shared a framework that's actively replacing days traditional analysts-driven fact gathering with eleven structured investor grade AI pumps.

00:08:55: Hold on, you're telling me they are outsourcing financial diligence to AI because I've seen language models hallucinate basic math or invent fake citations.

00:09:05: How can a VC trust an AI to validate business model when millions of dollars are on the line?

00:09:10: It's great pushback.

00:09:12: The keys that they aren't outsourcing final judgment, they're automating baseline data synthesis.

00:09:17: Okay!

00:09:18: That makes more sense.

00:09:19: Right.

00:09:20: Dimovs prompts are explicitly engineered with hallucination safeguards and strict formatting rules.

00:09:25: They force the AI execute specific methodologies like calculating TAM which is total addressable market alongside SAM the serviceable available market and SOM, The Serviceable Obtainable Market.

00:09:37: Right!

00:09:37: The standard VC sizing metrics

00:09:39: Exactly And AI scores competitive motes and builds unit economic models based on sparse fragmented data rooms.

00:09:46: It synthesizes all this raw data into a coherent baseline so that human VC can focus entirely on stress testing the thesis... ...and evaluating founders' resilience.

00:09:55: Okay I see efficiency there But if AI is doing all of the market-sizing building financial model logic running the competitive analysis.

00:10:03: Doesn't the role of a junior VC just become a glorified prompt engineer?

00:10:08: Well, the culture is shifting dramatically.

00:10:10: Nicole de Tomaso shared a wild insight about VC recruiting.

00:10:13: right now in job interviews for venture capital roles candidates are literally being given two to five days to

00:10:23: get a job as an investor.

00:10:24: Yes,

00:10:25: To Get A Job As An Investor and they're given almost no instructions.

00:10:29: She shared examples where one candidate had to independently build a custom portfolio dashboard using AI tools And another had to build an autonomous AI agent that scraped and summarized industry research.

00:10:41: That is insane.

00:10:42: The baseline requirement to enter VC has officially moved from simply understanding technology or bringing clean Excel model into the interview to actually shipping functional code with it.

00:10:51: That is unbelievable.

00:10:52: Ten years ago, you just needed to wear a nice vest bring coffee and know how to run a discounted cash flow model.

00:10:57: now You have to be a literal product builder to get in the door.

00:11:00: Yeah

00:11:01: And this isn't Just happening at The junior analyst level either.

00:11:04: Adio Reci talked about the rise of general partners doing This what he calls agentic VCs

00:11:09: right?

00:11:10: The fund managers themselves?

00:11:11: exactly these are Fund Managers using secure open claw ready AI agents running In the background all day And just for context, when we say open claw ready.

00:11:21: We're talking about Open Source AI models that are configured to operate securely within a firm's private data walls

00:11:28: crucial point.

00:11:29: so they aren't leaking highly confidential startup financials To the public web.

00:11:35: right exactly So Ressie explained.

00:11:37: one of these secure agents will automatically discover limited partners The people who invest in the VC fund That perfectly match the funds investment thesis.

00:11:46: Meanwhile, another agent constantly scans the web app stores and press releases to automatically pull weekly portfolio updates.

00:11:52: Wow!

00:11:53: Yeah The GP never even has to chase a founder for an email update...the AI builds their report autonomously.

00:11:59: If we connect this to bigger picture This rise in extreme AI driven efficiency on both the founder side and the investor's side is colliding head-on with a very harsh macroeconomic reality.

00:12:12: And that collision, it putting immense foundational pressure on traditional VC fund model itself.

00:12:19: This where numbers get really sobering.

00:12:22: Ahmed Carrey made this brilliant observation about a barbell economy forming Inventure Capital.

00:12:26: Oh I love this analogy.

00:12:27: That

00:12:27: so good!

00:12:28: Think of a weightlifters barbell right?

00:12:30: All the weight is concentrated on two extreme ends and middle is completely thin.

00:12:35: On one end of the VC barbell, you have mega funds firms with five billion dollars plus in assets under management.

00:12:42: they win purely on scale.

00:12:43: They can write a fifty to three hundred million dollar check To dominate a late stage AI company Right.

00:12:48: And on exact opposite end You have micro VCs Managing between five and hundred million dollars.

00:12:54: They thrive on pure speed.

00:12:56: They can write a tiny early check to get access to brilliant founder before market consensus even forms.

00:13:02: But

00:13:02: the middle of that barbell is hollowing out

00:13:04: Completely hollowed-out.

00:13:06: The mid-tier funds, the ones managing a hundred million to maybe one and half billion dollars are being structurally crushed.

00:13:13: They're too big to effectively move the needle with tiny experimental early stage checks.

00:13:18: but they're way too small to defend their ownership percentages in those hyper competitive late stage rounds against the mega funds that are stuck in no man's land.

00:13:27: And we really have to ask why this squeeze is happening right now?

00:13:31: The root cause comes back to the limited partners, the pension funds.

00:13:35: The endowments and family offices who actually supply capital for these VC funds are incredibly frustrated.

00:13:42: Jonas Anker reported some telling data over half of all LP portfolios underperformed their benchmarks in past twelve months

00:13:50: Over half?

00:13:52: Yes,

00:13:53: and it's because the legendary power law of venture capital is becoming more extreme than ever.

00:13:58: Historically we knew a few winners paid for The Losers.

00:14:00: but today nearly ninety percent all value created in Venture Capital comes from just top ten percent companies.

00:14:07: If an LPs fund manager misses that tiny microscopic slice of mega-winners their returns look incredibly average.

00:14:14: But worse then being AVERAGE those average returns are completely illiquid.

00:14:18: And that illiquidity is the massive elephant in the room!

00:14:22: We started this deep dive talking about locking your money and a vault.

00:14:25: for ten years, Peter Walker shared data showing just how agonizingly slow VC fund liquidity has become.

00:14:31: as to this only sixteen percent of venture funds from the twenty seventeen vintage have returned one X DPI.

00:14:39: let's quickly define DPI.

00:14:41: anyone outside specific VC finance bubble.

00:14:44: That's distributions to paid-in capital.

00:14:46: It means actual cold hard cash return to the investors, not just theoretical paper markups.

00:14:52: Exactly!

00:14:53: Paper valuations mean nothing if you can't buy groceries with them.

00:14:55: Only sixteen percent of those twenty seventeen funds have managed to hand back the initial money their investors gave them.

00:15:01: That's wild.

00:15:02: The wells for these older funds are bone dry.

00:15:05: Walker noted that the median hold period For a venture backed company To finally reach an exit has stretched to nearly nine or ten years.

00:15:10: today

00:15:11: This raises and important question If capital is this tightly constrained and exits are taking a full decade, how does this dramatically alter the strategic landscape for startups globally?

00:15:22: Because this isn't just a Wall Street spreadsheet problem.

00:15:25: This dictates who lives and who dies in

00:15:28: market.

00:15:28: So what does all mean?

00:15:30: let's take the geographic divide as perfect example of how it plays out.

00:15:34: if you're European startup versus US startup this capital squeeze affects your survival entirely differently.

00:15:41: Right.

00:15:41: Nikol Shlapsna had a great post where he explicitly tells European founders, the second you are ready for a series A You need to get on a plane and go pitch US funds.

00:15:51: Why Series A specifically?

00:15:53: Like what breaks at that stage in Europe?

00:15:56: It's this sheer size of the check.

00:15:57: The U.S.

00:15:58: deploys dramatically larger capital at that state.

00:16:01: A Series B round in the u.s has a baseline acceptation around fifty million dollars.

00:16:05: Yeah In Europe you're popping champagne if you manage to close twenty million.

00:16:08: It is a canyon, not a gap.

00:16:11: And the mechanics of why that canyon exists come right back to the LPs we just talked about.

00:16:15: European VC funds are heavily backed by conservative pension funds.

00:16:20: Pension funds have to pay out retirees every month.

00:16:23: they panic at the site of massive capital drawdowns and risk American VC funds on the other hand or often backed by massive university endowments like Yale or Harvard, who are literally built to endure decades of volatility.

00:16:35: That structural difference in the LP base dictates the aggressiveness.

00:16:45: That is a

00:17:01: brutal reality check for the European tech ecosystem.

00:17:04: And it all ties directly back to that fundamental desperate need for liquidity because traditional IPOs, initial public offerings are basically stalled out right now waiting around for additional exit as luxury almost no one can afford

00:17:18: Right which makes alternative liquidity mechanisms absolutely critical.

00:17:23: Samir Khaji pointed out that secondary market volume where investors buy and sell shares of private companies before they go public just topped sixty billion dollars.

00:17:32: Sixty billion?

00:17:33: Yeah, in fact for the twelve months preceding mid-twenty twenty five secondary market volume actually exceeded traditional IPO volume

00:17:41: which makes perfect mathematical sense because growth rates naturally slow down as a company matures into later years.

00:17:47: holding a company for fifteen years completely destroys the internal rate of return to IRR.

00:17:52: even if the final paper outcome is a massive billions of dollars valuation, holding it that long cuts the IRR in half compared to exiting at year eight.

00:18:00: And LPs judge fund managers on that IRR.

00:18:04: Which is why Kaji notes that having structured liquidity plans knowing exactly what valuation metric triggers a partial sale on the secondary market Is now a total must-have.

00:18:15: Oh, absolutely

00:18:16: If you're an emerging fund manager pitching in LP today without a Secondary Market strategy You will be laughed out of the room.

00:18:22: it's no longer and afterthought.

00:18:23: It is the core of the investment strategy.

00:18:26: The venture capital model is being violently forced to grow up.

00:18:29: It has to operate with the same rigorous, unsentimental financial mechanics as mature private

00:18:35: equity.".

00:18:51: And that actually brings us to a final incredibly provocative thought for you to mull over.

00:18:55: We've talked extensively about the squeeze on The Funds, the stalled IPOs and companies taking a decade to exit.

00:19:01: Well Simon Blakey shared an amazing insight.

00:19:03: what happens in the shadows of this broken system?

00:19:07: He noted there are hundreds of VC-backed companies right now That're too fully developed and functional.

00:19:12: just shut down.

00:19:14: But their hyper growth has completely stalled.

00:19:16: Okay.

00:19:17: Because they aren't going to return a hundred X the money, The VC funds just disengage.

00:19:22: Wait!

00:19:22: They just walk away.

00:19:23: Why wouldn't a VC try at least double their money on a stalled company?

00:19:27: because of the fund math If A five-hundred million dollar megaphone wrote Five Million Dollar Early Check Turning that five million into ten million over eight years doesn't move the needle on their massive fund return expectations.

00:19:40: Oh, I see it's a rounding error.

00:19:41: It's not worth there board seat time.

00:19:43: so they just leave the company as a walking zombie.

00:19:45: Wow

00:19:45: They're just abandon them

00:19:47: exactly.

00:19:47: but here is The Brilliant Twist.

00:19:50: Private angels and saddie operators are now quietly stepping in and executing distressed recapitalizations of these stalled startups at near zero valuations.

00:20:00: oh wow Because the VC has emotionally and financially checked out, these angels buy The Company for pennies.

00:20:07: They legally clean up the bloated cap table they carve-out a brand new massive equity option pool to re-incentivize the original exhausted founder And pivot their business on profitability instead of hyper growth.

00:20:21: That is brilliant

00:20:23: Right.

00:20:24: Blakey has seen these angels walk away with seven-figure cash and hand outcomes from rescuing these businesses, it is a quiet highly lucrative secondary market forming entirely around the wreckage of broken VC deals.

00:20:37: So as you look at The Venture Landscape today You really have to wonder Is the smartest money right now actually feeding on the scraps left behind by traditional venture

00:20:45: model?

00:20:45: That's an amazing thought.

00:20:47: The structural X-ray machine didn't just expose the fatal flaws in the venture capital system, it showed the smartest opportunists exactly where to make.