First Funders

We're all discussing current market conditions - valuations, AI hype, fundraising challenges... Before we kick off our planned interview series on First Funders, we sat down with our friend Arjun Arora to discuss the Trends in Venture Capital 2024. As investors, we always look ahead, making this a great way to start 2024.

Highlights from our discussion:
  • What to expect in round sizes and valuations
  • Anticipated returns from the AI hype
  • The significance of data-driven decision-making for VCs
  • The rise of hyper-specialized funds
You can read the full report here:

This is for information purposes only. This is not investment advice.


  • (00:00) - 01: State of Venture Capital 2024 - Arjun Arora
  • (00:49) - Guest: Arjun Arora on the State of Venture Capital 2024
  • (01:24) - Arjun's Founder Background
  • (03:03) - Format One and how they help founders
  • (04:41) - Are Mega-deals only happening in AI?
  • (06:07) - How should early-stage investors consider exit strategy?
  • (08:02) - Is AI coming for venture capitalists?
  • (10:36) - Social signals inform investors about founders AND teams
  • (11:51) - Later-stage investors use prior investors as a signal
  • (13:57) - Are crowd-funded companies legit investments?
  • (16:01) - Do funds focused on a niche limit returns and increase risk?
  • (22:25) - Don't go chasing Unicorns?
  • (26:41) - Where's crypto and blockchain?
  • (27:27) - Do founders want to do one-and-done raises?
  • (29:17) - Can seed funds less power law, higher average outcomes?
  • (31:45) - Will AI generate returns for investors?
  • (33:35) - Advice for founders in this market environment
  • (35:21) - Key Take aways: What we learned from Arjun's report for our own seed investing strategies
  • (43:00) - Outro

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Creators & Guests

Aamir Virani
Helped 50+ orgs grow product and scale teams.Software Engineer โžก๏ธ Product Manager โžก๏ธ Founder (Nest Cam fka Dropcam) ๐Ÿ”€ Investor, CRE, Founder@pifgov 2021
Shaherose Charania
Venture Investing at @CakeVentures and @joindvc | Always helping founders | Raised on Atari, MS-DOS, Bollywood & Hip Hop. ๐Ÿ‡จ๐Ÿ‡ฆin ๐Ÿ‡บ๐Ÿ‡ธ
Arjun Dev Arora
Now: Format One; Prior: Expa, 500Startups, ReTargeter; Passionate: startups, venture capital, learning, people, philosophy & life.

What is First Funders?

Learn from angel and seed investors bold enough to write the first check.

How do they decide which startups to invest in?
How do they gain conviction in founders and ideas?
How do they add value to their companies?

Shaherose Charania and Aamir Virani are operators turned investors. They chat with their friends investing in early-stage technology startups and learn about their strategies to fund the best founders and startup companies.

If you are an angel investor or seed investor, you'll hear how others operate.
If you are a startup entrepreneur, you'll hear how investors filter and decide on writing that first check.

[00:00:00] Aamir: Hi, welcome to the podcast. To kickoff 2024, we're talking to Arjun dev Arora, a tech founder turned investor and head of FormatOne, a firm that coaches founders on fundraising, board leadership, go to market, and team building.

[00:00:17] Shaherose and I got a sneak peek at Arjun's State of Venture Capital 2024. In it, he covers a few themes we're thinking about like:

[00:00:24] AI's hype cycle and what that means for early stage investors, valuations and deal sizes.

[00:00:29] Investment considerations as you specialize in a niche and how much you can really use data to make decisions.

[00:00:35] The democratization of venture capital and how that relates to emerging managers and sources of capital.

[00:00:40] We don't cover the whole report here.

[00:00:41] So for more details, go to and download the report. Now onto the interview with Arjun.

[00:00:49] Guest: Arjun Arora on the State of Venture Capital 2024

[00:00:49] Shaherose: we have longtime friend and collaborator, Arjun Arora, to join us here for a conversation about the state of venture capital.

[00:00:56] this is a conversation that Aamir and I have all the time

[00:00:59] So we're [00:01:00] excited to bring you in to be a third person to talk about this,

[00:01:02] how you and I know each we first met you were running Retargeter and I was running Women 2. 0

[00:01:07] six years ago is when we really started collaborating. we did, an investment together, that was my first investment ever

[00:01:13] We did a growth stage, SPV together.

[00:01:16] And we've done a few deals since then,

[00:01:18] And then 2019, we brought you on to my team at Nike so that we could build out our investment committee.

[00:01:24] Arjun's Founder Background

[00:01:24] Arjun: Yeah, it's been a lot of fun. Thank you. really appreciate, y'all taking the time and, and bring me on the show. by brief way of background, So, graduated from UC Berkeley, studied Electrical Engineering and Computer Science.

[00:01:35] technical by background, but pretty quickly thereafter kind of went into the business side of things. So it was investment banking for a couple of years, focused on M& A and IPO. And at the time there was activity across all of those things. So private placements, M& A, IPO, focused on mid market technology.

[00:01:50] So it's a great place to learn the fundamentals of, finance and, technology, business in particular.

[00:01:56] And then a couple of years at Yahoo; ended up running business development for [00:02:00] Yahoo real estate. And this was just as kind of listings were going from offline to online.

[00:02:04] So imagine folks having, only sold homes by listing it in newspapers and magazines and then jumping over and actually putting it online, which was great. and so that was a fun time to be in that space and at Yahoo.

[00:02:18] And then ended up, from there, starting my first company called Retargeter in the online advertising space.

[00:02:22] you and I met kind of around that time, Shaherose, and it was a, wild and crazy entrepreneurial journey in its fullest form. We ended up having tens of millions in revenue. We, ended up having customers all over the world and work with some of the largest ad agencies.

[00:02:35] and then was a, a partner of 500 startups and was, actively investing globally at an institutional level, and then also was responsible for fundraising and investor relations for, for the firm.

[00:02:46] And so that gave me a really unique vantage point at the LP level, which I'm grateful for and kind of folds into some of the thinking in this report as well.

[00:02:54] which thank you for mentioning, kind of excited to launch that, here at the end of January, 2024 and get that out [00:03:00] in the world. and look forward to sharing some of those insights here, today.

[00:03:03] Format One and how they help founders

[00:03:03] Shaherose: Why don't you, tell us a bit about what you're doing right now

[00:03:06] Arjun: so these days at format one, and more broadly kind of really focused on supporting founders in a tactical, and strategic way. Typically folks that are just before the A all the way through the series C.

[00:03:17] that's where, There's a lot of growth happening for the founders, both in their leadership capacity, and from a coaching perspective, but then also from just the need to tactically build cells, get deals together, design their organization, think about their own time, connect into the broader ecosystem in their market and, and be thoughtful about how to go from hopefully some early indication of product market fit to truly building a company.

[00:03:43] and that's where, you know, spend a lot of time with CEOs on a weekly cadence, digging in and being supportive and, providing value add, but in a tactical way and, and, doing that in a way that is a bit more neutral, a bit more Switzerland like as opposed to having, a large position on the cap table, more of a neutral [00:04:00] party that's there to support the, the founder.

[00:04:02] And So think of it like an independent board member on steroids, digging in to help support, the company.

[00:04:07] So yeah, that's been a blast. And then also, do a little bit of personal investing, SPVs from time to time, as you mentioned, and then, continue to help Nike, and then also, support a handful of emerging fund managers as well.

[00:04:18] given my time, at, 500 and, working with the LP set, and even prior to that, supporting, emerging and, and, and emerged fund managers as they're kind of out in the world.

[00:04:27] So that's the, the mix of things, that keeps me busy these days. and as you can probably tell, I love this ecosystem and,

[00:04:33] Shaherose: So let's talk about the report. There's a few key points that we pulled out that we thought would be interesting for our audience.

[00:04:41] Are Mega-deals only happening in AI?

[00:04:41] Shaherose: So the first thing is around this trend around mega-deals and you commented that it's not just happening at the growth stage that, but it's also happening at the early stage. There are fewer deals being done, but the round sizes are higher. is this mostly happening in AI companies? Are there any non AI companies [00:05:00] that are doing this?

[00:05:00] And what does this mean? Is this one of those structural changes that is here to stay?

[00:05:05] Arjun: I think this is probably more reflection of kind of AI deals more broadly and the select group of deals, in other kind of very hot spaces. that are primarily AI oriented and with the later stage rounds, with some of these massive AI rounds being done, it just skews the average in a meaningful way.

[00:05:21] I think the median is still probably similar, if not even lower, than where it was prior to, let's call it the mini reset we've had in the last 18 months. and then at the earliest stages, I think similarly in the AI space, and then the select group of crypto companies, have been able to pull off, even in this market environment, some pretty large, seed rounds.

[00:05:39] So again, I think that skews the average. I think on the whole, what we're seeing is, protracted seed processes that are taking a lot longer to get done, but when they get done, they're generally of the same size, and, are continuing to kind of execute as, as they would have in the past, it's just taking a little longer.

[00:05:55] as opposed to kind of the later stage deals, which are either these absolutely massive, [00:06:00] AI infrastructure companies, or, for most folks, the C's and the D's have, have effectively disappeared.

[00:06:06] so it's been pretty, pretty rough out there.

[00:06:07] How should early-stage investors consider exit strategy?

[00:06:07] Aamir: do you feel like this change means that some companies just aren't getting funded or does it mean we're going back to a world where there are fewer rounds before a company has to exit or IPO?

[00:06:19] How do you see this change affecting a company's prognosis and how investors should, early stage investors should look at their exit strategy?

[00:06:25] Arjun: Yeah, I think what's happened, particularly maybe at the A and the B stage for companies, this has an impact on both ends of that spectrum.

[00:06:32] maybe towards the end of last year, so 2022 and into early 23, it was a lot of layoffs and bridge rounds and just kind of survival mode and the back half of this year, you know, post the SVB crisis as well has been more kind of tactical, founder led sales, founder led business development deals to stay afloat and get closer to profitability.

[00:06:52] I would say those deals are still getting done, but they're just less deals happening, I think, as the market improves and we get, Back to some [00:07:00] semblance of normalcy, hopefully in 2024 and kind of into Q1, Q2.then I think, those deals will return.

[00:07:07] And one of the things that I think has happened not only has the public markets in Q4 of 23 improved, but also the founder capitulation is complete in terms of valuation. I think there is nobody out there that barely expects to get anything close to 2021 valuations. even in some of the AI spaces, and I think with that kind of full valuation capitulation plus a little bit of the market returning I think we'll see kind of the As, Bs, and Cs pick up in volume, in, in the next year. it may still take one more year, especially with the election looming but, on the whole, you know, my sense is things will get a little better.

[00:07:43] So I don't think there's a structural change as to to You know, the long term need to kind of have subsequent rounds of financing to an exit, but I think this is just a bit of a weird time where folks have had to stretch the dollar, and so it looks like nothing is getting done, even though it'll [00:08:00] return in some meaningful way, in due course.

[00:08:02] Is AI coming for venture capitalists?

[00:08:02] Aamir: Arjun in part of your presentation, you talk about the emphasis on data driven decision making and you call out the fact that there are ML algorithms that can sometimes outperform, venture capitalists.

[00:08:12] Could you dig in more on this?

[00:08:13] Sure. So I think, this practice has been, started for a little while now. I think SignalFire is one of the early folks there. I think even Tribe Capital has been, pushing this in a meaningful way over the years. And then Rocketship VC, 212 Angels is a phenomenal group that's done an incredible job with data driven, understanding.

[00:08:29] Arjun: in the case of tribe, they're looking to ingest company data in a meaningful way and benchmark it across other companies.

[00:08:35] in the case of, SignalFire, they're looking at a whole host of kind of other broader signals in the market, and then 212 and other folks are looking at social signals, Plus having direct conversations with founders, of course.

[00:08:46] But my, my read on this is that if you can ingest data in a really thoughtful way and understand, from a fund manager perspective, the The places where, as a team, you may not either have enough [00:09:00] time to do that level of diligence or may not be, as a broader thing, the aptitude or interest of the team, and ingest that data and provide meaningful insights, then you can, couple that with, the, continuity of human based decision making, which I still think to this point is necessary.

[00:09:16] You know, where those models can beat, Humans tends to be much of later stage where there's a lot more data to be able to leverage and even that's still early in in the ability to say that that's the thing and you still have to win the deal, right?

[00:09:28] So we talk a lot about venture capital. It's making sure you see the deal, Understanding it and choosing it and then winning it and supporting it. So the winning part of it is still very much a human part and supporting it is obviously very much a human thing.

[00:09:42] But in the early days to the point that can you ensure that you see everything? I think data can play a massive role. And then in terms of making that decision, can you supplement your human decision making with incredibly thoughtful, well understood insights that both aggregate the data of the company, but also benchmark it in a [00:10:00] really, smart way. that I think is an opportunity to leverage ML, AI, um, and, LLMs even to help synthesize information in a way that allows you to make a better decision as a human.

[00:10:14] I'm not here advocating that we, you know, rip and replace and just put robots in venture seats just yet. But, I do think that there is a tremendous amount of support or enhancement that can happen for the decision making process by thoughtfully using data in whichever form you can most, thoughtfully grab it, and wherever you might have that leverage point as a, as a GP.

[00:10:36] Social signals inform investors about founders AND teams

[00:10:36] Aamir: Have either of y'all seen actual data sources that have led to an investment? Like any, any secret sauce that you've seen exposed so far in your own investing backgrounds?

[00:10:46] Arjun: what I've seen is people who understand social networks really well, as one piece of kind of secret sauce is they deeply understand social connectivity and other elements of that, as a way to understand, founder capacity and [00:11:00] capability and in layered into that is, is the trajectory of their, career. So combined with their social connectivity is kind of one vector.

[00:11:07] I think the other side is just kind of the classic benchmarking. So ingesting startup data, you know, primarily revenue and cohort analysis and to understand growth patterns. So what they're looking for is, is this really breaking out? Like, does this match the pattern of other companies that have achieved hyper growth and hyperscale in a quantitative fashion? And if so, then okay, let's flag that and really dig in and understand that better.

[00:11:32] So I think that's one other element that people, you know, are leveraging. the social part, it's particularly with early hires and just understanding, are these the type of early hires that lead to hyper growth outcomes,

[00:11:43] So the, the social network and career trajectory of the founder, and then that of their early employees and the folks that they've been able to recruit.

[00:11:51] Later-stage investors use prior investors as a signal

[00:11:51] Arjun: and then the other thing is later stage folks look at the constellation of early stage investors and angels as a. potential, success [00:12:00] indicator as well.

[00:12:00] So if you have a certain set of angels and pre seed and seed stage funds, the likelihood of, hyper growth is higher.

[00:12:07] Now, these are all signals. I wouldn't make a decision off any one of these vectors, but together combined with a human analysis, that I think is the way to ultimately make that decision.

[00:12:19] That being said, this information is incredibly helpful to have at the ready, especially if you don't have a lot of time, right? In hotter markets you, have effectively zero time to make a decision. So the, to the extent that the, data can be ingested and understood quickly, it's great.

[00:12:36] In this market environment you might have more time, but then, you're likely supporting your portfolio company and helping them through tough times. So you still probably don't have time.

[00:12:45] and I was talking with a, a partner at a very notable venture fund recently.

[00:12:50] And he's like, it's been super busy, just, getting everyone over the line. So even if, he, did have that time, he doesn't.

[00:12:56] Aamir: just from my own background, I remember people would talk a lot about [00:13:00] just track the people on LinkedIn, see what the growth is for the company. And they're, you know, based off of their company profiles.

[00:13:05] And then later on it became follow GitHub projects and see, and see how many are getting starred and watched, just to see if there's any signal there, especially around infra companies, um, or, or companies doing, you know, something that's developer related. So, and then that became very noisy and people knew to just pay to get stars.

[00:13:22] Arjun: Yeah. I saw that behavior as well. Yeah.

[00:13:25] Aamir: then it became the more human aspect of like, no, really dig into forums and where people are talking about these things and see if they're actual humans talking about the usefulness of this tool.

[00:13:35] And it seemed To go back to, good old footwork

[00:13:37] Arjun: Yeah, exactly. you know, OSINT or open source intelligence is a great like framework to use a lot of folks spent a lot of time understanding how to ingest and synthesize publicly available data to understand anything primarily that's been used for more, defense related, use cases. But a lot of those first principles are very much applicable to this exercise that we're talking about here.

[00:13:56] Shaherose:

[00:13:57] Are crowd-funded companies legit investments?

[00:13:57] Shaherose: we wanted to talk a bit about some of the changes, in [00:14:00] terms of democratization of venture capital.

[00:14:02] you talked about how crowdfunding is maturing, tell us more about what you're seeing.

[00:14:07] We both know one of the companies in this space, Republic,

[00:14:10] Are the companies on these platforms venture scale businesses that are raising money? Are they great tech enabled businesses, that don't need venture capital? And or are they great CPG companies that, need,capital what are you seeing there and what this means for venture capital?

[00:14:27] Arjun: I agree that there's a wide variety of, of different styles of companies on these platforms I'm investor in a company called Firefly Aerospace, that's in the space tech space. And, they raised money on the Republic platform. They have some great investors, very, Large and, you know, amount of capital necessary to build a space tech company. So there's no non trivial in that regard. so there are these, incredible examples

[00:14:49] And they're not all venture. And I don't necessarily think that's a bad thing. I think, finding tech enabled services business, CPGs, you know, real estate opportunities. I've invested in a real estate opportunity off of [00:15:00] Republic as well.

[00:15:01] in your presentation, you talked about this democratization and increasing access, and then you mentioned B2B, SMB, those types of companies may be performing better. Do you think that that's going to allow for the same types of returns in these democratized platforms as you would through general venture capital?

[00:15:16] Aamir:

[00:15:17] Arjun: I'll speak personally. What I'm underwriting to in each of these cases is very dependent on which company is there. So if I truly believe it is a venture scale outcome, I'd want to underwrite it to a hundred X, multiple, particularly if it's at the earliest stages.

[00:15:30] but if it's a real estate deal, I'm probably underwriting to some cashflow component and, maybe a two X at best,

[00:15:36] the ability to have different archetypes of deals on the platform is going to require more consumer education around What one should be underwriting to.

[00:15:47] that is going to require continued financial education for, for investors on these platforms. You can't expect, a hundred X, space tech type of outcome from a, local real estate deal on one of these platforms or a recurring, [00:16:00] royalty deal for music or something like that.

[00:16:01] Do funds focused on a niche limit returns and increase risk?

[00:16:01] Shaherose: we saw your slide on the growth of hyper specialized funds. There was a wave of specialized funds who are like FinTech, health tech. But now we're talking about a fund focused on the dental industry, or psychedelics for medicine. and so when we think about this, what feels like very hyper specialized funds, tell us what this means again for the industry and what this might mean in terms of returns that LPs can expect and even a bit about how this might have an impact for early stage investors like us.

[00:16:35] Arjun: I think anytime emerging fund managers come out to market, they really have to differentiate. And I think that's one of the critical pieces for emerging fund managers. the sharper the differentiation, the better. And over time, they can expand that scope and, get out there a little bit more.

[00:16:49] So I think in the early days, even for the fintech funds that at that point in time, felt wildly specialized, when those first fintech funds came out, they said "oh wow. Is there enough there to [00:17:00] do? Is this really kind of a space where we can have a whole fund ecosystem dedicated to it?"

[00:17:05] Um, and obviously that, you know, got proven right. Now it's TBD on whether some of these spaces are sharp enough to warrant larger AUMs over time, or if they're just really going to own their niche, and be, the specialty funds there there that see the absolute best deals in that space, and get in all of them and win them. And so that's a, tbd on the spaces.

[00:17:25] But in the same way that GPs bet on founders, and their products in a market, seasoned emerging fund manager LPs are really betting on broader markets and then the ability of that GP to See and win everything in that particular market.

[00:17:41] So, those LPs that made investments in all the top fintech funds, let's call it 10 or 15 years ago, have done incredibly well. maybe some of the folks that invested in consumer only funds, over the last few years haven't done so well, right?

[00:17:54] I think as emerging funds, continue to show up and I think they'll always be a part of the asset class more [00:18:00] broadly. We'll see these kind of unique and fun points of specialization, and I think particularly in difficult fundraising environments, you have to be even more, differentiated and specialized and clear on your thesis, because it's very hard for an LP to back another generalist seed fund, particularly in this market environment.

[00:18:18] So I think it's, good for the ecosystem. I think those that nail it and, win a market, for example, the psychedelic, medicinal market really does take off and becomes a, a national method, for folks to, tackle issues around mental wellbeing. then, hey, that fund is probably going to do really well,


[00:18:34] Now, if it gets hung up in regulatory, land for the next 10 years and they can't really get this going and it lives at the edges of the gray world, hey, that fund's probably not going to do so well.


[00:18:44] Aamir: LPs are approaching this as a portfolio? They've already got these funds that they've been invested in for years. Many of the larger LPs out there.

[00:18:52] what's their mentality when they see some of these niche categories?

[00:18:55] Arjun: typically the larger institutional LPs may have a thesis. [00:19:00] And so the way they look at the world is quite fascinating. It's like, here's the private equity bucket.

[00:19:04] Within that bucket, I've got a venture bucket.

[00:19:05] Within the venture bucket, I've got a smaller, early stage bucket, or it might have a thesis specific or geographic specific, thesis to fill.

[00:19:13] so if it matches what their core thesis is, then, great. They will, as an institutional level, will invest in that specialized fund.

[00:19:21] if it's, more of a family office kind of LP, then they may just either know that space really well or be excited about it. It might be, the GP had dinner with the principal of the family office the night before, and they have a check the next morning, and sometimes that's how it works, and, in that instance, it's really about showcasing and being able to kind of sell somebody the possibility there and get them excited about, that particular point of differentiation versus, aligning to an institutional thesis or area of interest, or just hole in their map of assets they need to shade

[00:19:51] So, I think those are, different LP archetypes and how they might look at, these specialized, funds. but back to the kind of massive market point, there still needs to be a huge [00:20:00] or quickly growing market, for that point of specialization or differentiation.

[00:20:05] Otherwise, neither of those folks are really going to be interested. It's not really worth their time from an LP perspective.

[00:20:10] Shaherose: it feels like LPs are, taking the bet on the GP being the one to first of all, do the, the incredible job of finding the best deals. And at the same time taking a bet on whatever industry or niche it is that there will be some inflection point during the life of the fund,

[00:20:27] That will actually help with, the growth of either the industry or returns in that portfolio for, for that particular fund. And so it's like a multi layered bet.

[00:20:35] numbers show that generalized funds tend to outperform specialized funds. And so what I'm gathering is that, that doesn't matter because a lot of these institutional funds have their own thesis and want to have exposure to that space that maybe a generalized fund might not have, a good enough breath enough, focus on. Is that sort of the thinking there?

[00:20:55] Arjun: Yeah, exactly. the average tends to be, partial to the generalist funds, but [00:21:00] because power laws are true, even within the, the venture asset class in and of itself, I think the specialized funds that really nail a market are going to be order of magnitude. perform better.

[00:21:10] And this is, somewhat true of the seed stage and the pre seed funds of yore, those were also considered specialized funds in some way. We've been talking a lot about vertical specialization, but their specialization in the context of stage, which, our mutual friend Charles Hudson, the folks at Afore at the pre seed stage, that was a new Asset class.

[00:21:27] People say, why would you invest pre seed? Isn't seed supposed to invest early? What is this weird new thing called pre seed? And that was an equally interesting kind of point of differentiation and specialization, just not necessarily in the vertical context. The other kind of similar thing is geography.

[00:21:43] so 500 startups, had emerging funds in emerging economies, which is the hardest of the hard. some of those economies have now really, really taken off. We think of kind of Latam or, the broader Eastern European Turkey region, or obviously the Middle East, with, recent announcements on kind of fintech [00:22:00] companies and Saudi, you know, really taken off.

[00:22:01] So there are, multiple ways to kind of slice that and power laws will rule, that as well. But on the whole, the seasoned top 10 generalist firm on Sand Hill Road is almost always going to outperform everything else, on average. once in a blue moon, you get these points of specialization that really crush it.

[00:22:19] Crypto funds five years ago, oh my god, you know, those ones did really well too. And some of them are no longer around.

[00:22:25] Don't go chasing Unicorns?

[00:22:25] Aamir: as you went through the venture capital landscape and look ahead, you talked about unicorns and you mentioned that they're rare, but they're not extinct. how would you look at that as an investor in 2024? Like, should we consider different return profiles for investment?

[00:22:39] do you think it's still go chase the unicorn and hope for the best?

[00:22:42] Arjun: you know, at the pre seed and angel space, yeah, I think we'll see the return of, that hyper growth, unicorn style of investing at some point within the next 10 years, whether, over time, interest rates change or, something happens that allows for that to return and who knows whatever that, Black Swan event will be of the future.

[00:22:58] at the earliest stages, it's [00:23:00] still about finding great companies that are, looking to get to product market fit as quickly as possible and in big markets, and that in this moment in time are staying scrappy and not dependent on subsequent rounds of financing to Ensure their success, but have paths to stay alive and continue to grow regardless,

[00:23:16] in the later stages today, I would assume that for the next little while the C's and D's are going to be pretty dry. There's not going to be a lot of new unicorns minted. It's, it's more just, hanging on, until the markets turn.

[00:23:28] And even then, I think, people's willingness to give outsized valuations has certainly been reduced in a meaningful way. I think we'll just see less unicorns for the sake of it, and people fighting over winning a deal because it's hot and just bidding up the price to clear the billion dollar threshold so the founder will take the deal. That sort of behavior, I think, is very much from our zero interest rate heydays of the last 10 plus years.

[00:23:53] and, And now I think people are going to be more thoughtful. we'll see unicorns, but I think they're going to be more well deserved in the sense that there will [00:24:00] be more rigor, more PMF, more go to market consistency and repeatability that is present to justify that, valuation versus, some folks just sell in a few early deals with some early indication of PMF and a hot space and getting thrown a, unicorn valuation felt a little crazy and I think we're coming back to reality.

[00:24:19] Shaherose: if you were to, think about where we are in time now when it comes to, the technology curve, We feel like technology has matured And so what does a unicorn starting today, look like? the last wave had either really new technology or they were changing behavior many companies now with all these specialized funds going into spaces that, we're applying technology to. And then you have, companies that are tech enabled.

[00:24:53] they're serving a very specific, industry with existing technology that they might be stitching together.[00:25:00]

[00:25:00] what are those? are they attempting to be unicorns or are those of a different return profile?

[00:25:05] Arjun: my sense is those ladders tend to be more supported by growth equity and private equity folks if they are truly building, tech enabled services. And so they might, get a, deal from a growth equity shop or might get a 80 percent buyout from a private equity place to go run for three and five years.

[00:25:21] So that I think is generally tends to be of that archetype.

[00:25:24] and things that I think are truly of venture scale that can get to unicorn status are still building real software that is highly defensible, but maybe in a particular vertical where they can really own it. And then they are excellent at execution in this market environment.

[00:25:38] So they, really own the dental billing space and build software for that. or, they really understand, adding AI to help, trucking routes, be more efficient or something like that.

[00:25:48] Massive markets in both cases, huge. but they are phenomenal at execution. They nail them. and They grow into those markets still in a, exponential way, but focused on.[00:26:00] thoughtful execution and making sure that they're, crossing all the T's and dotting all the I's and that sort of, discipline around growth, in a, way in which they're able to tweak the dials of running the business really thoughtfully. They run it on a, sharp model. They understand every input and output on that model.

[00:26:17] those are, I think, the kind of companies that are venture backable, possible to scale, And will get to that unicorn status.

[00:26:24] And then to your earlier point, I think there are still some tectonic shift, businesses out there. I think all the really interesting stuff in AI definitely fits that category. And that might be a little bit of our, our past kind of coming back. in the sense that those companies can get those crazy outsized valuations out the gate because They are tectonic shifts in technology.

[00:26:41] Where's crypto and blockchain?

[00:26:41] Arjun: Are there any spaces other than AI that you're excited about

[00:26:45] Yeah, I think in that kind of tectonic shift category, right now it's probably mostly AI. I'm still excited about, the resurgence of crypto and blockchain. And I think now with some sobriety brought to the space and more kind of focus on use [00:27:00] case, there are, some really interesting things going on.

[00:27:03] I, just caught up with Adam Jackson today at Braintrust and some really cool stuff going on, over there, but a long haul, right? He's signed up for 10, you know, maybe even 15 year journey, but, the size and scope of that opportunity is absolutely tremendous.

[00:27:16] So I'm still bullish on the, possibilities that open up as it, relates to fintech or value exchange more broadly, but it's going to be a, a longer slog. And I don't think we're seeing that in the market.

[00:27:27] Do founders want to do one-and-done raises?

[00:27:27] Shaherose: so let, let's shift our attention to the early stage, I've been having meetings with founders getting to know them and, really feeling and hearing this response, which is really excited to raise this pre seed or seed round and, you know, Hey, between us, I'm not planning to raise another round.

[00:27:45] And so then my question is, Are those venture minded founders? Charles Hudson, our, our friend just put a post about founders wanting to get off the VC train. I'm curious what you're thinking

[00:27:56] Arjun: a little bit of that is reaction to the fact that investors have been pushing hard [00:28:00] towards profitability of late and I don't think they're pushing towards profitability forever. It's just this market environment requires folks to be able to manage their business in a really thoughtful way.

[00:28:10] And, so I think the response from the founder market is to say, "Hey, well, you know, I could not have to raise after this 'cause this is just the money I need to get to PMF and I will thoughtfully build a, kind of scrappy business that doesn't require additional capital."

[00:28:24] Now I think that defeats the purpose of venture in some ways because venture's all about capturing market share quickly in a space where you know you can, and really win, in a meaningful way.

[00:28:34] And so, while that may be the appropriate stance for now, I think it's more of just waiting out the broader macro environment so that when capital does flow again, as silly as it sounds, if you don't take that money when it's flowing again, someone else will if the opportunity is big enough and the competition is real.

[00:28:50] that's probably just a reflection of the odd times we're in right now, but the reality is once the money starts flowing and the opportunity remains clear, it, people will start taking it [00:29:00] because they want to win. They want to build the, the biggest company they can and be that winner in the space.

[00:29:04] the other thing is if that's not, then yeah, it would be a little reticent to write that founder a check if that's truly how they're thinking in the long run, because I don't think they're building for a venture outcome in that instance, nothing wrong with the business, just not a venture style business.

[00:29:17] Can seed funds less power law, higher average outcomes?

[00:29:17] Aamir: I think most founders that are in Silicon Valley are not necessarily going for the world changing 1 trillion outcome. They want to have a business. They want it to make a ton of money for themselves. And in that case, Yeah. maybe the venture path is not right for them.

[00:29:32] Or is it that the venture path is wrong and that the thing they followed in going after unicorns, which is a coin that was like termed only in 2009 is too recent.

[00:29:41] And there are other firms that have come up, They say, hello, LP, we'll get you the three X return by going after companies that are more likely to survive and succeed instead of going for this, power law of company success.

[00:29:54] do LPs buy that argument? If I can promise you a three X return, so I can end up in the top quartile from Cambridge [00:30:00] associates, rankings, but I can do it with less risk just more average positive outcomes. Does that sell?

[00:30:06] Arjun: At the earliest stages, it doesn't really sell because the risk is still there regardless.

[00:30:10] So even if you're starting a company with the intent of growing linearly, if you're starting it, the zero to one is still a very high risk moment.

[00:30:17] And so I think LPs would rather write a check into a growth equity fund that invests in a Bootstrap founder who's already found their way to kind of let's call it 5 million and 1, 5 million in revenue, 1 million in profit, or half a million in profit, or 10 and 1, 10 million in revenue, and 1 million in, in EBITDA.

[00:30:34] Because that model, is tried and true and it works and a lot of this stuff is de risked and there's still a 3x or 5x from there for those growth equity folks, but they don't have to take on that kind of zero to one risk. In that instance, that's kind of done. We have bootstrapping or friends and family or angel money.

[00:30:50] but the ability to underwrite that risk at the earliest stages, they almost have to structurally look for outcomes that are going to be, hundred X outcomes in order to [00:31:00] make the fund math work because of the realities of power laws. So I think until there's a way to truly de risk, the earliest stages.

[00:31:07] And this has happened in some ways through venture studios who have really been able to I'd say, de risk some of that in specific verticals where they really understand it and, can de risk it. and, I think there's been some LP interest in those kind of top tier venture was certainly a thing for a while.

[00:31:23] I think if, if they're purely looking at it from the truest inception stage risk Standard to underwrite to a three x that I think that piece will be challenging to, to make work.

[00:31:33] ButI think the more different archetypes of capital and founders are out there, I think it's a great thing. I just think that type of capital you would need for that will need to be a little bit different and, maybe a bit more patient

[00:31:45] Will AI generate returns for investors?

[00:31:45] Arjun: in another part of your report, you talk a lot more about AI and you mentioned that it'll continue dominating in 2024. and as part of that, you say It's still a question how venture capitalists will be rewarded. Can you tell us a little bit more about that?Yeah. it's TBD on which [00:32:00] archetype of company is going to most benefit from the AI boom.

[00:32:03] we're definitely seeing the infrastructure level companies, benefit in that way. but I think the, application layer is still TBD.

[00:32:11] Not, not sure if it's necessarily going to be even some of the larger incumbents that already have the data and the consumers. that end up ingesting, AI and making it successful, or whether it's the series B and C companies that have captured a ton of data in a thoughtful way, integrate LLMs, maybe even build their own model, and then kind of accelerate and capture market share, or maybe it's just so differentiated that it requires, a true upstart to come in with a customer centric modality Plus an AI centric modality right out the gate.

[00:32:43] and those are the ones that maybe can grow fast enough, both collect enough data, sharpen their models, and, win customer trust with speed, as the ones who will win.

[00:32:52] I'm a little partial to the mid to late stage investors benefiting from this because some of those companies have [00:33:00] walled gardens of really unique data that they can then leverage AI with, that might allow them to Capture more market share and win.

[00:33:07] but I think there'll certainly be use cases in which it's, very early stage companies, and there'll definitely be use cases in which some of the biggest companies, are able to innovate. some of the large corporates, and because they have the data, the history, the customer relationshipswill be able to out innovate some of the early stage folks, just because they'll have a head start with the data, and insights that they have.

[00:33:27] Now, corporate innovation is very hard, so I'm not holding my breath, but,

[00:33:31] we shall see.

[00:33:31] Shaherose: is there anything we didn't ask you that you'd want the audience to know about?

[00:33:35] Advice for founders in this market environment

[00:33:35] Arjun: in the next couple of years for founders, they will have to both be focused on the hyper growth potential of their business and the market that they can capture all while keeping their feet firmly on the ground and being cognizant of the market realities.

[00:33:51] So they're going to need to both be able to be scrappy and have a, strong hand on the reins of their business while at the same time understanding when and [00:34:00] where the market might shift so that if there is an opportunity to go raise capital in order to scale aggressively that, they can do that and then go win, the market that they're inso it's going to be a little bit of a, of a unique time for founders and that they'll have to do both. Whereas in the past it was just, grow at all costs, raise money, keep going, push, push, push.

[00:34:19] and, it's not the same as the darkest days of maybe 2008, where it was full survival mode. So it's this weird in between moment, which I think, founders are certainly comfortable with uncertainty and, and this is a unique time to test that skill set, but yeah, excited for the next phase and I think the scrappiness and thoughtfulness and first principles thinking that's developed through kind of 23, 24will pay dividends as, as the market returns and hopefully 25, 26, but we shall see.

[00:34:46] Shaherose: we had a blast looking at an early version of this report. tell the audience how they can get access to the report.

[00:34:53] Arjun: Thank you so much. Really, again, appreciate the opportunity to be here and speak with y'all. you can find the report. I'll be sharing it on my, LinkedIn and Twitter, at [00:35:00] Argent d Aurora, and then on the website at Arjun, Dave Aurora, R-A-R-J-U-N-D-E-V. A R O R A dot com.

[00:35:08] but I'm all over LinkedIn and Twitter and so you can find me there and hopefully get a fun set of conversations going on about the report. And thank you again for giving me the opportunity to share this report with y'all and, kind of announce it to the world here. So really grateful to you both.

[00:35:21] Key Take aways: What we learned from Arjun's report for our own seed investing strategies

[00:35:21] Shaherose: That was a great discussion. Thanks to Arjun for coming on and sharing his insights with us. Here's some of the top takeaways for me. The first was, while the data says mega deals are up, when you dig into the data further, the average round sizes are certainly up.

[00:35:40] But it's really skewed because it's accounting for mostly AI companies, which makes sense, right? The current hype is focused on AI, which skews the average, which means for non AI companies, they're still raising about the same as they did in years past.

[00:35:56] Aamir: How did you look at this as an early stage investor? If you're trying to be the first money in, [00:36:00] do you think this really affects how you're going to consider valuations?

[00:36:03] Shaherose: I think at the early stage, my sense is this doesn't have too much of an impact. the reality is for us at the early stage, we're not seeing the round sizes go up and we don't see a reason for that. We want founders to be, as thoughtful as they can be with their money as always,

[00:36:19] Aamir: Arjun said that he thinks the valuations have reset. hopefully that's beneficial to the early stage investors, To get things more back in line with where we'd like to see it. I do think there's been so much build out over the past two years and so much money that's gone into the platform companies, the foundation models, that I actually wonder if we're going to see the same thing we saw when cloud came online, where suddenly making startups was much, much cheaper because of the available infrastructure and availability of, compute. I wonder if that's going to mean that a lot of fast follower companies are going to come out that are trying to make products built on the AI and that they're just getting the benefits of a cheaper, platform to build on.

[00:36:57] And that, that means that they don't need as much [00:37:00] capital anyway, because they're not trying to be, another OpenAI.

[00:37:03] Shaherose: I think of those as AI first companies, these companies will leverage these platforms to build unique value for their customers. So let's see where that goes. I think that'd be a really interesting space to keep watching.

[00:37:13] Aamir: what was another one of your takeaways?

[00:37:16] Shaherose: Another takeaway is. Is AI coming for the job of a VC?

[00:37:21] While some decision making models have outperformed VCs, we dug into it, and at the end of the day, this doesn't mean the job of a VC is going to disappear, but rather it's going to be augmented. So for early stage investors, we talked about how they can leverage AI, particularly LLMs to synthesize large amounts of data and trends that can support a decision,

[00:37:44] This is particularly helpful for small funds who don't have a team of people who can create, trend reports and information that help inform an early stage decision. There's not a lot of data about the company that you can leverage, but there certainly is other data that helps [00:38:00] you decide.

[00:38:01] And for growth stage investors. You can leverage ML to synthesize company data that again could help with decision making.

[00:38:08] those examples are very specific to different parts of the investor role. And at the end of the day, I think the role of a VC is still human first. You have to source a deal, which, you know, arguably you could leverage AI to maybe find a company, but for the most part that is still happening through networks, through people, and closing a deal is very much the same.

[00:38:31] It involves two people to agree to work together. So I think it's the combo of both human and non human work that can actually make the job of a VC better. But to say that the job of a VC will be 100 percent AI or even just 100 percent human, I think both don't actually lead to better outcomes. It's the combination.

[00:38:55] Aamir: I think a lot about what, Arjun was bringing up around the data sources you could use to help at the top of the [00:39:00] funnel. I feel like that's been a windmill I've tilted at, for the past, 10 years, and I've never really found anything that works,

[00:39:07] the data pools that might help you are behind closed doors or in spreadsheets on, a founder's laptop. So how would you get access to that anyway? So I feel like there's still no real solution on how to at scale find companies before you end up talking to humans. So I don't know how much AI is really gonna help you there at the early stages.

[00:39:26] how did you feel about this as it rolled into the thoughts around, hyper specialized funds since you're working at a smaller fund and thinking about this, more intimately,

[00:39:33] Shaherose: So as he talked about this wave of hyper specialized funds that are really tackling niche spaces, His point was that in this difficult fundraising environment, new fund managers do need a way to stand out. And so the coming forth with a specialization as an emerging manager, Is a great way to get started.

[00:39:52] And that's interesting because he talked further about how LPs think about this. They often are investing in [00:40:00] multiple funds and have been for many years. They might already have a bet on a generalist fund. And when they see a new space, they have to also believe that these are fast and growing spaces that warrant some sort of focus.

[00:40:14] And so, it was really interesting to talk about how maybe five or 10 years ago, when people were launching FinTech funds, many people said, Oh, that's too niche, And you wouldn't say that now. So it's about looking at a space where five or 10 years from now, there's room for it to become A big industry and there's room for it to have big outcomes.

[00:40:35] Aamir: Yeah, I thought the historical perspective he was providing was really great I think those were my main takeaways too, the stuff around AI, and early stage investing. was there anything else you thought was useful to keep track of going forward?

[00:40:48] Shaherose: Yeah, our discussion around, the question we posed, right? When we think about investing in companies that can generate revenues and aren't as [00:41:00] risky, why would an LP not do that?

[00:41:03] And his point was really sharp here that at the end of the day, LPs are looking to Put money into places that can outperform any other asset class and in any type of company, it's the zero to one stage that has the highest risk.

[00:41:18] So for LPs investing at the early stage, they actually want GPs to be focusing on finding opportunities that might lead to future unicorns, because if they were investing in lower risk, cash positive businesses, the return being, let's say three X in some amount of time, they can get that elsewhere.

[00:41:39] And the last point was on unicorns.

[00:41:41] We're all in the business. of finding and winning deals into future unicorns and. Knowing that the last cohort of companies. That. Looked like they had a path to unicorn status are most likely not going to make it.

[00:41:58] It's, it's a hard thing for [00:42:00] us to all adjust to, but there's so much learning in that. Right. How many companies did we see get funding? without product market fit, without clear signals of traction. And have set themselves up for. A bloated valuation that puts them in the difficult positions that they're in today because they're not able to execute within the reasonable amount of time on, on those expectations.

[00:42:27] and sometimes it's not. Because they're unable to execute.

[00:42:30] They simply weren't companies that were viable to begin with.

[00:42:34] And so we're learning a lot, right?

[00:42:36] what does a unicorn look like today? what does it mean to reach that unicorn status?

[00:42:41] I hope that we can keep talking about this because it's really important that we are setting our companies up for success.

[00:42:48] That's great. I think this was a great way to kick off 2024 and next week we'll have on an angel investor or seed investor that talks about their own theses and the companies they're actually working with.

[00:42:59] Aamir: See you next [00:43:00] week.

[00:43:00] Outro

[00:43:00] Shaherose: Thanks for listening. We'd love your feedback and suggestions on topics and guests. You can find us on Twitter/ X, @shaherose and @avirani.

[00:43:11] Aamir: Subscribe to our newsletter to get behind the scenes access, learn more about the guests, and receive the key takeaways from each episode. You can find it at

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