From: allin
The venture capital (VC) industry has seen shifts in deal activity and market dynamics, particularly influenced by the rise of AI and changes in political administration.
Venture Capital Deal Activity
Following a significant funding drop-off in 2022, VC deal activity, in terms of both the number of deals and the amount of capital deployed, is approaching pre-COVID-19 numbers seen in 2019 [01:04:00].
However, this trend is not uniform:
- AI vs. Non-AI Deal flow is segmented, with a “pretty hot” market for AI companies with the right teams, while non-AI companies exhibit a different funding chart [01:05:07].
- Crypto Companies These companies are back in vogue, with renewed belief and confidence stemming from the new administration [01:05:51].
- Enterprise Software Non-AI based enterprise software had been “pretty cool” but shows signs of inspiration from recent IPOs [01:06:13].
Venture Capital Firms and Investment Strategies
Keith Rabois, a prominent venture capitalist, transitioned to VC in 2013, spending six years at Khosla Ventures (KV) and five at Founders Fund (FF) [03:51:00]. His decision to move from KV to FF was partly influenced by his dislike for commuting to Sand Hill Road and his belief that San Francisco, not Palo Alto, represented the future of investing [05:40:00]. Becoming a VC often involves building relationships with board members, as exemplified by Roelof Botha (Sequoia) recruiting Mike Moritz, and Ravi Gupta (Sequoia) recruiting Mike Moritz after serving as COO/CFO of Instacart [04:52:00].
Khosla Ventures (KV) vs. Founders Fund (FF)
Both KV and FF are highly successful funds known for funding iconic companies and founders [06:30:00]. However, they differ in their investment approaches:
- Khosla Ventures (KV):
- Involved as early as possible, typically in seed or Series A rounds [06:53:00].
- “Input driven” organization [07:35:00].
- Focuses on early-stage investing (year zero, year one, year two) [07:52:00].
- Keith Rabois prefers to invest based on a keynote deck with “no product, there’s no metrics” [08:04:00]. He believes “nobody else in Venture is good at that” [08:11:00].
- Investment decisions are based on “Founder assessment” – the capability of a founder to build an iconic company [08:18:00].
- Keith enjoys “company building” and helping founders increase their “amplitude or probability of success” [08:38:00].
- Vinod Khosla and his team are known for being “extremely helpful,” adding board members, and introducing commercial partners, acting as “traditionally proactive participatory VCs” [09:22:00].
- Founders Fund (FF):
- A “momentum investor,” often investing at valuations of $500 million or more [06:53:00].
- “Output driven” organization [07:35:00].
- Their mantra is to “find great Founders and just get out of the way” [09:07:00]. They believe if they need to be helpful, it’s not the right kind of founder [09:14:00].
- Despite their “get out of the way” approach, Founders Fund has stepped up to protect founders in crucial business moments [09:47:00].
Exits and IPOs
While venture capital deal activity is increasing, VC exits are not keeping pace [01:04:25].
- Recent IPOs: Service Now went public, trading up 50% [01:04:28]. Chinese self-driving car companies We Ride ([01:14:47] $4.5 billion market cap) and Pony.ai went public on NASDAQ [01:14:52]. Clara plans to go public in the US [01:15:03]. Service Titan has also filed [01:15:06].
- Stripe: Despite its success, Stripe has not gone public, choosing to construct alternatives to a public structure [01:06:29]. This contrasts with the view that companies should go public as early as possible, ideally at 100-200 million [01:06:57].
- Value of Going Public: Going public provides capital resources (equity or capital) to be strategic and increases optionality [01:08:07]. It allows for acquisitions, like Facebook buying Instagram or WhatsApp, which might not be possible for a private company [01:08:24].
Challenges in Exits
The main factor holding up acquisitions and IPOs is not market conditions but rather “investor and board expectations on valuation relative to where they put money in the last couple of years” [01:10:30]. Many late-stage VCs and private equity firms that invested at high valuations in 2021-2023 are reluctant to take companies public at a 60-70% haircut, preferring to wait for valuations to recover [01:10:54].
Additionally, a cultural shift among public companies has led many to prioritize building competing functions internally rather than pursuing acquisitions [01:11:38]. High valuations demanded by sellers of high-quality companies further deter potential buyers [01:12:11].
One participant argues that antitrust leadership has not significantly impacted exits in institutional venture capital, as fund returns primarily come from IPOs, not smaller M&A deals [01:13:30]. While seed funds can generate returns from M&A, larger funds (e.g., 2 billion) typically do not [01:14:09].