In this episode of the Equidom Podcast, Dan Gray and Daniel Faloppa discuss the evolving landscape of startups, particularly focusing on the impact of AI, changes in venture capital, and the bifurcation of opportunities in the software sector. They explore how the economics of SaaS have shifted, the challenges new companies face in a saturated market, and the need for investors to adapt to a new reality where traditional metrics may no longer apply. The conversation highlights the importance of understanding risk and the changing dynamics of funding in the startup ecosystem.
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Takeaways
There’s been a huge amount of uncertainty since 2022.
Competition in startups is becoming more normal again.
The economics of SaaS have changed dramatically.
Fundability of software opportunities is now bifurcated.
Investors are returning to traditional industries like biotech.
The nature of funding rounds has shifted significantly.
Venture capitalists need to relearn risk management.
The private markets operate like auctions.
Capital is no longer a constraint for innovative ideas.
Startups must adapt to a more competitive landscape.
Chapters
00:00 Navigating the Startup Landscape
04:24 The Evolution of SaaS Economics
10:24 Bifurcation in Software Opportunities
17:50 The Shift in Investment Strategies
26:14 The Changing Nature of Venture Capital
38:48 The Future of Startups and Investment Dynamics
Daniel Faloppa (00:01)
Welcome everybody again to another episode of the Equidom Podcast, episode 16. We wanted to talk about what’s happening in the startup scene, the new trends that are happening in startup funding brought by just AI, VC concentration, and just the current environment of tariffs and interest rates.
Dan Gray (00:24)
Yeah, I think ever since that kind of doomed quarter of 2022, there’s been a huge amount of uncertainty and it really hasn’t seemed to have gone away. It’s become almost like something we have to live with, which maybe is normal. Maybe that’s how things should be after a decade of perhaps too much certainty. So yeah, be interested to get into that.
Daniel Faloppa (00:43)
Yeah.
Yeah. So what I think I would like to argue today is that we are back in a period where competition, business competition, startup competition is more normal. And that the part was the, the software period was the abnormal period where there were abnormal returns, abnormal cash flows. And
almost like an abnormal easiness of innovating and doing business. I think maybe that’s where we could start. So we said this in other podcasts, when we started at As Equidam we started really with the SaaS wave, which at the beginning, nobody understood. Like in Europe,
the understanding came later in the US, maybe it was a bit sooner, but when investors and entrepreneurs were coming from more traditional companies, traditional at the time was a product company, maybe, I don’t know, socks, or a series of restaurants or real estate. So it was almost impossible to explain to this type of business people or services like anything was at the time.
it was almost impossible to explain them, the economics of software, the economics of SaaS, right? The type of reliable recurring cashflow and that like low margin. The margin was expanding as well because the costs were coming down, right? Easiness of developing, easiness of hosting and all those things were coming down incredibly. So the economics were more and more…
interesting for these type of companies. And I think if you look at the time before that, when you were doing a service, when you were creating a factory to produce a specific product, those economics look much more like the companies that we are seeing today. You need fundamental research, you need differentiation in the market, you need large investments in the sense of
like not the half a minute, like you need those half, those large investments to get to a proof of concept. You don’t raise that money just to expand, just to do marketing, just to reach that top position on the market share board. You actually need that money to discover the solution to a specific problem, to make sure that the product is viable. And we’re addressing that now in a short time on Equidim with a modified.
technology readiness level question.
I think we are returning to that.
Dan Gray (03:00)
Yeah, it certainly seems like that. And there’s kind of patterns in the past where after there has been a bit of a bust in the kind of venture capital market, investors have seemed to return to categories with like higher capex, higher barriers to entry, more sustainable competitive advantages, like the initial green tech bubble after the dot com crash. Yeah, I think that’s something we talked about before on the podcast as well.
But the other thing which I think maybe led to investors first undervaluing software and then later overvaluing is the fact that like initially maybe it just seems like too good to be true, especially combined with the rise of like digital advertising. And suddenly these SaaS businesses were kind of like money printers. You feed money in, they can grow like incredibly easy, incredibly easily, very low friction.
and then they generate more more revenue. And then you have the whole issue of pricing to revenue and as they grow price on revenue, they can raise more money to feed into more growth. And it’s like a very pro-cyclical engine for growth, which is great as long as you get out before it all falls down.
Daniel Faloppa (04:03)
Well, I don’t think it fell down for those companies. They’re still very good companies. They’re still making, like if you think about Salesforce, like one of the earliest SaaS ever, right? But all the big SaaS, right? They’re still there. They’re still making money, Slack, you know. But what changed is what happens to the new ones, right? So the new ones, first of all, they find themselves in a very tough competition spot.
right, on just serving the business. Every business or every buyer of SaaS is spoiled for choice. And then on the distribution difficulty, right? What were easy channels and channels that were booming and exploding, like influencers or just online advertising and so on, are now extremely saturated for that type of content.
So then plus the changes that are happening in AI are bringing down the cost of creating these businesses even further, increasing that competition even further, right? To the point where every single little niche is over saturated with multiple SaaS solutions. And it’s almost difficult to end up on the first page of Google for that specific.
for that specific niche because there are already 20 players there. And this is extremely similar to like commodity physical products, right? If you think about Christmas sweaters, right? Like the number of Christmas sweaters in the world is insane, right? And we did talk about this in the podcast. At some point, SaaS is gonna be like hairdressers, right? It’s almost at this point in time,
Dan Gray (05:33)
with
Daniel Faloppa (05:35)
Maybe not, but if you look out like six months to 12 months, it’s almost easier to start a SaaS than to start an hairdresser, right? Because you don’t need to buy assets for the SaaS. So yeah, the economics of that specific sector have changed dramatically over the past six, seven years. And in my opinion, the fundability
of those specific opportunities is now completely different. And if we want, we can finish talking about the software sector before seeing what happened to the rest. So the fundability of these opportunities is now, in my opinion, completely bifurcated. the…
extremely small side where people are building their own SaaS, their own little agent, their own little API, their own MCP. And they are doing it alone, maybe like two or three people, but they’re all co-founders. They’re not really raising much capital if they’re raising at all. If it’s really truly a SaaS, maybe they are raising non-equity, non-dilutive financing. If they have some traction, some customers, they…
they can maybe find a loan to finance a bit more growth. So there is that side. And then on the opposite side, still in software, you have a few projects that can really explode. And aside from the actual foundation models, which I wouldn’t classify as software itself, this type of software that can explode right now has, I think it’s mostly exemplified by the coding editors.
Dan Gray (07:02)
Mm-hmm.
Daniel Faloppa (07:02)
That’s
a traditional SaaS, but that has that opportunity to explode. And they’re raising hundreds of millions. Windsurf just exited for $3 billion to OpenAI. So its cursor is allegedly the fastest company ever to 100 million revenue. It can happen. It can always happen. It’s just like… And that’s also, to be honest, how some of the SaaS started, but then we got into this commodization.
of SaaS and now we are seeing the extreme of that, right? So really in this extreme, is like a million little tiny SaaS companies and then like one extreme outlier. It feels like it’s pretty normal.
Dan Gray (07:39)
Yeah, I think there’s also a lot of uncertainty about the kind of like a lot of people said like the stickiness of the revenue, how much of that in the kind of that category of very fast growing AI powered companies is just like experimental. And you can look at the I think that the most often cited example is a company that did like AI generated profile pictures based on real headshots early on and they went from like
50K monthly revenue to 2 million and then back to 50K in like two months. It died out incredibly quickly. And I think we’ll see a lot of that still. And of course, even with the code editors, for all that, that’s like probably the leading use case at the moment. There’s also gonna be like consolidation there as well, I think.
Daniel Faloppa (08:24)
For sure, for sure. And that’s what happened to, like before this whole thing, to companies like Dollar Shave Club, Dollar Shave Club, incredible commodity product, razors, right? They had like one meme, right? The advertising campaign that they did at the beginning. And that brought them incredible recognition. And…
They were innovating on the model as well. It was a subscription, so it was kind of interesting. They did have some retention. But without that incredible way to find distribution, they would have never gotten as far as they did. And then it was acquired afterwards by, I forget, one of the other big razor manufacturers. That is the situation now for software, I would argue.
You can explode sustainably if you manage to find a competitive advantage that keeps the people there and so on. Or you can explode in the sense of doing something viral for a little bit, and then that is going to die down. Whereas the vast majority are going to compete on trying to find these things, trying to find distribution, trying to carve their niche, trying to carve their brand. And we go back to traditional competition.
Dan Gray (09:32)
It makes me wonder, on the bifurcation point, is it going to end up potentially with a situation where you have, as you said, lots of little companies who may build something that explodes in terms of growth and then becomes a very attractive company quite quickly? And on the other side, does it change where now a company isn’t just a SaaS product, but maybe because it becomes so much easier?
Daniel Faloppa (09:32)
in a sense.
Dan Gray (09:56)
Maybe they’re like kind of like the Tesla for SaaS, know, like they’re like vertically integrated SaaS producing companies who build products wherever they see opportunity.
Daniel Faloppa (10:05)
It could well be. It could well be. That’s the interesting sci-fi part of what we’re living in now with AI. If you extrapolate the capabilities of AI, then yes, you can have personalized apps made in seconds just for you, for your specific needs. That could be maybe one of these large companies. I was thinking about another example. Another example is…
Dan Gray (10:10)
Yeah.
Mm-hmm.
Daniel Faloppa (10:30)
Nothing phones, nothing smartphones. They are going into a very hyper competitive market. They had to get everything right. So they needed a ton of capital. They had to get the strategy right. They had to get the marketing right in order to be able to have a sustainable long-term company in there. They’re doing okay for now. And the strategy was extremely interesting. I start from the headphones.
Dan Gray (10:31)
Mm-hmm.
Mm-hmm.
Daniel Faloppa (10:54)
which is a huge market that nobody really think is that huge and then start building phones and so on. So it’s just tougher competition,
Dan Gray (11:01)
Yeah, yeah, I would say in an absolute sense, nothing is doing pretty well in a relative sense, like relative to other consumer hardware startups, they’re doing incredibly well. yeah.
Daniel Faloppa (11:12)
Definitely. Yeah. Yeah. And even if you compare it to Samsung, right? Samsung has
been having problems for a while.
Dan Gray (11:18)
come out like competing with Apple and AirPods and then to make a phone and to still be surviving like I have a lot of respect for them.
Daniel Faloppa (11:25)
Incredible. Yeah. Yeah. So this is, I think, what we’re going back to. If you look at the latest funding rounds on any platform that you like, Crunchbase, Deal Room, Seed Table, and so on, in Europe, but really anywhere, the nature of them, I think, is very different compared to five, six years ago. So there are still a few…
Dan Gray (11:43)
Mm-hmm.
Daniel Faloppa (11:45)
platforms that solve a specific SaaS problem, but that’s now less than 10 % of them. You have specific AI tools for now, like people that are trying to capture a bit of a vertical of AI. And that’s, would say, still the closest thing to traditional SaaS. But otherwise, you have industries that require investment. You have cybersecurity, biotech,
like more general medical research, like outcomes of medical research that need to be commercialized and so on. And they are raising, those are the ones that are raising like the seed of like three to four, five million because they need that money, right? Like three to four, five million seed on a traditional SaaS, like what was happening three years ago is not happening anymore.
Dan Gray (12:21)
Mm-hmm.
Daniel Faloppa (12:33)
Those companies, yeah, no, it, right? And we went back, right? And nobody’s talking about traction for those companies, right? And because that money is still raised now for finishing and proving the technology as it was before, I would argue before 2017, before 2016, right? So of course, and then the question for those companies goes from like, what kind of traction do you have to…
Dan Gray (12:33)
and nor should it.
Mm-hmm.
Daniel Faloppa (12:57)
how ready is your technology and how far can you prove that it actually works. And then because this is a difficult problem solved with technology, medical research, whatever, that’s also what creates the moat for that company to keep up cash flow in the future. So those, in my opinion, are the current…
Dan Gray (13:11)
Mm-hmm.
Daniel Faloppa (13:17)
SaaS in a sense. So what was SaaS in 2019 is these type of companies that are going to be raising between five and 50 million that are going to have maybe an extremely high exit, sure, but a reliable, sustainable cashflow generating business that can go as big as it can.
And they are the sensible investment, right? They are not the hyped investment. are not the winner take all they might be, but that’s not their pitch, right? And I think it’s extremely interesting, right? And just the tactics are changing incredibly and they’re changing very, very fast.
Dan Gray (13:51)
Mm-hmm.
Yeah. Yeah. I’d say
that there’s like bifurcation there as well. There is, there are investors that are now looking at businesses who can generate better, better, better margins in future, healthier businesses, better growth. And to like AI powers that to an extent. There’s also investors who are, I think, looking to like continue the patterns that we’ve had in like the past decade.
So they’re kind of bringing their expectations for traction forward because of AI. Like now a pre-seed company for them is expected to have fast growing traction. And to me, that’s insane. that traction is rarely going to last, I would venture, I guess.
Daniel Faloppa (14:41)
Yeah, so if what we’ve been saying so far is true, then those investors, in my opinion, are going to have a very hard time.
Dan Gray (14:48)
Mm-hmm. Yep.
Daniel Faloppa (14:49)
Because indeed, traction is not going to last. You are still trying to apply a model of a product mode that really doesn’t exist anymore. And like, yeah, you’re still trying to invest in business they call software companies, which are extremely, extremely rare with the same expectation that you had before that two out of 10 would actually make a sizable exit.
Dan Gray (15:10)
Mm-hmm.
Daniel Faloppa (15:11)
I don’t think that works. Investors as well need to almost relearn what it means to take risk on industries and products and business models and business plans that they don’t truly understand, fully understand. And what we were saying just yesterday is how tough it was.
to raise capital in biotech for the past 20 years, right? And how biotech was almost unfundable when SaaS was there and how this has completely shifted on its head right now. And it’s fantastic, right? For me, it’s fantastic. I do believe biotech innovation is much more useful to the human race than software. I mean, I love software. We do software, but…
Dan Gray (15:56)
100%.
Daniel Faloppa (15:59)
Yeah, so that, and it’s interesting to see, right? Biotech costs are coming down in the same way that software costs were coming down, right? You needed like a massive team and you needed your own software servers on-prem and you needed authorizations and so on to build those types of businesses. And now like with acceleration of AI,
Dan Gray (16:08)
Mm-hmm.
Daniel Faloppa (16:21)
Labs that are more open like co-working labs almost where these people can make new discoveries like we’re commoditizing that type of And it’s great, The advantage there is it’s a bit more defensible you can you can have patents you can patent a lot of Biotech things whereas in software you cannot really do much of that Yeah, super interesting
Dan Gray (16:41)
Yeah, my kind of hot take on that is that whole era, like the 10 years you could say from like 2011 when Andreessen published his software is eating the world article. That decade, a lot of people have said this is it’s not an original insight, but like VCs became spreadsheet investors, they started following like fairly superficial metrics for growth, like obviously revenue, revenue growth rate, know,
LTV, NDR, all this kind of stuff. And they were invested based on these metrics with predictable growth, like increasingly predictable growth and in theory, predictable outcomes, but maybe not really. And because of this, they like over-weighted growth and predictable businesses. They…
focused less on like what you could say is like pure venture capital, which is like the super risky, really interesting stuff like biotech or like geoengineering or like genomics research or whatever, energy and nuclear. They neglected all of that. And actually over that decade, they kind of forgot how to manage risk with those kinds of companies. all the fundamental stuff like…
Daniel Faloppa (17:39)
Yeah.
Dan Gray (17:50)
like proper portfolio strategy or like being able to really understand the business model and the balance sheet and whatever. All of that literacy, think, was kind of neglected and atrophied a bit. And now they’re having to relearn it.
Daniel Faloppa (18:02)
Yeah, exactly. And I don’t think it’s their fault at all. That was a higher return for the same risk or same return for lower risk. And that’s why Biotech was extremely hard to fund because if on the other hand, you had 60, 70 % gross margin, 1 % churn rate, 20 % growth type of company, how are you going to finance anything else?
It’s physically like competing with that on a business model, on an investment point of view is impossible.
Dan Gray (18:33)
I
suppose the counter argument, which is a bit tenuous, is that you have a 10-year fund cycle. You have to have a kind of a contrarian attitude. So maybe you put your stake in the ground and say, you think this reality isn’t going to last. And some investors did. And maybe they ran a risk of being really wrong and wasting a lot of opportunity. Some of them timed that well.
did okay out of it.
Daniel Faloppa (18:59)
Yeah,
yeah, yeah. Yeah, so it got to a point towards the end where it was clearly overhyped, right? Where valuations were extremely high, churn was hiding stuff, right? Because the investment, prior investments were subsidizing customers and subsidizing lower churn. And I think a lot of the industry lost track
of the goal and of the profitability because you just get used to these type of things. So, yeah, definitely the last period of that was maybe preventable. Some people prevented it. And it’s always this same idea of trying to… If you try to understand the fundamentals, if you try to understand those things…
Dan Gray (19:27)
Mm-hmm.
Daniel Faloppa (19:42)
you might not play the lottery as much as somebody else. And of course, the ones that make the news are the ones that win the lottery. But then you might get out before the casino burns down because you’re actually paying attention.
Dan Gray (19:55)
Yeah, I think a good example
of that would be Bill Gurley. He was writing articles, I think in like 2014 or 15 about like, you know, the return of silly multiples in like round pricing. Kind of started calling the top of the market like probably too early to be honest in about 2015. But his firm Benchmark sold their stake in WeWork.
in 2018, like before the catastrophic attempt at an IPO and before the price created. So maybe that’s a perfect outcome.
Daniel Faloppa (20:22)
Yeah.
Yeah, yeah, yeah, indeed, 2015, yeah, 2015 was a bit early, but we’ve been continuously surprised since, I would say, 18, 19 about the prices of everything, not only startups, but like commodities and stock market and everything. Still now, despite everything that is happening, the stock market is incredibly resilient, right? So it’s…
Dan Gray (20:31)
Mm-hmm.
Daniel Faloppa (20:51)
Yeah, it’s interesting. And there are more some more macro theories about that. But I think if you look historically, yeah, multiples were already at the historical high in 2015. But now they are still higher than that. Right. So despite everything that happened. So yeah, it’s it’s so some things repeat, some things are like slightly different. The other side, I think, of this coin, if if
Dan Gray (21:04)
Yeah.
Daniel Faloppa (21:16)
we want to close the topic on the sell side, on the companies themselves, is the buy side. What happened to investors in the past three, four years, including what you just covered, is a bifurcation as well. So we’re seeing A16 that has 11 % of the whole total raised capital by investors in 2024, something like that. So we’re seeing extreme concentration of capital in the top
Dan Gray (21:26)
Mm-hmm.
Daniel Faloppa (21:41)
more brand name investors, right? Why is that?
Dan Gray (21:46)
Yeah. And you know, on the A16Z point, was 11 % of venture capital raised in the US in 2024, which is monstrous. And then this year they’ve already announced that like they’re targeting another 20 billion raised, which is I think double-ish last year. So it’s just crazy to me. this is where it gets very interesting to me.
Because like what they’re becoming, and I think it was Lightspeed announced yesterday, another venture firm, another giant, they’re also becoming like an RIA so they can deal in public equities and other assets as well. That’s kind of what’s happening to all of these big firms is they’re not really venture capital anymore. They just have like a portion of their strategy is venture capital. And it’s probably not even like a particularly high returning portion of their strategy. They just do it for
strategic reasons. But they’re targeting a different type of LP. So much larger institutions or sovereign wealth funds who have a lower cost of capital who can or who actually need to do much larger contributions, you know, they can’t do a hundred $1M contributions to a ton of different funds, they want to do one giant check. So they
Daniel Faloppa (22:37)
interesting.
Dan Gray (22:58)
I working with someone like Andreessen Horowitz or General Catalyst or Lightspeed.
Daniel Faloppa (23:02)
Yeah.
Dan Gray (23:03)
But the
outcome is like these companies, these firms aren’t expected to have the traditional returns. They can return much less and it’s still kind of seen as a success. But they’ll have much lower volatility, much more stable returns. And there’s, you know, I think to be honest, some of it, some of the incentive and the motivation is to do with like…
access to information, being a part of these big brands, like there’s various perks associated as well. So it’s a messy picture.
Daniel Faloppa (23:32)
Yeah, but again, I think that’s also a return to traditional type of things. So if you see the big private equity funds, there is a tendency of capital to collect into the winners. And then the winners get bigger and bigger. Whether that’s a good thing or not, that’s a big question because they also need to employ all this capital in a profitable way. But when you start tapping into private equity, especially now where
the only high performing industries of the past 15 years, now everything is changing again, but the high performing industries of the past 15 years has been software. New players have that brand of, can employ your 100 billion in software where the old like, know, KKR or Fidelity or the other big private equity funds cannot, right? And the…
a lot of the large private equity is still doing franchises and real estate and new developments and things like that that are coming back actually now, but for the past 15 years were not the point of return for these large investors, for the final LPs. So yeah, is definitely… But that’s fine, I think.
The question is like, well, and so first of all, we should understand that startup data is a bit biased because sometimes we put in startup data, something that is not startup, and it’s completely skewing the whole equation. So if we want to classify, and that’s why also when you look at funding volume, not in terms of number of deals, but in terms of investment and valuation.
you need to look at the top three transactions and decide for yourself whether you classify those as startups or not. Because if you include like an open AI funding round into this statistics, then it’s the best quarter ever, right? But if you don’t, then probably for investors works the same way. Is there like, is there a trend, is this investment in the majors like bringing…
a freeze for funding for the smaller VCs.
Dan Gray (25:27)
I don’t think so. think, like maybe for a while they were like eating from the same LP base as the smaller funds. And in that case, yeah, maybe it was kind of overlapping a bit. think increasingly now it’s not like the division between the two is better understood. they like traditional LPs of traditional venture are
returning to the kind of funds they would fund in the past. You could say 25 to 500 million instead of anything up to 20 billion.
But then there’s other issues with that. So like the concentration we saw last year with that 11 % to Andreessen, and I think it was like nine, the nine largest venture firms took 50 % of everything more or less. I think that’s going to continue because now you have issues with like endowments in the U.S., which have traditionally been a major funder of venture capital. They’ve been hit by some of the policy changes under the new administration.
they’re not able to fund anything through their endowments as actively as they used to. So that they’re probably gonna pull back quite a bit as well. So I don’t think this year is gonna be easy either, sadly. But at least it’s no longer due to like the big guys eating the lunch of the small guys.
Daniel Faloppa (26:37)
No, yeah.
That’s true. But I think also, mean, there is a, yeah, so the endowments is a problem. Just the word uncertainty is a problem for LPs when they go invest in VCs. And those are massive, right? I think that’s probably like 70, 80 % of the issue there in terms of how much these smaller funds managed to raise versus a few years ago. The other 20 % is…
Dan Gray (26:49)
Mm-hmm.
Mm-hmm.
Daniel Faloppa (27:07)
they need to change their pitch, right? So these funds that were just investing in SaaS and like, you know, almost guaranteeing this type of returns and so on, they need to walk that back or probably even rebrand and go after like more risky different type of industries or just different types of business models and technologies. And that’s gonna take some time, right? Just because of the nature of these funds is like very, very long. So…
And a lot of it was raised, right? Like a lot of that capital was raised for this type of SaaS and so on, even like up to 2022, right? So those funds are still all, well, they’re getting now to the end of their investment window. And then they’re getting now to raise their second fund or something. then, yeah, no, definitely. like, that’s what happened. The world has changed so much since they…
Dan Gray (27:44)
Mm-hmm.
Some of them. ⁓
Daniel Faloppa (28:02)
raise that first fund to now that they need to raise the second one, that it might as well be a different business.
Dan Gray (28:09)
Yeah,
yeah, I spoke to a few GPs last year who were looking to raise like a first fund or a fund to and the and even the year before as well and like so many of them were really tying the whole fund to like whatever was the thing at the time so like AI agents initially or and it just felt like they were all trying to find the thing to replace the previous thing where in reality now I think
there’s this, again, it’s like everything is bifurcating, it feels like. You have the more traditional strategy, the smaller funds, who should be looking for the crazy ideas, the biotech, the energy, whatever, the contrarian stuff. And for the AI focus, if you choose to tie your fund to that theme as a smaller, traditional VC,
you are now competing with Andreessen Horowitz and that’s going to be a very difficult time for you. So yeah, I think it’s almost like once something becomes like a legible idea and attracts starts attracting the attention of the big guys, you have to get out. So if you’ve if you built your fund on that, you’re like you have problems.
Daniel Faloppa (29:02)
Indeed. Yeah. Yeah.
Yeah, yeah, it’s true. It’s true. The same goes for the startup, right? So it’s almost a decision on day zero. Do I build this type of company or do I build that type of company? You can kind of always pivot the smaller one, like sort of the non-hype version, let’s say, into the big one, the fast train. I forgot who.
Dan Gray (29:37)
Hmm.
Daniel Faloppa (29:38)
who made this metaphor of the slow train and the fast train, you can pivot that, but you cannot go back. So the moment you jump on the hyper train as a fund or as a company, well, as a fund is very difficult. You need to set out to do that when you raise your own capital. But yeah, you need to make that choice and it’s going to completely affect what you invest in, why and how and…
Dan Gray (29:54)
Mm-hmm.
Daniel Faloppa (30:03)
what kind of values you value as well, what kind of people you work with. It’s really, really bifurcating. What kind of data you look at, what kind of amount of capital you look at. So yeah, extremely interesting. And in the end, what kind of business you look at as well, right? And those type of hyperscalers and hyperfunds and so on are…
Dan Gray (30:13)
Mm-hmm.
Daniel Faloppa (30:25)
after these winner-take-all opportunities that with the current uncertainty might look like winner-take-all straight away, but then see the foundational models might be extremely competitive in a few years and with extremely low retention. So yeah, new playbooks are required and it’s extremely interesting. And yeah, we’re going back to…
Dan Gray (30:40)
Mm-hmm.
Daniel Faloppa (30:47)
I think we’re going back to traditional competition everywhere. You need to stand out. You need to do hard things that have a lower probability of success. You need to be comfortable with that extreme uncertainty as an investor and as a company. yeah, back to that.
Dan Gray (31:02)
Yeah, we looked at the in the last podcast, we looked at the graphic by Rob Go, who made the point about like the re risking when you take venture capital in like rounds further in the company’s life, and how when you take it from these larger firms, they’re like Andreessen Horowitz type firms, you actually like re risk back up to like the highest level each time because you have so much money, you have to spend it so quickly on growth with a product that like maybe or maybe isn’t
perfectly built or, perfectly aligned with the customer. And it adds a huge amount of risk every time. So yeah, that’s something for any founder to consider with who they take money from. And also, you know, this is quite a big topic on its own, but they, the whole issue of, of exits and the question mark around like secondaries and IPOs. And to me,
Daniel Faloppa (31:39)
Yeah.
Dan Gray (31:49)
The outcome of these, the mega firms at the moment are like OpenAI, Stripe, SpaceX, companies that stay private for an incredibly long time, generate liquidity through secondaries, like in a kind of opportunistic nature for the investors, but it still feels kind of like an experiment. Is that going to work out for them in a much longer term than we see today?
Is that a model that works for many more companies?
I think that the traditional VC model of the smaller firms, like they’re going to start channeling companies more quickly towards like an IPO or an acquisition because it’s just like how the math works out for the huge firms who have this pattern of like perma private companies. Like it just feels so risky. Like nobody really knows if that model works long-term.
Daniel Faloppa (32:35)
Yeah, yeah, it’s no, indeed the whole bet. I’m not sure. And we wanted to do, and we will do probably an episode on that, but the, I’m not sure how much the valuation and the whole hype and recognition of hyperscalers is on the stability and the potential of being a winner take all company once in a century company.
Dan Gray (32:44)
Mm-hmm.
Daniel Faloppa (32:57)
versus how much of it is on AGI and just assuming that that’s going to be the last company. In the end, there must be a component of that because the private markets for their own nature are auctions. And the sales get sold to the highest bidder, the one that believes in the company the most. So the only investor that believes 100 % in AGI is going to be the one to win that auction.
So the valuation is going to scale like that. It’s an important point to repeat for founders. The risk of the company doesn’t always just go down, which is what you would expect when you develop more customers and you learn more about your business and so on. If you do take very large amounts of money and you end up on this very fast train, you are reducing your margin for error. You are increasing the risk of the company.
There are ways to mitigate that for you if you are really lucky, let’s say not lucky, but if the company is really sought after, right? You can partially exit yourself with the secondaries as well in this type of rounds. So yeah, those are important considerations when this investment funds come knocking.
Dan Gray (33:59)
Yeah. Yeah. And maybe just one last little funny note. You know, we saw Mira Murati, former, I think she was OpenAI CTO. She raised two billion pre-product for her company with a golden share. So no matter how the board changes in future, she always has control. And it’s like, I don’t know how to understand that. I mean, it seems to me like a bet from investors that her company will be the one to produce AGI.
Therefore, any price is worth it. Like, they just want to be in it. Because there’s this infinite potential outcome. So no maths makes sense. I guess. ⁓
Daniel Faloppa (34:32)
No, no, no.
Yeah, I mean, like she has some advantages, right? Aside from like, let’s assume that she is like definitely above average and she has that expertise. Okay. There are other advantages. She has a brand she can recruit because of her brand. And you know, so that’s a bit easier and she can raise additional capital afterwards because of that brand as well.
But yeah, $2 billion for an opportunity. If it was like an oil well, and you were sure that there was oil under there, then that’s a much easier bet. But yeah, I do believe those type of things must be based, again, because of this auction principle, they have to be based on some sort of extremely excited investor.
And in a sense, they also prove that capital is not a constraint anymore. If you have the way to employ it in this current world, you will find the capital for it, which I think is positive. has its own type of questions. yeah, crazy times, new times.
Dan Gray (35:23)
So.
Yeah, I think so.
Daniel Faloppa (35:37)
All right, good. I think that’s just the topic for today. Thanks everybody for listening. And if you have any questions, of course, drop us a comment and talk to you next time.