Generative Quarterly with Semil Shah: Seed Markets, Vibe Coding, and the Flappy Bird Effect

0:05Hey, everyone. Welcome to Generative Now. I am Michael Magnano. I'm a partner at Lightspeed And for today's episode, we're bringing back Friend of the Pod, Samil Shah, for our quarterly podcast that we do. Every couple of months, Samil comes on and we talk about everything that has evolved since the last episode in terms of VC, seed investing, AI, tech more broadly. Sometimes we dabble in some other non-tech topics. And just as usual, this was an awesome conversation. I had a blast talking to Samil, and I think you will enjoy it too. So check out this conversation with Samil Shah.

0:40samil michael good to see you sir it was great to hang out in uh in new york new jersey yeah a couple weeks ago that was fun yeah love love having you on the east coast we got we got to get you out here more i also brought great weather i think you did yeah it was really nice when you were here i know you're i know you're a big fan of new york you love uh you love the food in new York. I feel like I think you love a lot of things. Yeah. I mean, you're basically from here, right? Yeah. So always have a great time, although I just went to L.A. and I would say had a New York-esque experience in the sense of like how expansive it is.

1:18And yeah, I hadn't had that in a while. So it was a good reminder. Like just how big it is and how many people there are. Like, what do you mean define expansive in this context? It just felt like a mishmash of different cities. So like in New York, I can walk through the neighborhoods and I kind of know where to go and I know what to expect. And I'm a lot more familiar. But here it's just kind of Ubering, Ubering between neighborhoods and having a totally different scene, you know, was kind of wild. Especially like one night I stayed in Koreatown because I had a dinner there. And then that whole scene, you know, I've been to Koreatown many times, but never been out at night with people who know it, you know.

1:56In L.A., you're saying? In L.A., yeah. One question that's coming up for me, you obviously live in the Bay Area and, you know, that's your that's your primary area for work. And there's there's a lot to be said about Bay Area for tech right now. Obviously, given everything that's happening in AI, it really feels like that's where the gravity is. That's where the talent is. And then you just spent a few days in New York and you just spent a few days in L.A. I feel like these two cities, New York and L.A., they sort of they go through phases in terms of their relevance to tech. I feel like a few years ago, you know, maybe during like the creator economy era, L.A.

2:37had like a big center of gravity. Social media also similar like for L.A. Obviously, tech, fintech is a big thing in New York. Having juxtaposed the three cities just over the past couple of weeks, give us the state of tech in LA and New York and how it relates to SF. Yeah, I mean, one man's opinion, you know, everyone take with a grain of salt. But I've been pretty public about this. I think New York, if you think about every May, June, whenever there's college graduation, you take like your 2 ,000, 3 ,000 smartest kids graduating. The share of those people, I think, moving to New York post-COVID versus the West Coast, I think had gone up, except that with the rise of the Chachipiti moment and the amount of money people are making or can make in the Bay Area, it has this massive sort of counter-gravitational effect or counter-force against what was happening to New York.

3:40So that's kind of one thing. I think in New York, if you ask a lot of seed investors and people that we kind of co-invest with a lot, there's a lot of like health sort of fintech you mentioned, health tech, these kind of more like vertical applications that we see. And obviously there's consumer. And then in LA, I feel like we should get more Ritz in here. But I, and I love your opinion. I don't know the tech scene as well in LA. obviously there's like a pocket of things happening in and around El Segundo, Culver City, kind of that SpaceX, people kind of going off SpaceX and Andruil and that whole thing, which is very real, but like contained in a neighborhood or two.

4:26And then I think obviously there's the Snap ecosystem, which is still a thing. I don't really track that. My kind of theory or how I explain it to other people, although I don't swim in this world, is that the new way to touch consumers with consumer products is going to be through gaming. And if you really strip that down, it's basically like if you combine all the trends in technology, which is all these co-pilots and code generators and multimedia model development. I'm sure you see this on your Instagram or TikTok now when people are showing how they actually can create commercials now and doing all that.

5:11So could gaming be the interface for how people buy things in Fortnite or go out or make plans with people? I don't really know, but that's kind of my sense. And if that happens, it feels like that will be an L.A. phenomenon because the talent will move there. But again, big theory. I don't know if it's true. No, super, super interesting. So if I could summarize what I just heard from you. Post-COVID, New York had a lot of momentum, a lot of gravity sort of pulling away from Bay Area. But then AI just sort of flipped it back. I think it's the salaries. Yeah, the salaries, of course. LA, obviously we've got like the hard tech thing, robotics, SpaceX, that, you know, defense tech thing happening, which is, I would say, obviously a massive opportunity, but it's a small slice of the overall tech ecosystem.

6:12But maybe LA is the place for consumer and social moving forward. If gaming and AI become a big way that that consumer develops over the next couple of years. I'd love your opinion on that last piece, because part of my thinking has been partially influenced by just reading what Moritz writes and thinking about it, but also just seeing my kids interact with games. You know, it's like an undeniable thing. Yeah. You know, if you think they're all into Mario stuff now, right? So I've got, you can see my Mario wheel back there. Yeah. They're all into that. And it's like, yeah, if that keeps going, they're in that world.

6:54That's how they interact. Or like, we'll play games on it. And it's super social. And even without the functionality. So once they get into like bigger games and stuff like that, I can see it, you know, being a thing. Yeah. I think the gaming phenomenon is super interesting. And for me, the thing that has gotten me thinking about gaming again, because I, frankly, I'd like sort of stopped thinking about it. Although obviously folks like Maritz never left. But the thing that has gotten me as reignited my interest in the category is this whole idea of like vibe coding and specifically vibe coding games.

7:29I'm sure you saw this levels IO thing on Twitter. Did you see this? This guy levels IO, you know, he's vibe coding these games. He's got this flight simulator. It's doing like hundreds of thousands of, I want to say revenue. I don't know. I may totally get this wrong either a day or a month or whatever. And he just threw this game together through vibe coding. And there seems to be a little bit of a movement now taking place of people just throwing these games together really quickly through vibe coding. They're starting to be hackathons. And there's a little bit of a community forming around the idea of just like quickly developing games, which is funny because obviously games are one of these things historically that have taken far longer to create than like your traditional software, be it SaaS or consumer applications.

8:14you know you have to invest in huge huge teams of brilliant designers and creatives and storytellers and you spend years developing this game and then you you ship it after a few years and it's either a hit and it goes to the moon or it's a total bust and you wasted like three to five years building this thing and now you have people just like throwing these games out there i think in gaming it can be too much of a catch-all right because what you know there's like there's like the diablo of like immersive technical gaming. And then there's a, you know, Flappy Bird. I'm just thinking everything you just said is like history rhyming, you know, like when the iPhone came out, people were making these casual games like Paper Toss and, you know, all that stuff.

8:56So now, you know, now it's a little bit easier to go spin up those apps and the technology is helping it. So you can see people, you know, doing that. Like maybe you have a high school kid who's really entrepreneurial. 20 years ago, he would have had, or she would have had three little side jobs and now they're just making side apps. It's the same thing. Yep. Just different venue. I always remember Flappy Bird. I almost feel like I'm old talking about Flappy Bird now. But that guy was like an internet sensation, you know? Yeah, he was. Absolute, like, that would be an amazing guest for your podcast, actually.

9:32The Flappy Bird guy. Yeah, I wonder what he's doing. Moritz, you got to book Moritz and you got to book the Flappy Bird guy. I think it's a good idea. So yeah, I don't know. And maybe an interesting point that's coming from what you're saying now is like, you know, maybe this whole like vibe coding of games is just going to produce these casual games. And granted, casual games are far easier to distribute and monetize than they were in the Flappy Bird era. But maybe we get to a point where even the Diablos of the world can be created via AI very, very quickly. The way I think about it is, is that like a tweet is kind of like an envelope.

10:06and it opens, if you like someone's tweets or their Instagram posts or whatever, you're just looking at the envelope. But if you are curious, you can open the envelope and go into their world, you know, or their online world. There could be something similar force at play with these casual games. Someone who creates a casual game that hits something could be the start of a franchise. You know, you never know. So I think of it as like you let a thousand flowers bloom, let people create. I mean, this is the tech optimist version of this. And then, yeah, maybe the next Diablo comes from the storytelling insight and sort of very casual gameplay of a V1 of somebody who, you know, could be a barista or could be a garbage man or could be whatever, you know?

10:56I totally agree. And I think that concept can and will apply to not only gaming, but software more broadly. You know, I have this very specific app idea. It's not a groundbreaking thing, although I'm not going to talk about it on here yet because I might not ever do it. You're in stealth. Yeah, I'm in stealth on a project that could take me three hours on a weekend to build using Cursor, where I just have this idea of this utility I want for my own personal needs. And I'm like, I think I could build that with Cursor in a weekend. Maybe I'll do it this weekend if I could carve out the time. And I think if I did it, I would also just throw it up on the app store.

11:35And I think you're seeing a lot of people doing this right now. And some of these things, you see these examples all the time of people quickly generating, you know, 50K MRR or whatever off some, you know, random silly app. So I think the, the sort of, I don't know what the right word is, but the sort of trend going around is that like, if you don't, you know, if you learn how to use some version of AI creation tools, not all, but some, you're more marketable. You're going to make, you're more hireable. Um, and you're going to have more output and you have these opportunities, right? So all of it makes sense.

12:18I think, um, and it seems like people in general aren't afraid the technology they're like everyone i talked to even outside the bay area they're like excited about it i mean of course yeah they're concerns but the the sort of chats at the bar and coffee shop with people who are not steeped in it or have like a deep economic incentive is like pretty exciting yeah i've been talking to some some young folk you know because we are we are old you've mentioned flappy bird i think we're dating ourselves by by talking about flappy bird um and something I'm hearing from a couple, couple of kids in college, like thinking about their future and also kind of what they can do while they're in college.

12:59And there's an interesting divide is I'm hearing, well, I'm seeing all these people make money online from crypto and meme coins and sports betting. It's so accessible. Should I go down that path? Like, should I lean into sort of like degeneracy? I don't know if that's a word, This sort of like degenerative culture and YOLO my way to a fortune on sports betting and meme coins. Or, you know, should I be building things with AI? And the theme with both of those things, for better or worse, I hate to say it, is a little bit of like a get rich quick mentality. It's like, how do I leverage these tools?

13:40you know, these things that are now at my fingertips, be it some form of gambling or some form of speed running, building, you know, a startup to make some extra money in college, or should I do this when I graduate? And I find that to be kind of interesting. It is fascinating. I feel like that pull has been going on for a couple of years, but it's getting more intense, you know? And I also like really, really try to stop myself from trying to give advice even to a specific person versus generalizing. Even though sometimes I have an impulse to, it makes me feel uncomfortable. And I also wonder how many people are thinking either they're more hardscrabble themselves of pulling themselves up and maybe even paying for college or who knows.

14:35Or they don't have a safety net, right? So it's like, yeah, like, okay. I think also on top of that is like, it's pretty exciting kind of global remote culture that you can kind of steep into. And I guess what I would say to those kind of people is like, what's the intersection between like what you like to do, you know, one where you can earn a living so that you're not eating like packaged ramen, right? because then you're going to end up in the doctor's office, but also like creating value for somebody else. And how do you compound that last one over time? And then you would, then I would engage in a conversation like, okay, on the crypto side.

15:25But what's crazy about the crypto side is you could, your mental model is you can go in and view it as, this is why it's so powerful. Like I'm building a new money for the unbanked, new money rails for the unbanked. And that could be your motivation of creating value. Or you could wake up the next day and say, well, actually, no, I changed my mind. I'm going to create a stable economic currency that will not deal with congressional oversight and all this budgetary stuff. Or you could wake up the next day and say, hey, I just want to trade these things because it's a liquid market and it's open and there's no rules and I can live my life wherever I want.

16:11So there's so many ways to slice that that it's like mind boggling. I randomly, as an aside, when I was in New York, I met a colleague's friend who's been who's been a crypto trader, but he just manages other people's money and he has these like different books, he calls them, and he works by himself. The way he described the economics of it it sounded like he was doing extremely well for being under 30. Very put together, Ivy League education, very organized in his thought. And I was like, wow, maybe that's just a new job. And what's the difference if you're trading soybeans? Right, right. You know?

16:55Yeah, it's probably a lot easier to get started. And I don't know much about the regulation regarding that, but probably less red tape to, to, to get through to, to launch a career like that, you know, being like, um, you know, some formal like financial advisor, Morgan Stanley or something. Yeah. I think it's just trading. Like, um, you know, I don't think, I don't think any of us would, would advise someone out of college to be like a sports collectibles trader, like probably not a great idea, but you know some people do it and it's it's a really funky market um but at least this one like you can you can measure down to the decimal just like soybeans or gold so before this episode we we went to the timeline on x and asked people to send in some questions and we have a few grab bag grab bag before we do i have a question for you yeah so this one's coming from me uh i didn't post this on X, but it's something I've been thinking about.

17:54So when you were in New York, we hung out with a bunch of seed investors. Awesome time. Great meeting and talking to so many seed investors that are working on lots of different things and have lots of different perspectives. And one thing that kept coming up for me as I was talking to some of these people, and I figure who better to answer this question than you is, how are you thinking about seed Investing as it relates to sort of the entry price of many of these companies, which seems to be getting higher and higher. But obviously your funds are fixed in a moment in time. And for your funds to work, not just A-Stack, but seed funds, you have to hit certain ownership thresholds.

18:37But you only have so many dollars to do it. And with AI, these rounds are just getting so out of control, especially even at the seed stage. How do you adapt? How do you change your strategy? Do you not? Do you just wait for the perfect opportunity? It's probably the biggest question that as a seed investor I wrestle with or like my friends and colleagues, peers, mentors in seed wrestle with because this is the biggest dislocation I've experienced in pricing in my 12 year career of doing early stage investing. So it's wild. And I think you see people taking different approaches. One approach, since you mentioned the ownership, is people have just said, hey, if my fund is relatively small, it's more about picking the right companies and the ownership matters less.

19:28There will be dilution and all that stuff, but hey, I got to be in this company and I got to work with this team and look who's investing and all that stuff is happening. right so there are a group of people who are kind of what i call playing the game on the field right the game on the field is that a really hyped up team pre-product can raise anywhere from five to five hundred million dollars without having written a line of code for their prop i think there are another set of people and maybe we fall in this bucket we can talk about it is like the fund size is a strategy and you are contained to the strategy and you have to find opportunities within your opportunity set that makes sense for your limited partners in building a portfolio which means that you can break the rules sometime but also you have to give the portfolio you're hired like we're hired as managers to build a portfolio and give it a chance to win when everyone knows that nobody can predict the outcome.

20:39And I think then there are other people who are rethinking their strategy and fund size in the moment to sort of say, hey, I at least want to play in some of these rounds and write, you know, before my seed check at 2 million would get me 10 % ownership. It may need to be four to five now, but that creates a cascade of problems and commitments that you have to go through because then you have to go to your limited partners and say, well, you know, our last one was 120, but we think the next one should be 250. Then they have a whole different math equation that they need to run to. And your GP commit goes up and, you know, it's not that easy of just turning the dial.

21:19And so for us, maybe I'll just end on the way I've approached it is that because we're primarily driven and interested in people and we follow interesting people that, of course, some of them we're going to meet are going to be playing with AI in some way. We're probably priced out of around like an SSI where they're raising hundreds of millions or I can't remember, like a billion off the bat or something. That's probably not for us. That's not what our LPs are paying us to do. But then also we look at deals that are not true native AI deals. And that has a cost as well in the sense of like right now in terms of the follow on funding environment, it's a little bit harder for the true non-native AI companies to raise.

22:08So I'll stop there. But that's kind of a quick, quick way. Yeah, I think that makes a lot of sense. And, you know, I think what I'm about to say is probably a flavor of one of those, which is you're also seeing seed funds take different approaches to getting in earlier and earlier. Like, it seems like lots of seed funds are now saying, oh, we're going to try an accelerator program. We're going to try some, you know, some some new mode of investing where we spray a little bit more to find the winners like at the pre-seed stage. Right. And maybe that's just maybe that's just one, you know, another example of some of the things that you mentioned.

22:41yeah i mean that's been percolating for a while um i want to say that has been percolating for 10 15 plus years and it's now coming to a point where um there's some geographic dispersion on that there's some competitive pressure in terms of money financing there's different flavors of ice cream so you have south park commons where like the technical creatives hang. You have HF0, where now they're just focusing on all AI and second-time founders. You know, what Gary's doing with YC and, like, changing the pace of it, right, and the frequency of it. And, you know, there's so many other places that are trying to do their demo days and things like this.

23:36In one sense, I think it's great because it's a free market and people can experiment and it's more choices for founders, blah, blah, blah. For me personally, I like meeting people in an organic way as possible through other people. And so those formats of like the factory format or like the batch format, even though I think it's helpful to a founder to have the peer pressure of that, is not the way I like to get interested in a person or idea. Yeah. Yeah. Makes total sense. So I struggle with that. Yeah. And it's a different motion, right? And it's different requirement in terms of sort of operations, how you run your fund.

24:23Like, it's just a completely different thing, I have to imagine. I don't know the way HF0 runs, but it's probably way different than Haystack. It's a different beast. It's a different beast. And again, I think Dave and those guys who run HF0, it's amazing. I couldn't do, even if I had extreme focus, I don't think I could do what they do. The way I invest is I try to get into a series of deep conversations with a founder. and I think deep conversations don't really happen around batches and demo days so it's just it's not a criticism of those it's just more like I struggle I struggle to connect in those venues yeah yeah let's go to a question from uh our our friend our mutual friend knuckle uh uh tweeted at us uh as mega firms get used to writing 100 million dollar plus checks in companies that are scaling fast already.

25:25How do they retain the DNA of doing series A's where taste and patience is required? Seems like a structural series A crunch brewing. My quick, like, so if I could, like, add some context, I think what he's saying, you know, there are some of these companies, you know, that are raising at such large scale and, you know, successive sort of up rounds so quickly, it's almost like a different investment strategy, right? Yes, you have to have the fund capability and you have to have kind of the risk tolerance to just fire say like a hundred million dollar shot but the reward is that in three months that hundred million may be worth 300 million at least on paper whereas you invest in a standard series a might take five years seven years for it to have that kind of multiple you know uh different game different level of effort and work yeah i mean where to begin i think that like let's talk about like what the what the potential outcomes are of this you know what is what i call like a gravitational effect of money once you start writing 50 100 million dollar checks it's hard to focus on a five million dollar check it's like in a casino when you go into like that velvet rope high limit room you You know, they're there for a reason.

26:45And those people need certain stakes to get to get on bed. So one one scenario is that the HFOs, the Y Combinators, the new seed funds, the people spinning out. And you're already seeing this in the market. Fill that gap and it becomes territory to fight over. Right. So if you think about it like like a risk board game, you know, is like, you know, do you fight over that territory? or do you let other people fight in that territory and be around to pick off the things that are working? Yeah. Sounds easy, you know? So that's one approach, right? I think like in the, you know, in a previous era, and I don't want to necessarily speak for them, but my impression of a firm like Benchmark, which came out, you know, very clearly in the late 2000s, 2010, 10 and said, we're only doing series A's and a few series B's.

27:45That's it. We'll be your first board member, write a big check. We don't do follow-ons outside of supportive stuff. And we work with you on the board. It was a very clean stage specific pitch. They didn't want to play in the seed ecosystem. They said, you guys do that. If it's working, call us. And a lot of people call them. I think now these firms will have an incentive and a hunger to be able to do everything, everything from a secondary strip sale continuation vehicle all the way down to like a million dollars and the next person who leaves open AI. And I think how do firms can do it? They can create their own separate vehicles.

28:30They can do carve out vehicles, you know, like a company would they can hire people who are like that and enable them to do that they can say hey like let other people do that that's a lot of work hf0 to put on the batches and them would be great you know um and let's let's attract people to our brand with with um our know-how when the time is right so that's kind of a survey of like how different people view it but let me share let me sure what is actually happening, which is what are LP dollars moving towards, and they're definitely filling that gap. So there are funds being raised$200,$300,$400 million, lots of funds under$200 million, where a lot of LPs are voting with their feet, voting with their dollars, to basically say, I want smaller funds, right?

29:30I want experienced managers doing the smaller funds. because look, if I put 20 million in a, in a$200 million fund, the worst that can happen is I lose 20 million. Yeah. And then, you know, they're basically calling the bluff of these larger firms and saying, you guys are so big now. You're so, you got so many people, you're trying to do so many things. You're not going to have the, the patience or awareness or care to do the seven on 32 in something because you track this entrepreneur for six months and you're obsessed with him or her. Right. It doesn't make sense. But counterpoint, then they can't get in some of these rounds, right?

30:11They can't get these LPs. I'm saying they can't get exposure to the SSIs of the world. They can't get exposure to the XAIs of the world. Well, that's why they have a portfolio too. So like most LPs who have been in the game a long time that are truly institutional, they usually have two to four what I call platform relationships that they will never give up. And if you think about like the platforms today, right, where you have kind of Lightspeed, Excel, General Catalyst, Sequoia, and Andreessen, right, where there's like some global footprint, there's like billions of AUM, they all started as technology VC funds, right?

30:51There are amazing funds that are not at that scale or ambition, like Founders Fund, Thrive, I mean, I don't, you know, Benchmark, there's plenty of funds that are amazing, but it's hard to see there being another platform fund created, right? Maybe, maybe there's somebody out there. So I think when you're an LP, you don't want to give up that real estate if you've been there 20, 30, 40 years, right? And so that's what they're doing. But then they're sort of saying maybe funds in the middle. I should mention Spark. I mean, they've just been incredible. They're basically saying, hey, I have my two or three platform funds.