Latest / Best of LinkedIn: Strategy, M&A & Investments / Best of LinkedIn: Venture Capital CW 19/ 20

Transcript

Best of LinkedIn: Venture Capital CW 19/ 20 · Best of LinkedIn: Strategy, M&A & Investments

• 0:00
  Speaker 1: Provided by Thomas Allgeier and Frennus, based on the most relevant LinkedIn posts about venture capital from CW-MXXV, Frennis supports general partners in identifying relevant limited partners across multiple sources researching connection strategies coordinating event attendance.
• 0:16
  Speaker 1: And running structured outreach campaigns that turn cold lists into scheduled conversations and committed capital.
• 0:22
  Speaker 1: you can find more info.
• 0:26
  Speaker 0: It is really great to have you with us today.
• 0:28
  Speaker 1: Yeah, thanks for joining us.
• 0:29
  Speaker 1: if you operate anywhere in like M&A private equity venture capital or consulting You already know the market is incredibly noisy right now.
• 0:37
  Speaker 0: Oh totally
• 0:38
  Speaker 1: Right.
• 0:38
  Speaker 1: so our mission today is just a cut right through that noise.
• 0:41
  Speaker 1: We've gone through the top venture capital trends seen across LinkedIn over the past couple of weeks specifically calendar Weeks nineteen and twenty And we're looking at how Capital AI and deal making are fundamentally shifting
• 0:54
  Speaker 0: yeah?
• 0:55
  Speaker 0: today, not the higher.
• 0:56
  Speaker 1: Exactly so.
• 0:58
  Speaker 1: let's just get right into where the capital is flowing because The concentration happening Right now Is well it's frankly staggering?
• 1:04
  Speaker 0: It really is.
• 1:05
  Speaker 1: I was looking at this data that Abhinav Rastogi shared about the first quarter of twenty-twenty six.
• 1:09
  Speaker 1: Get This an unreal.
• 1:11
  Speaker 1: two hundred and forty Two billion dollars flowed specifically Into AI infrastructure bets.
• 1:18
  Speaker 0: Wow two hundred And Forty Two Billion.
• 1:21
  Speaker 1: yeah That is eighty percent of all global venture funding in Q one going into basically a single sector.
• 1:28
  Speaker 1: So we're talking physical AI labs, quantum computing
• 1:32
  Speaker 0: and open AI raising at what an eight hundred fifty two billion dollar valuation exactly.
• 1:36
  Speaker 1: it's not just the heavy quarter you know It's fundamental restructuring where risk capital actually lives.
• 1:41
  Speaker 0: yeah I mean We have aggressively moved past funding those lightweight consumer chat box.
• 1:47
  Speaker 0: To
• 1:47
  Speaker 1: thin wrappers
• 1:48
  Speaker 0: exactly, capital is consolidating around the deep infrastructure now.
• 1:51
  Speaker 0: but there's a critical tension here
• 1:54
  Speaker 1: which is
• 1:54
  Speaker 0: well.
• 1:55
  Speaker 0: while the billions pour into that foundation layer The financial frameworks we've used for decades to value the application layer you know standard software and sauce those are basically breaking down.
• 2:06
  Speaker 0: okay
• 2:06
  Speaker 1: let's double click on them because Amit Kumar brought up point of this really reframes whole conversation.
• 2:10
  Speaker 1: oh yeah For like, twenty-seven years annual recurring revenue ARR was the golden metric.
• 2:18
  Speaker 0: It's essentially a religion.
• 2:19
  Speaker 1: Right and at the peak of things in Twenty-Twenty One The median late stage VC valuation Was sitting out.
• 2:26
  Speaker 1: massive one hundred and fourteen times ARR
• 2:29
  Speaker 0: Which is just wild to think about.
• 2:30
  Speaker 0: now
• 2:31
  Speaker 1: it Is.
• 2:31
  Speaker 1: but Amit argues that AI has effectively destroyed those underlying mechanics Of sauce.
• 2:37
  Speaker 0: Well mechanically speaking he's totally right because The whole premise of a massive ARR multiple relies on extreme vendor lock-in.
• 2:47
  Speaker 0: Right,
• 2:47
  Speaker 1: exactly.
• 2:47
  Speaker 0: Like historically if you put a SaaS platform into an enterprise ripping it out was total nightmare.
• 2:53
  Speaker 1: You'd need months of developer time
• 2:54
  Speaker 0: Yeah Months to rewrite the code, migrate the APIs, retrain everyone.
• 2:58
  Speaker 0: That friction is what guaranteed the recurring part of their revenue.
• 3:01
  Speaker 0: But
• 3:01
  Speaker 1: now I mean AI models can just instantly rewrite code bases.
• 3:05
  Speaker 1: Exactly.
• 3:05
  Speaker 0: they could translate API's over a weekend.
• 3:07
  Speaker 1: So this switching costs completely collapse.
• 3:10
  Speaker 1: and if you leave software vendor with basically zero friction that returning revenue isn't guaranteed at all.
• 3:16
  Speaker 0: Right And public markets are already pricing it in.
• 3:18
  Speaker 0: Oh for sure.
• 3:18
  Speaker 0: For first time ever Software trading at PE discount Investors are basically saying, hey your revenue isn't special anymore.
• 3:27
  Speaker 1: They want actual earnings now?
• 3:29
  Speaker 1: Yes
• 3:29
  Speaker 0: which is why EV to EBITDA enterprise value-to-earnings before interest taxes depreciation and amortization Is rapidly becoming the new standard
• 3:39
  Speaker 1: Which is crazy because that was almost never used of value early stage.
• 3:43
  Speaker 1: saw us before
• 3:44
  Speaker 0: Never.
• 3:45
  Speaker 1: But okay, I've gotta play doubles advocate here.
• 3:48
  Speaker 1: If EV to EBITDA is the baseline now doesn't that completely break their return models for all those mega funds raised a couple of years ago?
• 3:55
  Speaker 0: Oh absolutely they didn't underwrite for profitability
• 3:57
  Speaker 1: Right!
• 3:58
  Speaker 1: They underwrote for hyper growth
• 3:59
  Speaker 0: Exactly and that misalignment is causing massive board-level friction right now.
• 4:04
  Speaker 0: Look at data Wilson Patton shared about the twenty nineteen fund ventures
• 4:07
  Speaker 1: Seven year old funds.
• 4:09
  Speaker 1: Yeah
• 4:09
  Speaker 0: these funds should be distributing massive cash back But instead, fifty percent of those twenty nineteen vintages have returned less than three percent invested capital.
• 4:20
  Speaker 0: Yeah the median fund is sitting at basically zero DPI meaning limited partners haven't seen a dime of liquid returns.
• 4:27
  Speaker 1: So this brings to mind this analogy.
• 4:29
  Speaker 1: It's like a VC Is holding A winning lottery ticket for one hundred thousand dollars but they refuse To cash it because They desperately need a million dollar jackpot Just to pay off their mortgage.
• 4:41
  Speaker 0: That exactly what happening.
• 4:43
  Speaker 0: GPs are so desperate for a fund-returner to save their DPI, they're forcing founders to reject life changing exits.
• 4:50
  Speaker 1: Wait like how big of an exit is we talking
• 4:52
  Speaker 0: about?
• 4:52
  Speaker 0: Wilson pointed out that GPs actively blocking eighty million or one hundred million dollar M&A deals.
• 4:58
  Speaker 1: That's insane!
• 5:00
  Speaker 0: They're pushing founders to burn cash and chase unicorn status instead.
• 5:04
  Speaker 0: because if you manage the three hundred million dollars fund and own fifteen percent at Exit One Hundred Million Dollar sale only returns fifteen million.
• 5:10
  Speaker 1: It doesn't even move needle for them Right.
• 5:12
  Speaker 0: they need the billion-dollar exit just to return a chunk of the fund.
• 5:16
  Speaker 0: So you've got a founder with great profitable ten million dollar ARR business being told to risk bankruptcy, just bail out VC
• 5:24
  Speaker 1: Which means that traditional VC structure is fundamentally misaligned with modern software outcomes.
• 5:30
  Speaker 1: Completely
• 5:30
  Speaker 0: Misaligned.
• 5:31
  Speaker 1: Well then natural reaction into broken relationship as breakup.
• 5:34
  Speaker 1: and because this billion or bust trap, founders are actively writing a new playbook.
• 5:40
  Speaker 0: Yeah they're prioritizing cash flow and bypassing VCs.
• 5:43
  Speaker 0: entirely
• 5:44
  Speaker 1: Right!
• 5:44
  Speaker 1: And Ron Wiener highlighted this fascinating trend happening in Seattle right now the rise of what he calls free-flow companies.
• 5:52
  Speaker 0: Tell me about those.
• 5:53
  Speaker 1: So these are AI agent founders keeping their teams strictly capped at like two to five people, no massive hiring hitting positive cash flow within a year.
• 6:03
  Speaker 0: Wow that's incredibly lean.
• 6:05
  Speaker 1: but here is the brilliant part.
• 6:06
  Speaker 1: they aren't incorporating as standard secor They're setting up as LLCs.
• 6:11
  Speaker 0: Oh interesting so they pass K-one tax losses directly to early angels.
• 6:15
  Speaker 1: Exactly Angels can use those early losses off set their personal taxes which immediate financial value.
• 6:21
  Speaker 1: and then when it profits The LLC distributes cash like high yield dividend.
• 6:25
  Speaker 0: But the real kicker there is that traditional VCs are structurally prohibited from investing in LLCs, right?
• 6:32
  Speaker 0: Yes.
• 6:32
  Speaker 1: Because VC funds have tax-exempt LPs they legally can't touch.
• 6:37
  Speaker 1: pass through entities.
• 6:39
  Speaker 1: By choosing an LLC founders put a giant.
• 6:42
  Speaker 1: do not enter sign on their cap table for traditional funds.
• 6:45
  Speaker 0: That's such blind spot.
• 6:47
  Speaker 0: but you know market hates a vacuum.
• 6:49
  Speaker 1: Yeah someone will fill it.
• 6:51
  Speaker 0: Henry Shi actually noted a massive development here.
• 6:54
  Speaker 0: Yash Patel's Cap Reventors just raised a one hundred million dollar fund exclusively for these lean AI startups.
• 7:01
  Speaker 0: Oh wait, really?
• 7:02
  Speaker 1: What are their terms?
• 7:03
  Speaker 0: they're offering one million to five million dollars.
• 7:06
  Speaker 0: seed checks For as little is five percent equity
• 7:08
  Speaker 1: But weight.
• 7:09
  Speaker 1: how does that math work?
• 7:10
  Speaker 1: if you only take five percent Equity You need a crazy volume of exits to return a hundred million Dollar Fund.
• 7:15
  Speaker 0: it sounds like spray and pray right?
• 7:17
  Speaker 0: yeah but its response To A Crazy New Reality Henry pointed out that the world just saw its first one-person, one FTE billion dollar ARR company.
• 7:26
  Speaker 1: Oh wow!
• 7:27
  Speaker 1: One person?
• 7:27
  Speaker 1: Yeah
• 7:28
  Speaker 0: So Capra is betting these hyper lean teams won't ever need to raise later rounds meaning they won't suffer delusion.
• 7:34
  Speaker 1: Ah so they keep their full five percent all the way to the exit.
• 7:38
  Speaker 1: Exactly
• 7:38
  Speaker 0: and
• 7:39
  Speaker 1: Greg Myers connected this perfectly too what enterprises actually want to buy?
• 7:43
  Speaker 1: right now, everyone assumes we're just building more chatbots or basic ARG products.
• 7:47
  Speaker 1: Right
• 7:47
  Speaker 0: which enterprises don't really want?
• 7:49
  Speaker 0: Exactly
• 7:50
  Speaker 1: Greg says they actually want a shared agent maintained enterprise knowledge vault
• 7:55
  Speaker 0: like multi user obsidian setup.
• 7:56
  Speaker 1: Yes exactly an AI operating in the background curating company knowledge and if two person LLC can build that foundational Enterprise infrastructure with Few million dollars?
• 8:09
  Speaker 1: I mean, won't that completely deflate the mega fund ecosystem.
• 8:12
  Speaker 0: It has to right.
• 8:13
  Speaker 0: why raise a billion dollar Fund if the best companies don't need or want your money?
• 8:17
  Speaker 1: So as founders get leaner The venture capital industry itself is basically being forced to sozify Just keep up.
• 8:24
  Speaker 0: Oh the infrastructure side of VC Is automating at breakneck speed.
• 8:26
  Speaker 1: Yeah!
• 8:27
  Speaker 1: The barrier To entry to become a VC is dropping to zero.
• 8:30
  Speaker 1: Nathan Bucci and Alan Cruz just shared this update on the start fund
• 8:34
  Speaker 0: Sat.
• 8:34
  Speaker 1: it's created by the guy who invented the safe note.
• 8:37
  Speaker 1: It basically lets managers launch a VC fund overnight.
• 8:41
  Speaker 1: Zero upfront legal fees, no wait times Wow!
• 8:45
  Speaker 0: So you just spin up a fund instantly?
• 8:46
  Speaker 1: Instantly.
• 8:47
  Speaker 1: And to handle the diligence for all these new funds Adio Resi is pushing this tool called Startup Play.
• 8:54
  Speaker 1: it takes the standard two hundred hours of VC due diligence and compresses into a comprehensive report in ten minutes.
• 9:01
  Speaker 0: See I have major reservations about that.
• 9:03
  Speaker 0: Yeah And so do LPs.
• 9:05
  Speaker 0: Maddie Holman shared a really sharp warning about this.
• 9:08
  Speaker 0: She noted that limited partners are running VC pitch decks through AI models like Claude to decide who gets the meeting, but venture returns come from extreme outliers.
• 9:18
  Speaker 0: AI models inherently regress to the mean.
• 9:21
  Speaker 0: They recognize patterns of past success,
• 9:22
  Speaker 1: so they're gonna filter out The weird non-consensus ideas that actually drive huge returns
• 9:27
  Speaker 0: exactly plus feeding a highly sensitive Confidential founder deck into a third party ai.
• 9:32
  Speaker 0: That is a massive breach of
• 9:34
  Speaker 1: trust.
• 9:34
  Speaker 1: Oh I would be furious as a founder if you dumped my IP in Declod
• 9:38
  Speaker 0: right and Himanshu Jane backed up why human judgment still matters.
• 9:43
  Speaker 0: His data shows that even though every VC wants to be linked an influencer Right now.
• 9:48
  Speaker 1: Ah, they really do.
• 9:49
  Speaker 0: Only ten percent of deal flow actually comes from cold inbound.
• 9:52
  Speaker 0: Sixty-percent of closed deals still come purely from professional networks and proactive outbound.
• 9:58
  Speaker 1: So deploying AI for diligence is like using a GPS to drive a Formula One car?
• 10:04
  Speaker 0: I liked that.
• 10:05
  Speaker 1: It might tell you where the track is, but it cannot give you a gut instinct to take corner at two hundred miles an hour.
• 10:11
  Speaker 1: If everyone has that exact same AI output... Where's your edge?
• 10:15
  Speaker 0: You don't have one!
• 10:16
  Speaker 0: Your Edge is your network.
• 10:17
  Speaker 1: Speaking of edges let us talk about the final hurdle here M&A exits and strategic realities of these term sheets.
• 10:24
  Speaker 0: Because eventually they exit And the M&E market is open, but the acquirer standards right now are brutal.
• 10:30
  Speaker 1: Highly brutal.
• 10:31
  Speaker 1: they demand profitability low churn real strategic fit Right But Greg Heads shared this amazing success story showing that Sawz isn't dead it's just Dead to VCs chasing a hundred X returns.
• 10:43
  Speaker 0: Tell me about that.
• 10:44
  Speaker 1: So Andy Alsop bought this little iPad app for two hundred and fifty K. he bootstrapped into a company called The Receptionist
• 10:51
  Speaker 0: Okay
• 10:51
  Speaker 1: Got it to seven million in ARR with just thirty employees and then sold it to a strategic buyer called Sinon.
• 10:59
  Speaker 1: He didn't chase VC growth, he just built great company...and the exit came to him!
• 11:03
  Speaker 0: See that is the contrast we need look at.
• 11:05
  Speaker 0: Compare this to reality for founders who do take VC money.
• 11:09
  Speaker 0: Ruben Amiga's e-bar broke down the twenty twenty five term sheets And math is terrifying for founders as they scale.
• 11:15
  Speaker 1: Terrifying how?
• 11:16
  Speaker 1: What are later stages looking like?
• 11:18
  Speaker 0: By series C hundred percent of rounds have preference shares, meaning investors get paid back first.
• 11:23
  Speaker 0: Right.
• 11:24
  Speaker 0: Eighty-six percent feature anti-dilution ratchets which severely dilute the founder if valuations drop and worst of all founder vesting protections dropped to just thirty two percent.
• 11:34
  Speaker 0: Wow
• 11:34
  Speaker 1: so they strip away the founders downside protection entirely?
• 11:37
  Speaker 0: Completely.
• 11:38
  Speaker 1: And as If That's Not Bad Enough Andrea Jensen highlighted one last massive hurdle for cross border deals Canada's Bill C- Thirty Four.
• 11:46
  Speaker 0: Oh The National Security One.
• 11:47
  Speaker 1: Yeah.
• 11:48
  Speaker 1: So standard US VC term sheets always demand board seats, right?
• 11:52
  Speaker 1: Well now for Canadian startups in sensitive sectors like AI or biotech giving a US VC a board seat triggers a months long national security review.
• 12:02
  Speaker 0: So you combine these tightening term sheets, multi-month regulatory delays and the fact that half of these VCs aren't returning capital anyway?
• 12:09
  Speaker 0: Yeah.
• 12:10
  Speaker 0: Aren't founders heavily incentivized to just build small profitable LLCs and totally ignore the M&A treadmill
• 12:16
  Speaker 1: which brings us To The Ultimate Thing?
• 12:17
  Speaker 1: You Have To Ask Yourself.
• 12:19
  Speaker 1: We're looking at a market where single person can build billion dollar ARR company and founders are purposely structuring as LLCs to keep traditional VCs out.
• 12:28
  Speaker 0: Right!
• 12:29
  Speaker 1: If software moats are dead, capital efficiency is king well the next generation of truly category defining tech companies even have institutional venture capital on their cap tables.
• 12:39
  Speaker 1: or if ten year venture fund about become niche product exclusively for capital intensive hardware & defense it's something to mull over.
• 12:47
  Speaker 0: If you enjoyed this episode, new episodes drop every two weeks.
• 12:51
  Speaker 0: Also check out our other editions on private equity M&A and strategy in consulting.
• 12:55
  Speaker 0: Thank you so much for joining us On This Deep Dive.
• 12:57
  Speaker 0: make sure to subscribe And we'll catch ya on the next one.