Latest / The Learning Corner by Precursor / Episode #68: The 2028 AI Crisis Memo, Rethinking Series A, 2021 Founders Hitting Reset

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Episode #68: The 2028 AI Crisis Memo, Rethinking Series A, 2021 Founders Hitting Reset · The Learning Corner by Precursor

• 0:00
  That's what I worry that we're losing in venture.
• 0:02
  It's either you're instantly 10,000,000 in ARR two weeks in or, like, nobody cares.
• 0:07
  Well, not every good business follows that trajectory or looks that way.
• 0:11
  And this is sort of the cold water I've had to explain to some of our founders in our
• 0:14
  portfolio.
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  In order for, like, substance to matter, you have to have people who are looking for and
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  investing in substance.
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  Otherwise, you're just yelling into the wind.
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  It's the week of February 23.
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  Welcome to the Learning Corner, a Precursor Ventures podcast.
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  Welcome to the Learning Corner by Precursor.
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  I'm Mia Farnam, and I'm joined by our GP and managing partner, Charles Hudson, where we will
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  be talking through the articles and Goodreads that caught our team's attention over the past
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  week.
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  This week's first piece is the much circulated Sattrini research piece, the twenty twenty
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  eight global intelligence crisis, written as a macro memo for the future, styled as a
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  postmortem on how the AI productivity boom tipped into something much darker, a 38%
• 1:01
  drawdown in the S and P, unemployment at 10.2%, and a consumer economy quietly hollowing out.
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  The argument isn't that AI failed.
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  It's that AI worked exactly as advertised, and that's the problem.
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  The piece traces how agentic coding collapses the SaaS market.
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  AI agents dismantle the entire intermediation layer of this economy, and white collar job
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  losses compound in a feedback loop with no natural break.
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  It also digs into how PE backed software LBOs and life insurance companies became a dainsy
• 1:32
  chain of correlated bets on white collar productivity growth and what happens when those
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  bets go bad.
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  Last week, we talked about something big is happening, which rippled through group chats
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  and LinkedIn, and the Sattrini 2028 memo seemed to have percolated all the way out to public
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  markets with notable software sell off reflected in stock prices.
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  Last week, I know you asked yourself, why this one?
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  Speaking to why this article was picked over others and got the reaction that it did.
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  Do you have the same reaction here?
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  I read it and I'm always like, these posts are fun to read because they're like thought
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  experiments.
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  I've also learned there's very little I read in there where I'm like, I haven't heard other
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  people make these comments.
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  And this is like the second time in two or three weeks where something has blown up.
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  And I was like, oh, that's right.
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  You live in the world of private markets where you read a bunch of people who've been talking
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  about and thinking about these things for a while.
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  And I have no idea what makes any given post breakthrough and stand out, but it does.
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  I read it and there were certain parts of it that I was like, I'm not entirely sure I
• 2:34
  understand.
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  They they don't really present like an economic model for how this all works.
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  It's more of a thought experiment.
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  The two things I read in it that I thought were interesting.
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  One is this whole notion that no one's gonna buy software anymore.
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  I think a lot of you are like, oh, people are gonna vibe code stuff.
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  Like, there are other alternative universes where software is less valuable.
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  And I don't know.
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  I told our LPs this a few years ago that, like, I think AI is gonna be very deflationary for
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  software, and they looked at me like a crazy person.
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  I think it's far less likely that you're gonna vibe code an HRIS system.
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  It's a lot to maintain.
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  And I think the thing people seem to forget is if humans are gonna vibe code all these things,
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  everybody's gonna have to recreate the same feature themselves and maintain this stuff and
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  do patches and security.
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  And the history of software is it's more fun to build prototypes than it is to maintain
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  production software, but that's like the human world.
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  What I could imagine is something that looks more like Moldbook where you have a bunch of
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  agents who get together and say, we're going to build and maintain an HR system, and we're
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  gonna build it together as autonomous agents.
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  And as our human overlords or underlords as the case may be encounter problems, we will
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  collaboratively.
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  You know what that sounds like?
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  That sounds like open source software.
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  The only difference being the contributors are agents and not human beings.
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  And if you think about some of the things that have plagued open source software, it's that
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  people don't generally get paid to maintain it, and they have jobs.
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  And unless the project achieves escape velocity or has a really motivated project creator, they
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  don't go anywhere, but the agents don't need jobs.
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  So I can imagine a world where there is more software that's commonly used.
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  It's supported by an army of agents, and those agents are using some platform that WolfBook or
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  some agent language where they are doing the development and advancement of features.
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  I can envision that world.
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  I don't think that world happens in 2028.
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  I think the piece also is your classic.
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  We won't need McKinsey.
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  We won't need all we won't need DoorDash.
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  I was like, you know, coordination is part of what intermediaries provide.
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  And I read the DoorDash piece, I guess it could be, like, agents finding work for people, but
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  this seems like decentralization for decentralization's sake.
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  And I kept reading it, and I was like, the thing that bothered me about the piece that I
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  couldn't put my finger on it till this morning it assumes that there's no system level
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  reactions as these things are happening.
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  It's just like these things happen, and people just allow it to happen, and they don't
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  intervene.
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  And I don't think that's what's gonna happen.
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  I mean, we're already seeing people have pushed back as data centers kind of take over in
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  different rural areas.
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  People get a little bit more personally attached to kind of where things are headed.
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  I'm gonna budge the author's name, but run another piece that was a response to the
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  article.
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  And he said the response of the software sell off, people are kind of forgetting that a lot
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  of these software tools in stronger language stink to use day to day.
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  Yeah.
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  So no surprise that there is pushback.
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  The market is reflecting so.
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  A portion obviously to do with different launches of products coming out from
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  foundational LLMs, but maybe more to do with the fact that people are always wanting more
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  improvements in the multimillion dollar contracts that they're paying for.
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  And for the first time, maybe those folks are looking at other options.
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  But we talked about this two podcasts ago, the idea that everyone moves over immediately.
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  Massive Fortune 500 companies move over immediately and abandon these software
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  companies that have serviced them for the last few decades across their time organization
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  overnight.
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  It just feels a little bit reaching.
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  Noah Smith wrote a really good piece, I thought, about the public's reaction to the
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  piece on his sub stack, no opinion, noting that it's normal for stocks to dip when a new
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  product launches under Yep.
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  A foundational LM.
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  But the fact that this was, one, like, on a sub stack, and two, just a scenario, and still made
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  so many headlines was what surprised him.
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  He also, to your point about we've seen this before.
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  He draws parallel to 2008 where different looking stakeholders sold each other assets
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  that simply weren't worth what they were priced, and the market collapsed under the
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  volume.
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  So any thoughts on that comparison from your perspective?
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  Every time I talk to somebody who's in credit, the only thing I wanna talk to them is about is
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  data centers.
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  Like, the only thing I wanna talk to them about.
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  It's also the only thing they're investing in, so it's actually a pretty easy conversation.
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  And I think if there were a canary in the coal mine, I do think it's I think we mentioned this
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  before.
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  When these things blow up, it's usually on the debt and credit side of the ledger.
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  It's not usually on the equity side.
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  We don't know the residual value of a data center, particularly on the current trajectory
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  because most data centers are power constrained.
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  And so right now, two things.
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  One, there appears to be relatively little it's like this weird conundrum.
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  We don't have enough data center compute to power everything that people wanna build.
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  But at the same time, it's not clear that the ROI on building all of these data centers I was
• 7:00
  like, it's gonna be like fiber.
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  We eventually needed it.
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  I'm like, well, we put it in the ground.
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  It wasn't a big eyesore.
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  It wasn't power constrained, and we lit it up as we needed it.
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  Data centers are are a little different.
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  I could tell you a world if chips remain power hungry where some of these old data centers
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  simply just don't have enough power to be relevant.
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  And I think this is the first I think also, as you mentioned, the social political piece
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  around this is the first tech wave in my life where people were not unambiguously
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  enthusiastic about it.
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  And I don't think people are wrong to be hesitant in the, like, what does this mean for
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  me bucket.
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  And I do think AI is gonna reshape some political alliances in terms of, like, who's
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  for it and who's against it.
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  So I don't know.
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  I I I think a lot about all of the credit that's are being placed mostly on data centers,
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  and that scares me a little bit.
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  And, again, similar to what Will talked about in full shaped objects last week that we
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  featured, the piece did exactly what it was designed to do, which was to get everyone
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  talking about where do I fall in this chain.
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  The answer was everyone is impacted and it eventually will come for you.
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  I mean, they walked through kind of like the drawdown on consumer spend.
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  Eventually, like, no one will have enough money to be able to buy anything.
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  So even if you sell a CPG product, that no one will want.
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  Or a luxury good that's made by hand, like, you will be affected as well.
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  Again, if I live outside of this bubble, which you and I live in, which is just venture and
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  tech news all the time, you would know that there's been hundreds of these pieces published
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  prior, and a lot of them kind of touch on similar threads.
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  But if this was the first time that I'd read it, but it reminded me of, like, Tim Urban's
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  Wait But Why, that he did in, like, gosh, the 2015 or something, and everyone rediscovered
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  it.
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  Similar reaction.
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  Everyone running around like crazy on Reddit.
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  I don't think the full Citrini scenario is where things end up.
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  But specific points along that plane do feel entirely possible.
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  But as early stage investors actively funding in technology that could accelerate parts of
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  this, do we have an obligation to think about what we fund and what we don't?
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  I know that there are specific buckets that this definitely impacts that we we don't place
• 8:57
  enough capital in to move the needle as heavily as in credit, but did you have any thoughts on
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  that?
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  I talk to our LPs a lot.
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  My view is investing is like voting for a version of the world that you wanna see exist.
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  So every time we make an investment, I always ask myself, do I want this version of the world
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  to exist?
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  And there are some very relevant, technology areas.
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  I'm far less interested in prediction markets than a lot of my friends.
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  I think it's mostly speculation and gambling, and does it sometimes reveal interesting
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  information?
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  Yes.
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  I'm just not interested in that version of the world, and I I don't say that to judge people
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  who are.
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  I'm just like, that's not something I want to usher in, so I'm not gonna put my money behind
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  it, and it doesn't matter, to your point.
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  There's plenty of people who do wanna see that version of the world exist, and I'll let them
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  fund that stuff.
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  But I do think you can't have it both ways.
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  You can't say, I don't care about the social impact, or it's not important.
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  And then when it happens, be like, I'm shocked.
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  I'm shocked that there's gambling.
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  You can't have it both ways.
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  So I I just find it's easier to just say, look.
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  You're putting people in business to achieve their vision for the future.
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  Just make sure that you're interested in the version of the future world that they're
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  describing.
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  Well, for our next topic, we're highlighting a great piece from Strictly DC download where
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  Connie Loisis sat down with Stacey Brown Philpott, former CEO of TaskRabbit and the
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  founder of our friends over at CherryRock Capital.
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  A firm laser focused on series a investing, CherryRock is deliberately focused on series a,
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  as Sage Stacy believes is full of opportunity with her team's edge being the ability to find
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  great companies early and across multiple coasts and position themselves as the obvious
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  partner before the deal gets super competitive.
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  Her approach to winning in that competitive landscape is finding companies early and
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  positioning CherryRock to be the obvious partner by the time the company is showing real
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  signs of growth.
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  She is focused on quality revenue over ARR as the signal, specifically long term contracts
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  and deep enterprise relationships that point to product market fit at scale.
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  The episode also touches on the bifurcation happening across venture as fund sizes grow
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  with lots of activity at seed and at the mega rounds, but a real scarcity of co investors and
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  follow on capital at series a and b.
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  Stacy's view is quite simple.
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  It's great businesses will get funded.
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  She also shares a measured take on workforce displacement, noting that most founders she
• 11:05
  speaks with are focused on workforce enhancement and that she believes we are still
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  years away from true displacement being a real concern.
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  Stacy's framing of quality revenue over ARR as the signal for series a traction is something
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  we've talked a lot about before when we've talked about, like, experimental ARR.
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  Seems like
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  Yep.
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  Years ago when we used that.
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  What can we do to position our founders to lead with real metrics even when it can be tempting
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  to lean on something a bit more glamorous but fleeting?
• 11:34
  I find myself having conversations with our founders all the time of, like, where can we
• 11:37
  strike the balance of making sure that you're competitive enough knowing the types of more
• 11:41
  glamorous metrics that are getting tossed out there, but also being true to the true traction
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  that you have and and not over embellishing.
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  I I listened to this, and I thought about two things.
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  One is as we have this great pulling apart of venture between big firms and little firms, the
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  question is, well, what does it mean to be in the middle?
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  And I think Stacy's got some good arguments.
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  And I do think there are going to be companies that are not immediate vertical rocket ships
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  that either need more time or need more capital or need a partner who can, like, help them get
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  from a to b.
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  I think that's what I worry that we're losing in venture.
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  It's either you're instantly 10,000,000 in ARR two weeks in or nobody cares.
• 12:18
  Well, not every good business follows that trajectory or looks that way.
• 12:22
  And this is sort of the cold water I've had to explain to some of our founders in our
• 12:25
  portfolio.
• 12:26
  In order for substance to matter, you have to have people who are looking for and investing
• 12:30
  in substance.
• 12:31
  Otherwise, you're just, like, yelling into the wind.
• 12:33
  I look at our portfolio.
• 12:34
  Have a handful of companies that are compounding really nicely.
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  They're they're not growing 10 x.
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  This is real revenue.
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  These are customers who are using and paying for the product and coming back month over
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  month.
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  And I have I have no concern.
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  There are other companies that I've met where I've seen vertical growth charts, and I'm just
• 12:49
  like, are those people ever gonna come back and use this again?
• 12:52
  And we see this at the beginning of every cycle.
• 12:54
  You know, I think back to mobile, and then for a while, was downloads.
• 12:57
  Everyone's like, look at this download somewhere.
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  And then we eventually realized, you know what's more important than downloads?
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  Usage.
• 13:01
  You know what's better than monthly usage?
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  Daily usage.
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  You know what's really interesting?
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  The ratio of and eventually, we figured out what mattered.
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  And before we figured out what mattered, a lot of people blew a lot of money on things that
• 13:13
  ended up not mattering.
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  I'm certain we are doing the same thing in AI right now.
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  And we will look back in a few years and say, wow.
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  Some of that stuff was substantive and real, and some of that stuff was selling a dollar of
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  compute for 75¢.
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  And it shouldn't be shocking that if you're giving away money, people will beat a path to
• 13:30
  your door.
• 13:31
  I love the CherryRock team.
• 13:32
  I know that they do a really good job of identifying people who are kind of, like, at
• 13:36
  the inflection point and getting ahead of them before, you know, it hits the automatic series
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  a metrics, which everyone then has already flooded to the market and typically given term
• 13:44
  sheets that not everyone can compete on.
• 13:46
  But that strategy does require everyone around the investment committee table to be bought in
• 13:51
  on being okay with a little bit less traction in metrics than you'd be comfortable with.
• 13:56
  If you're like a true series a or true series b investor, I think this a lot about I was on the
• 14:01
  phone with somebody else who they are a classic series a fund, and you can tell they wanna come
• 14:06
  earlier and earlier, specifically, like, with pre seed stuff.
• 14:09
  They were asking me, like, what sort of things could be competitive for us to construct within
• 14:13
  our own fund model to make us take up a bigger space within that market?
• 14:17
  And my response was, does your leadership fully align with what pre seed looks like?
• 14:21
  Because if not, then you're just gonna end up getting into deals that aren't actually the
• 14:26
  best pre seed.
• 14:27
  They just look good for what you're trying to do.
• 14:29
  We do pre product, pre everything, and so we're very uncomfortable with that.
• 14:32
  But I know a lot of people who attempt to move early as a mechanism to get competitive end up,
• 14:36
  like, almost selecting the wrong types of deals because if You
• 14:39
  You get the worst.
• 14:40
  Yeah.
• 14:41
  So how do you I don't know.
• 14:42
  I'm curious to know what you think about that one.
• 14:43
  Talk your whole internal thinking similar strategies.
• 14:45
  I think it's funny.
• 14:46
  He seems to make fun of people for being Luddites.
• 14:49
  I think most people in venture don't want the venture business to change just as much as
• 14:52
  people in the newspaper business probably didn't want the newspaper business to go
• 14:55
  digital.
• 14:56
  And I think the most dangerous thing you can do as a fund manager is assume that the future
• 15:00
  will be like the past.
• 15:02
  And I think there was a a very important and clear role for $500,000,000 series a venture
• 15:07
  funds in a world where fundraising was sequential and where the biggest venture funds
• 15:12
  weren't actually that big.
• 15:13
  We just don't live in that world anymore.
• 15:15
  And so the question's like, if you're gonna participate not at pre seed or seed and not at
• 15:21
  scaled series a, you gotta have a reason for existing.
• 15:24
  And one reason for existing, if I were to, like, play back something I think Stacy said
• 15:28
  kind of without saying it, is there are companies that would have been series a ready
• 15:32
  three years ago based on metrics and progress that are good companies that are being
• 15:36
  overlooked because there's a set of investors that are looking for something that's in order
• 15:40
  of magnitude higher.
• 15:41
  And the mistake I see people make is what you describe, which is like, we wanna do pre seed.
• 15:45
  Someone's like, yeah.
• 15:45
  We do pre seed companies.
• 15:46
  I'm like, what are looking for?
• 15:47
  Well, companies with at least 250 k in ARR.
• 15:50
  That's what our seed portfolio looks like, not our pre seed.
• 15:53
  So you might find companies with those metrics, but they're probably not the droids you're
• 15:57
  looking for.
• 15:57
  Like, they're not gonna be the best companies.
• 15:59
  Well, our last piece this week is a LinkedIn post from Alex Paul, one half of the chain
• 16:04
  smokers and founder of MantisBC.
• 16:06
  Alex shares that over the last few weeks, he's received a handful of eerily similar emails
• 16:11
  from portfolio companies, founding teams splitting up and moving on, not because the
• 16:15
  companies failed, but because the frontier had moved.
• 16:18
  These are mostly twenty twenty one vintage companies that tried to adapt AI, some really
• 16:23
  thoughtfully and some by just bolting it on.
• 16:25
  And now the founders are staring at a brutal opportunity cost question, watching entirely
• 16:30
  new categories get created in real time with teams shipping faster than ever and ARR curves
• 16:36
  going parabolic, optimizing an older business no longer feels like the best use of their time
• 16:42
  and ambition.
• 16:43
  Alex frames it not as a failure, but as a first principles moment.
• 16:47
  Sometimes the right move is admitting you gave it a real shot.
• 16:50
  We learned a lot.
• 16:50
  And now it's time to go build the thing you actually wanna wake up.
• 16:53
  Thinking about again?
• 16:54
  Charles, how often are you seeing this type of behavior across our portfolio or with founders
• 16:59
  that you know personally?
• 17:00
  And for those conversations, how do you make the decision between encouraging the pivot or
• 17:05
  abandonment altogether or encouraging them to see their original idea for especially with the
• 17:09
  market that we exist in today.
• 17:11
  I just think as a investor, you can't make somebody keep going.
• 17:14
  So usually if someone tells me, like, I don't even wanna quit.
• 17:17
  I'm like, well, it sort of doesn't matter why unless I think they're just tired and they need
• 17:21
  a break.
• 17:22
  I'm like, okay, you've decided to quit as is your right to do so.
• 17:24
  And so I think there's something even more I don't know if probably more interesting that
• 17:29
  I've seen lately, Mia, which is I've seen brand new companies breaking up quickly, like six
• 17:33
  months in.
• 17:34
  And I've talked to a lot of them, and in many cases, the pace of AI development is such that
• 17:40
  the founding principles for the company, a new model release comes out, a new technology
• 17:45
  development happens, and these folks are instantly like, oh, the whole reason we started
• 17:50
  this company is now in peril.
• 17:52
  And the question is like, what do we do?
• 17:54
  And in many cases, there is not agreement on the answer to that question.
• 17:58
  One person's like, I think we should go left.
• 18:00
  The other person's like, I think we should go right in response to this development.
• 18:04
  I'm seeing a lot more team breakups, but it used to be that the team breakups were more
• 18:08
  interpersonal conflict or, like, significant differences in strategy.
• 18:12
  And now, I guess, what I'm seeing more of is variable perspective on how to respond to the
• 18:17
  changes in the AI ecosystem and a lack of agreement about both the optimal response and
• 18:23
  the severity of the threat of something.
• 18:25
  And in many cases, like, we just had a a brand new team that recently just announced a seed
• 18:30
  round that's maybe a nine month old company.
• 18:32
  Cofounders are parting ways, largely over disagreement in sort of what all these AI
• 18:37
  developments mean for their strategy.
• 18:39
  So that's fascinating.
• 18:40
  Alex is usually talking about this in the terms of, like, successful series a or series b
• 18:43
  companies, but we're also seeing this happen right away just with the current market.
• 18:47
  Last question here.
• 18:47
  There's something in this post about the relationship between excitement and output that
• 18:52
  I find quite interesting.
• 18:53
  Founders having fun building again actually produces perhaps meaningfully better companies.
• 18:59
  Do you believe that's true?
• 19:01
  And if so, what does it mean for you on how you evaluate founding teams going forward?
• 19:06
  I'm honestly I'm thinking about conversations that I've had with almost a lot of, like,
• 19:09
  repeat founders Yep.
• 19:10
  Who are so pumped to get back into this market and, like, build again quicker and leaner.
• 19:15
  And then sometimes when I hear of their ideas, I'm kind of surprised with what they've chosen
• 19:20
  to spend their time on.
• 19:21
  It's so funny.
• 19:22
  Yesterday, I was talking to of our portfolio founders.
• 19:24
  This is someone who I am now working with for the third time.
• 19:28
  And we were talking and he was showing me a demo.
• 19:30
  I was like, you know, I've never worried about speed and velocity with you.
• 19:34
  That's never been an issue.
• 19:35
  And he kinda laughed and he goes, we use our own product every day.
• 19:39
  I go to him and he goes, well, it's hard not to feel urgency when you're using your own product
• 19:43
  every day and you see something wrong.
• 19:45
  The desire to fix it is really strong.
• 19:47
  And he's like, I don't know how you can have the same level of urgency for a product where
• 19:53
  you don't have a connection, either to the customer or to the problem.
• 19:57
  And I was like because I was like, I wish I could teach people to be more urgent.
• 19:59
  He's like, you probably can.
• 20:00
  I'm like, I know.
• 20:01
  And he's like, well, we we simply care because we are part of the audience.
• 20:05
  And I think we talk a lot about how that can blind you as a founder.
• 20:08
  I think it can also be incredibly motivating.
• 20:10
  And so we've had a few founders where sometimes I'll ask them, like, do you even care about
• 20:14
  this problem anymore?
• 20:15
  I don't know if you're rude.
• 20:16
  And sometimes they're like, no.
• 20:17
  But, like, I signed up to help these poor tax accountants do ledger reconciliation, and I
• 20:23
  can't fake my enthusiasm anymore.
• 20:25
  And so my hope is that everybody gets to work on something that they're excited about.
• 20:29
  It doesn't have to be because it's like a glitzy, glamorous thing, but it's because it's
• 20:33
  meaningful to them.
• 20:34
  That does seem to produce better outcomes.
• 20:36
  Well, we are all out of time today.
• 20:38
  Thank you, Charles, for jumping in.
• 20:39
  I know you're traveling.
• 20:40
  Thank you to our listeners for hopping in as well.
• 20:42
  Please like and subscribe, and we'll talk with you all next week.
• 20:45
  Thank you.
• 20:45
  Bye.