The $400B Question: How AI Is Redefining Venture Capital and the Future of Startups

29:07But this isn't the kind of thing where incumbents are going, ask that thing doesn't matter. All of them have AI teams. So is this a sustaining or a completely disruptive technology? I think open question, but it feels as though it has the potential to be more sustaining than other technological revolutions where the jump from the web or just browsers to mobile, most of the companies that were amazing at browser didn't make that jump. I'd be more hesitant to bet against the existing incumbents in this case. You mentioned in the article you all wrote, you mentioned how there's kind of this shift from the consumer side from brand first to invest in unit economics and revenue durability.

29:51And I know we talked a little bit about revenue durability and AI and how we've now gone through the first cycle. When it comes to unit economics right now, how much do you think investors on the AI side are focused on the unit economics actually being profitable or being right? You'll get a different opinion from all the investors. to me, and this is, you know, not even speaking from Carter's perspective here, just speaking as Peter, I have always felt that if you scratch a VC down a couple layers, underneath all of the talk is, are you growing fast enough? That is the key thing. Revenue. So just revenue.

30:35Revenue and other traction metrics, you know, not to say that they're going to ignore you completely if you're a consumer app and you're doing millions of DAUs a day and all that kind of stuff. So over it. But like, are you growing? Like growth is the mantra of venture capital. And does profitability matter and growth in capital efficient ways? More than it used to. But it doesn't change the fact that, you know, there's this trade off inherent, usually inherent, although I guess AI might change it, between the money that you're spending and the profitability of your company. And if you spend a dollar to grow faster, it means you didn't save that dollar to look better on the balance sheet.

31:15VCs are almost always going to push you to grow faster. That's what they want. They want you to spend. And they want you to spend while also telling you to be capital efficient. So it's a tricky thing. And some of the teams have really internalized that. But the core metric that we're hearing, especially around B2B SaaS businesses these days, is ARR per FTE, which is how much revenue you have per every full-time employee. What that doesn't get to, and that's an amazing metric of capital efficiency in one way, but you can imagine a company that has far fewer employees than one of four or five years ago that's still burning cash because they're burning it on compute or distribution or other things.

31:56You can spend money on a lot of things that aren't people, even though that's the new favorite metric of a lot of VCs. Yeah, that's a great point. Marketing spend, compute. There's infinite ways to spend it. No shortage of ways to spend a million dollars. Yeah, exactly. I think in part of the article that you all put out, which I really enjoyed reading, it talked a little bit well on the consumer side about how there's now this expectation or the expectations obviously have grown and unit economics matter a lot more than what they used to, which we've certainly, which I've certainly seen that talking to investors and founders.

32:38But also as well, the fundraising cycles have become to be a little bit different. And it used to maybe be 12 months, 18 months of runway. Now it's spread all the way to three years. Can you talk a little bit about, do you think that, because sometimes what happens is with quarterly reports is it's hard to know what the noise is or what's actually long lasting, right? Do you think that this is something in consumer that's going to be more long lasting and and kind of more of the norm? Or do you think that this is kind of a blip due to due to where we are, due to also what we can certainly get into tariffs, obviously, and and or or even, you know, interest rates rising and everything like that?

33:21What are your kind of thoughts in terms of the actual fundraising cycle and consumer, and as well as the focus on unit economics really mattering? I'm glad you mentioned the macro because we can get back to it, but it definitely matters, right? Interest rates matter. Tariffs matter. These things are not, startups are not separate and apart from the core economy. So that's number one. Number two, I think the chart that you're referencing shows this really interesting trend, which is how long is it typically between a startup raising a seed round and startup raising a Series A round? So consumer startups in this case.

34:00You see the median black dark line there, and it goes from about one year to one and a half years to two years. And now in the most recent quarter, it's up at three years as the median time between seed and Series A. Three years is a thousand days, more than a thousand days. That is a, that's forever. It's a long, long time. What I'm thinking is happening underneath that median is actually there's a distribution of startups that are speed running through rounds, raising seed and A in maybe a year or so between each other. And then there's a group of startups that are waiting really, really long times.

34:40and my instinct is that this chart if we looked again at this chart in a year or what happened is it's going to peak around three it's going to start dipping back towards two but it's not going to get down to where it used to be it's going to be higher than it used to be but it's not going to be quite at this sharp moment and the sad thing is think about what happened three years ago three years ago we were in the second quarter of first quarter second quarter of 2022 that was the hottest seed market we any of us have ever seen. Things were going wild. People were throwing cash around. Three years hence, a lot of those deals that looked cool when there were zero interest rates do not look so cool anymore.

35:24And that was even before AI really came on the scene. So like everything has shifted underneath these founders. And I want consumer founders to know this is not just a consumer phenomenon. We see this trend in many, many different sectors. And I think what's happening is the companies born before AI and before the interest rates changed are kind of at a do or die moment. Either you're going to make the jump to becoming either AI native or so attractive in terms of growth or economics that people have to fund you. Or sadly, I think a lot of these companies are not going to be able to make the jump to the new world.

36:01And so that's why this time between rounds is like extended further and further because there's so many companies in that backlog. No, that's actually really, really, really helpful and really useful. I'd love to hear your perspective on how you think about, maybe this is too dramatic, but the future of venture capital when it comes to emerging managers, because there were a lot of emerging managers that appeared and were able to raise funds in, let's call it 2019 to 2022. And then, and probably, even if they were able to get some good deals, they were investing in a hot market. Overall, prices were really high, right?

36:44In terms of companies. And of course, you now have this downturn. You also have a lot of companies that, some of the companies did well, not saying that companies didn't do well, but you probably also, with many of portfolio companies, might have experienced down rounds or even gone out of business or bridge rounds. And my point is, if you are a venture fund and it's fund five or fund six, and you have all these historicals of companies doing well, if that one fund can't return, yes, it's horrible. However, you'll probably be able to raise your next fund, probably. But emerging managers, where it's their first fund and this is their portfolio, it's probably going to be hard to raise fund too.

37:31So my question is, do you think that it's, I think this is also an interesting time where you're going to have a lot more money coming to venture, especially with 401k, for example, you might be able to invest your 401ks into private markets, for example. How do you think about the future venture capital? Is it going to be, I know it's contrary right now with mega funds, But is it going to be even more concentrated in the future because of because of what's happening? Oh, man, this is a great question. Look, I. I want to be optimistic about this, but the data, I think, is pretty clear that the mega fund phenomenon is not going away.

38:20and that many of those megafunds will pivot their business models from being purely venture capital to being institutional asset managers. Some of them are already RIAs so they can hold stocks into the public market. Some of them are expanding into private equity buyout stuff, private credit. They're just going to become big, big financial institutions, the biggest ones. And they're going to have this foothold in venture. That's where they grew up. But I don't think that's going to erase the emerging manager venture class. The big question on whether venture capital for me isn't so much whether big funds and small funds are going to exist.

38:59I think we can probably all guess that there will be fewer VC funds than there are right now because it's unlikely a lot of them are going to make it through this. But there's always going to be a core of very small funds doing super early venture capital. And then there's, of course, going to be mega funds. The question is that middle$500 million to$700 million VC fund. They're squeezed on one end by the mega funds. They're squeezed on the other by the speed and nimbleness of the small funds. Their capital structures in terms of the number of GPs, size of the platform team, all that might not make as much sense.

39:36That's the part of the market that I am really curious. Like, how do those funds survive? Or does a new type of fund, you know, we've seen a lot of funds that are started by solo GPs or maybe one or two GPs that are spinning out of these big mega funds. And they're like, I have the mega fund experience, but I'm going to be nimble like the little guys. That to me might be where the center sort of goes towards. But I want to be optimistic about the future of VC because it matters a lot to Carta and it matters personally to me. I care a lot about startups. it's a little cloudy out there at the moment, Mike.

40:14Like, I don't want to be too Pollyanna about it. So you think that there's going to be, it's VC is going to have, I guess, two extremes where you have the small funds and then you also have the mega funds and the 500, and so the$500 million funds, those are the ones you actually think that are most vulnerable. Those are the ones where I don't have as clear a picture of what their future looks like. Now, to be even clearer than that, there's a whole cohort of startups that are now preaching the gospel of you don't need VC, right? We have AI. We have other ways like keep your capital structure down, build through bootstrapping and revenue only, avoid VC at all costs.

40:59That's one model. It's always been around, but it's like more talked about now within young startups. And then the second one, which is you only need a little bit of VC. And that's the kind of new-ish model where you're going to take one round, you're going to raise a couple million bucks. The goal with that money is to get to profitability and then to build your business from there. I think as a founder, that makes all the sense in the world. Why wouldn't I try that? As a VC, why am I funding that? What is useful about that as a VC? So I give you$2 million, you get to profitability, and then we wait for like 10 years, and then maybe you get bought, but probably not for that much because you likely weren't growing as quickly as the VC-backed company.

41:47So to me, it's not a pitch that I understand that clearly from the investor side. Maybe I'm missing something. Yeah, I mean, maybe, but maybe it's just a different model and certainly doesn't fall into VC or what VC is. but maybe it is a dividend model or something on that sort. But again, to your point, it's a very different model than what VC actually is. And that would require that we have new funds that support that model. Like if you raised money from LPs on strategy A, and then you pivot to this new strategy, strategy B, your LPs are going to be like, that's not what I gave you money for.

42:21Like, what are you doing? So maybe we're just waiting for a new capital class to emerge where it's a C. There are funds I know of a couple like on the VC side, like Bryce Roberts at Indie VC, who this is kind of their model, but they're few and far between. Do you think that some founders might be, I mean, I'm sure actually, you know, founders, not everyone wants to actually raise VC dollars, even if their company is venture backable. But do you think that this, where we are in these times, there actually might be less founders that actually might be interested in raising from VC? I think there are.

42:59I think that, or at least, how do I put this? I think that this is a, it's a tricky space to understand because if you're a typical VC fund, you, let's say you make 20 investments out of the fund. So how many companies do you see in order to make those 20 investments? 3 ,000, 4 ,000, like a lot of companies, right? So imagine 25 % of those companies said, we're not even going to try for VC. Now you're seeing thousands and thousands of companies in order to make the investments. So from the VC side, it will never look like we are running out of target. I don't imagine that they're going to sit there going, wow, we have no deal flow.

43:43What's going on? And yet there is going to be a class of founder who consciously decides to avoid venture capital at all costs because they got scared about the dilution. They're worried about the VC. They read the stories of the VCs kicking the CEO out, whatever it is. But it's a lot of, it's going to be, I think, a small percentage, but a meaningful percentage of founders who just don't want to interact with VCs at all. Yeah. I do wonder, just thinking about when I had on VCs that were VCs in the 90s, when they were just cold calling founders and cold calling founders and then trying to get into deals and everything like that.

44:23And it's But normally, they're different than today. Usually the best deals are the ones you actually, the founder is actually not willing to or not currently raising. That doesn't always happen, but it can be. And I do wonder for those types of companies if you call and you try to get into a deal or you try to get equity, if you might actually receive even more no's than what you used to and that people actually, the ones who never even was considering VC are dead set on no VC. So I think that this has always been the case where this VC thing is a weird combination of getting basically begged and pitched constantly for cash and then also begging some small, small subset of that group to take your cash.

45:13like VCs do both, right? All VCs basically do both. And there's this weird consensus-y driven thing that comes from that where if a founder doesn't need your money, they're automatically more attractive kind of by default. So it's an odd high school dynamic that happens across venture, but it's born of psychological good reasons, right? If a founder doesn't need your money and they're growing super fast, That's the kind of company you want to be in, and you're going to work really hard to be in that company if you can. So, yes, I'm sure they're getting more no's as well. Yeah, that's a great summary for sure.

45:53So within consumer, we have, you know, evaluation multiples are compressing. Certainly have seen that in CBG and in beauty personal care and other consumer categories. What I thought was really interesting from your research is in Seed, valuations have held up while round sizes have dropped by 30%. And the valuations did drop a little bit, but not nearly as much as 30%. What do you think is the underlying logic of this? What seems to be kind of contradictory in that if you like a company, you probably want to own more of the company. But what are your kind of thoughts on that? Yeah, it's a finding that's a little at odds with what we're seeing in broader.

46:42So I want to couch this and maybe there was a couple blip quarters here that made things look a little odd. But in general, seed valuations have held up pretty darn well for where they were. you know we're we're not maybe at peak peak but we're pretty close to peak for c valuations just fewer and fewer companies getting funded the same sort of dynamics that we spoke about at series a a little bit um on the round sizes you know i'd say there are two dynamics happening one is there are uh and this is true across many sectors but certainly a consumer as well if there's a bigger fund player involved in the deal, they are throwing their elbows around a little bit more than they used to.

47:24So they might be taking more share of that round than they used to. Like the lead investor might be owning a bigger percentage, right? So when we look at this, it used to be that the lead investor would own right around half. And now across all the venture deals on Carta for 25, the lead investor owns 65 % at seed. It's a big change, right? So they're willing to throw cash and say, hey, look, if we believe in this company, we're going to take a higher equity stake. We're going to push out. Well, it actually might be the same equity stake. Yeah, sure. It might actually be the same equity stake.

48:01They're just taking a larger of the pie, but it is a smaller round. So that's actually really interesting. You're exactly, that was a much better, that was a good clarification. It isn't as though the company is getting a bigger equity pie. It's just that one player in that pie is eating more slices for themselves. And that dynamic to me, when you look across the macro, makes a lot of sense. Like, hey, if I believe in fewer companies, then the correct strategy would be to own more of the companies that I do believe in at earlier stages and see where that takes me. The other dynamic is, of course, there's a lot of talk about how much money do you really need.

48:40To date, I think that seed round sizes are often dictated more by what the investors want as opposed to what the company actually needs, even though it's really hard to know what the company actually needs at seed stage. and I'd assume that in companies where you're manufacturing physical things, that's an even more difficult conversation than when you're spending your money on digital stuff and there's a lot of different narratives to suss out of that Well, speaking of manufacturing I would love to talk with you a little bit about tariffs. So tariffs back in the spotlight Let's do it It can't be a consumer podcast episode without talking about tariffs It's got to be, it's an evergreen topic for you, I'm sure.

49:26Exactly. Exactly. So with tariffs back in the spotlight and global supply chains, of course, under scrutiny, how are investors evaluating consumer companies that rely on international sourcing, particularly I'd imagine, you know, apparel, soft goods, electronics, a number of different ones, even, you know, yeah, electronics, even, even companies that there might be actual software component, but it is still a physical product. Do you think that some of these funds are actually pausing in terms of whether they should even deploy right now? Definitely.

50:03I think it's, if you're a consumer-focused fund and this is your life, right, this is all you do, you are probably deep in the weeds with your current portfolio companies on how they are responding to tariffs. And it's not even like you get to respond once. You get to respond every other week to a new thing that tariff is on, tariff is off. We're tariffing new things. We're tariffing less things. It's got to be the most confusing macro environment for cross-border logistics in 50 years. It's incredibly difficult. And yet, that comes into direct conflict with the thing that we always say about early stage venture, which is it is in some ways supposed to be a little bit insulated from what's happening the public market because you have so long to build.

50:50So some of the concerns about multiples and whatever, there's some seed stage investors who go, look, we'll figure it out in 10 years when this company's ready to IPO, right? We can put those conversations off a little bit. I think that what the tariffs have done more than anything is to bring into sharp relief the fact that there is always this interplay between public and private. And just because you're a seed stage startup doesn't mean you get to ignore the things that are happening to bigger companies or supply chains or anything like that. So I would be stunned if there aren't consumer VCs in particular who have put a little bit of a pause on things or added that extra due diligence step about your relationships with manufacturers.

51:31I'd be shocked if that wasn't happening. That's a great point. And I would also be shocked as well if that wasn't happening because that, you know, it's a product, it's a physical product. So yeah, certainly. I wanted to also, back on the VC side, I want to touch a little bit on liquidity and how the past couple of years, or the past few years, if it's fair to say, I heard a couple of VCs say this on a podcast, that LPs are pretty pissed off in that there hasn't really been a lot of liquidity happening in VC in the past few years. And what I do think is quite interesting from the data, I think that you showed us on LinkedIn the other day about how M &A is up.

52:14And I'm curious if you think part of the reason why M &A is up, and the reason why we're having a liquidity crisis, if it's fair to say, is because, of course, the IPO, there hasn't been a lot of companies that have actually gone public. There also hasn't really been, besides this year, a lot of companies that have actually been able to get acquired. There's been a lot of regulatory issues as well. do you think that the reason why there has been a lot of m &a activity is because of pressure for the actual companies to uh to exit and that they actually weren't they say that the best companies get bought not sold do you think that a lot more companies got sold rather than bought deep question i believe that's a part of it but only a i would say a pretty small part so there's this there's this conception that hey in a down market for liquidity like the one we're in now it's likely that vcs or other people on the cap might push founders to say accept an acquisition offer that if this was 2021 they'd be like ah screw that we're going for the moon like yeah No problem.

53:27I'd say that's probably on the margins happening. I hear a lot of talk about VCs who are, they either say managing towards liquidity is a cool phrase or manufacturing liquidity is another phrase. When they say that, I think primarily what they're talking about is, hey, we're trying to sell some secondary a lot of the time, not necessarily get these companies acquired. But Mike, I'll be honest and I say the reason we have a big liquidity crisis, you can blame the FTC on the acquisition side. You can blame public market IPO challenges. What it comes down to is that these companies aren't good candidates.

54:08They're overvalued. They didn't grow the way though they thought they were going to. Most of them. Now, there is a group of companies who should be public already that are not public. We all know those names, right? Strike, SpaceX, etc. We have a$400 billion private company in SpaceX right now. A$400 billion private company? That's never happened in the history of the world. And OpenAI is getting up there too. Yeah, OpenAI is going to race towards a trillion before they go public, I bet. Those dynamics have never existed. So the top, top, top, top class of private companies does not feel any need to go public.

54:49And the class below that is shuffling around on their metrics and going, I don't know. I mean, most of the IPOs that have happened in the last 18 months are underwater. They're lower. They're trading lower today than their last private market price, which suggests that a lot of them, that's where they should have been trading. So I think the fundamental problem with liquidity is that we overvalued a ton of assets. And that's a trickier thing than, hey, you know, Lena Kahn and her successors are keeping us down. that's a fair point do you think that we're currently in it in a uh reset yes um maybe another slightly spicy take i think we should be in a reset but we kind of got screwed up by ai so we like ideally if you had a peak like 21 and a downturn like 22 you'd kind of stay in the downturn for longer and like you'd have like it would things would have gotten a little bit worse more culling would have happened etc etc and then back out but we sort of cut that downturn short by saying ai is everything invest in ai companies get back to those i mean companies are getting whatever you think of ai and i'm i believe it's a transformational technology that doesn't mean that we're not wasting a ton of money of course we're wasting a ton of money some of these valuations are absolutely absurd um but we are in the middle of a hype cycle that's also in the middle of a downturn.

56:19So it's a very odd place to be. And so I think that, I think in terms of a reset, I kind of wish we had reset further, but we're back to, look at your favorite AI company's recent valuation. Those are 2021 level frothiness. That is a frothy market. So do you think that right now it's AI when it comes to valuations and everything else is way lower? 100%. Yes, definitely. And I don't think, I think that that is weird, but also on the baseline, the valuation multiples still, it is underrated, even as frocky as I think things are now. And they're pretty, that can be pretty bad. Most of the time, we're at least investing in companies that have more revenue and more traction, et cetera, than they did in 2021.

57:08I mean, oh my God, there were things in 2021 where it would be like, you are a unicorn and you have less than$10 million in ARR. You know, that isn't the case anymore. Things are growing more quickly, but the valuations are still pretty wild. And then you get into this dynamic of like, what is capturing the zeitgeist? I mean, when's the last time that we spoke about a non-AI tech company? You know, it's just, it's everyone's favorite word. And it's either gonna work out really good or there's going to be another downturn coming. We'll see. I really like your, well, not an example, but just your point about as well, what investors are thinking when it comes to AI is what will OpenAI take or Claude and what won't they take?

57:59And so also as well, thinking about that when it comes to, okay, maybe this company is doing well, but overnight can actually the incumbents take over from that that's that's really interesting it's kind of a new um it's a new thing to be worried about but it also you know if you're a founder what can you do really other than build the business that you want to build and start uh start making uh sense of what's going on vis-a-vis the foundational labs like does it make sense for you to spend a ton of time worrying about what OpenAI is going to do? Not really. If you have a core insight for your business and you're building something that you think is defensible, then just keep building.

58:44It doesn't actually change your day-to-day much, but it does introduce this new variable into investor calculations, which is to whom do these dividends from AI flow? Do they flow to the labs? Do they flow to incumbents? Or do they flow to startups? And people have very different opinions about who's going to win out there. That's really helpful. My final question for you is that we always do on this show. What's one book that's inspired you personally and one book that's inspired you professionally? Ooh, fun. That's a good question. One book that has inspired me personally, I am a huge fan of the James Clavel Asian Saga series, which everyone now knows shogun because it was turned into that wonderful show but i actually my favorite of the series is called taipan which is about um like basically the founding of hong kong uh as a as a british colony or a british outpost uh fantastic book super rich very exciting um so like that whole series is if you like historical fiction i think it's i think it's top class stuff um oh what's one book that has inspired me professionally i will mention because i have to embrace the deep inner data viz nerd within me um edward tuft is sort of the like i don't know what you would call him the guru the the chieftain of of all the books about how to be a great data visualization experience so the one in 1983 which is the first one is called the visual display of quantitative data um there's other ones called like beautiful evidence it's i have like a whole bookshelf of edward tuft and it's if you care about charts and like my job is to make great looking charts when you really dig down to it it's it's like a must read like it's he's the he set the tone for the rest of what like good chart making looks like love it love it excited to add that to uh to the list peter it's a little dry if you don't like charts i gotta be honest like don't don't don't read it expecting you're not a chart person yeah exactly yeah yeah all right he's a dated guy he's not a writer yeah good to know good to know well i'll be honest you're the first to mention these two books um The number one book that's been mentioned is, oh my gosh, why am I blinking on it?

1:01:21Zero to one, maybe? No, it actually isn't zero to one. That is common, but it is Shoe Dog by Phil Knight. Ah, yeah, yeah. Which, hence, consumer. Totally. You're speaking to the right audience. Exactly. You know who you're talking to. Totally, totally. Peter, thanks so much for your time. This was a lot of fun. Absolutely, man. Happy to do it. Good to see you. Awesome. And there you have it. Peter, thank you so much for coming on this episode. Blintz, thank you so much for sponsoring it. And check out the newsletter at theconsumerbc.com for a weekly email of all the latest news and deals that are happening in consumer.

1:01:56And you'll be the first to know when a new episode drops. Thanks for listening.