This seems to be the week of manifestos... On Monday I published my 84 slide take on how to understand what is going on in VC, where the real opportunities are, and what to avoid -- let's call it a 'techno-realist manifesto' ;)
The deck was pretty well received, and pretty widely circulated (flattering) ... so I figured I would forward along to my address book in case you didn't see it and it is of interest.
You can read it here
Some of the Key Points on Where We Are:
- The ‘shutdown’ of the VC factory line & death of the ‘factory farmed’ unicorn narrative that dominated silicon valley for the last 10-15 years. In particular what matters is understanding why this pipeline has stopped and why it is extremely unlikely to restart. The public market wants organic, pesticide free, au natural
- The mirage of AI and LLM startup investing fueled by magical thinking — make no mistake it is great great and impactful technology - but tech that is fundamentally an extending innovation rather than a disruptive one for incumbents.
- The awkward ‘crowd’ into seed investing by multi-stage firms (and even just late-stage firms) as they look for where the ‘can’ deploy capital given the factory ‘shutdown’ & based on the incentives of all the people they hired to ‘write checks’ to build a track record & get ahead.
- The post-pandemic fundamental cultural change impacting startups Economic randomization, personal reprioritization, and the search for self reliance and security are all dramatically shifting where talent goes and what it wants.
What to Do As A Seed Investor:
- Stay Away From the Seed Equity ‘Killing Fields’ of .AI & companies and heavily capital dependent businesses. These are the two hallmarks of disaster for early stage capital in this new environment.
- Prioritize Capital Efficiency Over Scalability of Investment ‘Opportunity’ Seed investors should focus on places where dollars are scarce and valuable to companies, they need not be concerned with which companies can ‘scale’ their dollar demand like late-stage funds. Spending money to create the opportunity to spend more money is seed-inefficient & businesses don’t need to ‘choose’ between early discipline and ultimate scale.
- Prioritize Financial Optionality for Investments & As a Fund You can’t trust the next round will be there when you need it. You can’t trust the public market will be there when you want to exit. Companies can’t rely on the old pattern of building for the next ‘round’ vs. building companies and being opportunistic when capital exists. Funds need to actively develop liquidity options vs. just patiently waiting for an exit to the public market or an acquirer (as PE firms learned a generation ago)
- Exercise Patience and Discipline & Work With Partners Who Do As Well** You need to work only with founders who love what they do and embrace the marathon. You need LPs that trust you over the long term.
And Where to Invest
- Small Business ‘Platforms’ - Revenge of Existing Mainstreet It is easy to forget that an enormous percent of the US economy is made up of small businesses, and with some noted ‘marketplace’ exceptions – platforms for small businesses are under-invested in and under-appreciated.
- Businesses in a ‘Box’ / Franchises - Create New Entrepreneurs Capital light opportunities that allow them to own and operate small businesses. Don’t take employees and make them 1099, turn them into owners who are building wealth in equity and can earn $500K+.
- Sneaky ‘Not-So-Lifestyle’ Businesses - The Real Future of SaaS / Software Entrepreneurship The economy is larger than you think. There are many companies where the ‘TAM’ might look ‘small’... but it is plenty big to generate single-billion dollar outcomes very capital-efficiently.
- Creators / Communities - The Best Under-funded Entrepreneurs There will be many many more self-made billionaire creators in vertical niches that have built trust and relationship with specific deep fanatical audiences. Financing them to build faster better communities and products is great white-space.
- What of Crypto? Crypto remains deeply interesting seed area, because it is one of the only areas where you can imagine a ‘next great platform’ which is seriously disruptive to incumbents. While disruption is unlikely in this era, it is important to stay open to any space which can generate $100B disruption.
The TLDR?
$1B Seed Backed ‘Small businesses’ FTW: It has never been easier for super small lean teams to build serious businesses with extreme capital efficiency and getting profitable early. There will be more software and community driven ‘billionaire’ founders of tightly held companies in the coming years than ever before & seed investors are ideally positioned to provide the single ‘shot’ of high risk capital for liftoff and do very very well backing these shots.
$10B Factory-Farmed Unicorns & The The Multi-Stage Firms Designed to Build Them Are F*ed: The 10B manufactured startup where multi-stage ‘Asset Managers’ charging VC carry could buy up and predictably manufacturer of the public markets is a broken thesis from the last decade. This goes away along with all the funds trying to profit off this model in a low interest rate phenomenon, with the possible exception of regulatory capture based industries (government contracting, etc)
$100B Platform Wins: were never manufactured… and never can be. This period is very very unlikely to yield platforms that look like this but you have to keep your mind open for where they ‘can’ happen (crypto, etc.) … probably NOT AI.
- hope you enjoy!