The Bipolar Market
It's an AI vs. non-AI world. Are we repeating mistakes from the past or is this a new paradigm?
Over the past 6 months, I’ve had dozens of conversations with founders, LPs, GPs, and operators. When founders are heads-down operating, it can be difficult to look at the macro picture so I wanted to provide some observations regarding what’s happening at different stages of the venture market.
There are currently two distinct sides of the early stage market that are at odds with each other.
On one hand, you have the AI-hype market. Mega funds are regularly leading $5M seed rounds, and some hot companies are raising up to 3 rounds of financing in 6 months. Cash is being thrown at founders who have any sort of background in AI and who can make a strong case about how they will build a product. Some of these companies are also generating revenue very quickly, and there are questions over if it’s sustainable. I’m quite cynical about companies that raise too much capital too quickly (E.g. $50M-$100M without any product) & aren’t prepared to handle it, but we’ll see how it all plays out. A few will work. It will come down to execution and metrics at the end of the day.
Each time these cycles happen, investors say that “this time is different.” I do see the step change in how AI unlocks new computing paradigms, and I also believe that many of the companies will end up looking like SaaS companies at the end of the day.
On the other hand, you have the non-AI companies. Some climate companies are getting tailwinds as a result of the cultural focus on climate (along with climate-focused funds), but most other startups are having a tough time fundraising. Angel investing has slowed down, it’s harder for VC funds to raise from their LPs, and the non-mega funds have gotten more conservative regarding their pace of investment & valuations.
A third category to consider is the startups who raised their Seed or Series A during 2020 or 2021. Many of these startups have not yet grown into their prior valuations and are hunkering down to focus on their business metrics, efficiency, and growth. Many founders & employees still aren’t aware of how difficult the fundraising market is at Series A, B and later, and they have not adequately planned for different scenarios.
Where are the biggest opportunities for angels and smaller funds?
I help many founders at the earliest stages, and I’m currently most excited about startups that are raising between $500k and $1.5M to get started. Founders who spend 6 months to 1 year talking to potential customers and validating their problem space before raising capital have a huge leg-up, as they raise their first round with very strong conviction about what product is needed & what problem they’re solving for. The best founders are also able to sign up design partners prior to fundraising, which is further proof of the problem and the founder’s sales ability.
Most of the time, these startups are focused on old-school, antiquated industries that are run on spreadsheets or pen and paper and are often ‘misunderstood’ from a VC perspective.
During this cycle, the brave (and almost contrarian) thing to do will be to stay away from the hype and to continue solving hard problems for customers. AI is one tool to get there, and it’s not the only tool :)