That Was The Week

Charles Hudson and Manu Kumar are two of the best early-stage investors in the world. This week, they both penned meaningful essays declaring that the fundamentals of early-stage investing have changed, possibly permanently.

Charles states:

For the past 18 months, the Series A market has been very quiet. Outside of AI-related investments, it feels like deal volume is off 75%. The Series A investors I know don’t feel any pressure to make investments and don’t really seem that excited or interested in much these days. Unfortunately for seed-stage companies, the Series A market can remain on strike longer than most seed-stage companies can remain solvent.

He predicts a significant dip in the number of seed-stage companies doing a Series A, a drop in Series As, and fewer extensions or bridge rounds.

Manu Kumar of K9 Capital extends the theme and suggests only companies building real businesses with real customers and revenue will survive. He implores companies to understand the following:

Early stage venture, particularly Pre-Seed and Seed stage venture, is a different game today than it used to be 10 years ago. LPs and GPs should be aware of this dynamic as they make investment decisions.

This follows from Sam Lessin’s theme a couple of weeks ago, declaring that the era of larger checks coming in at later rounds is now over.

At Signalrank, we have always distinguished between organic unicorns, built over many years from the seed stage, and artificial unicorns created by a single large check in an early round. Organic is always best and can survive downturns.

In this week’s video of the week, Jaimie Rhode doubles down on the theme, explaining that in venture capital, only power-law companies matter. Those companies grow to valuations, enabling an entire fund to be returned or more. The venture capital industry relies on the few power law winners returning invested capital.

In the heady days of 2019-2022, it was possible for a power-law company to emerge fast due to a single round of financing. And then quickly go on to do two or three more rounds within a year or two. Charles and Manu correctly point out that this is unlikely, except perhaps in AI. A power law winner will have to be built organically.

The implication is that early-stage investing will need to become once again deliberate and patient. I use the word capitulation (with a question mark) in the title, but this is just a recognition of reality. Capitulation to reality is a good thing. So, no, it is not a capitulation.

But it begs the question, can venture capital support wealth creation if it is really a lottery for a power law winner? Is there a way to benefit from the growth in venture-backed companies without needing to play the lottery of picking individual companies?

Marc Andreessen, Sam Altman and Geoffrey Hinton

To quote Oscar Wilde:
A map of the world that does not include Utopia is not worth even glancing at, for it leaves out the one country at which Humanity is always landing. And when Humanity lands there, it looks out, and, seeing a better country, sets sail. Progress is the realisation of Utopias.

Now, I have said that the community by means of organisation of machinery will supply the useful things, and that the beautiful things will be made by the individual. This is not merely necessary, but it is the only possible way by which we can get either the one or the other.

This was a week when it was almost impossible to escape politics, particularly world politics. The barbaric, medieval images coming out of Israel on Shabbat Saturday morning, at the start of the Jewish New Year, were both sickening and, at the same time, sadly, not surprising.

This was in a week where my media consumption included the interview Graham Alison did at the All In Summit and a similar couple with Ray Dalio and Larry Summers. All three focus on the current and future world order. The interview with Alison is this week’s Video of the Week.

So, it is time for me to stand back and ask some big questions. It is also time to begin to try and answer them. It all starts with Graham Alison’s book “Destined For War” and Ray Dalio’s essay this week - “Another Step Toward International War.” These are two super-intelligent big thinkers focusing on the coming end of US global supremacy, leading to a possible or even likely global conflict. Then there is Noah Smith’s “You're not going to like what comes after Pax Americana,” one of this week’s Essay of the Week.

Another week when there are many talking points.

The Q3 Venture Capital data is out, and both Gene Teare at Crunchbase and Peter Walker at Carta have significant insights this week. In an essay of the week, Kyle Harrison takes a stand back and examines the entire venture value chain - as we have discussed a lot in prior weeks. It is a great effort by Kyle and a very good read,

Also, Sam Bankman Fried is not in front of a Jury. Only two days in, the prosecution is mounting a strong effort to undermine his ethical stance, with his former CTO saying he was asked to write code enabling Alameda, SBF’s hedge fund, to take unlimited loads from FTX. It is not yet clear if this is criminal. I will wait for the defense case and consider it. But these two days have been difficult for SBF.
Meta is announcing Quest 3, which resembles Apple’s forthcoming approach (see through the mask into the room). Meta also announced the next version of its VR glasses with Ray-Ban. These look promising, to be honest. I might even pony up for a pair (prescription lenses too).

But for me, the story of the week is still AI. Open AI announced DALL_E 3 and that it will be included in ChatGPT. ChatGPT is also getting visual acuity - interpreting images and drawings. I have even seen demos of it writing code from paper sketches to make websites. Audio input and output are also now live in the mobile app.

Rex Woodbury writes an over-arching piece comparing the mobile revolution to AI. He concludes that AI will be far more significant than the already mighty impact of mobile.

I had promised there would be no That Was The Week this week, and Andrew decided we needed to record a show. Topics focus on the Bankman Fried trial, Amazon being accused of anti-trust, the Google trial, and developments with OpenAI

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