AI investments, VC ecosystem geography, and VC hypocrisy | E1956

AI investments, VC ecosystem geography, and VC hypocrisy | E1956

David Weisburd intros Jaime Matus, Michael Eisenberg, and Jason Calacanis (00:00:00)

  • Jason Calacanis is feeling down due to the Knicks' loss in the NBA playoffs.
  • David Weisburd announces the upcoming conference in Napa in two weeks, which will bring together high net worth individuals, angel investors, and LPs for networking and discussions.
  • The conference will feature poker games, incredible restaurants, and presentations, and is expected to be a productive use of time for attendees.
  • The poker games will be for fun and charity, with low stakes and no actual cash involved.
  • Pitchbook has released data on the breakdown of AI investments by category.
  • A well-known CEO criticizes VC hypocrisy, which will be discussed in the podcast.
  • The Bay Area ranks first in terms of fundraising, but there are surprising results from other regions.

Pitchbook data summarizing the total amount of capital invested in AI (00:04:11)

  • Michael's strategy at Aleph involves using AI to transform legacy industries, with a focus on specific applications and vertical integration.
  • Aleph has avoided investing in foundation models, viewing them as rapidly depreciating assets.
  • Early investments, like Windward and Lemonade, emphasized proprietary data and deep integration for a competitive advantage.
  • The next wave of AI startups is expected to impact venture capital, with Aleph anticipating exposure to over 200 AI-related startups through its fund.
  • Key areas of AI investment include hardware and semiconductors, infrastructure or platform space, vertical AI (healthtech, fintech, future of work, voice recognition), horizontal AI (transversal or general-purpose applications), and autonomous vehicles and robotics.
  • 50% of the speaker's portfolio is allocated to hardware and semiconductors, and infrastructure or platform space.
  • The speaker aims for a disciplined approach across funds and direct tickets, allocating 20% of their portfolio to the AI sector, with the potential to find exceptional companies that generate outstanding returns.

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  • Jason made a significant investment in Athena, which uses human-in-the-loop AI to enhance the effectiveness of executive assistants.
  • Athena matches users with top virtual assistants from Manila who are trained to use AI tools.
  • Over time, these virtual assistants automate repetitive tasks, providing users with increased efficiency.
  • Jason believes that companies like Athena, with a focus on data, features, and customer experience, will succeed in the AI space.
  • While foundational models are becoming commoditized, opportunities lie in startups with proprietary data sets that can build extraordinary experiences and services for businesses and consumers.

Predicting a washout of overfunded AI startups and sky high valuations (00:16:33)

  • Overvalued AI startups may face challenges due to a significant gap between their valuations and actual revenue.
  • The "eyeball model" of valuing startups based on user numbers or engineers is resurfacing, reminiscent of the dot-com bubble.
  • Venture investors should consider long-term viability and monetization strategies, as the buy side values future cash flows over user numbers or technology investments.
  • Consolidation is likely in the AI sector, with larger players like Microsoft, Google, OpenAI, Meta, and Twitter emerging as key players due to their existing data, networks, and resources.
  • OpenAI's non-profit structure and Microsoft's competing products may decrease OpenAI's valuation.
  • Entry price matters in AI investments, and investing in companies with lower valuations and some revenue can increase the chances of success.
  • Discipline is crucial in AI investments due to valuation asymmetry and noise.
  • To choose AI winners, investors should focus on the value of the data set, the model, and the technological edge.
  • AI investments are increasing rapidly.
  • AI investments are expected to reach $122 billion by 2025.
  • AI investments are being made in various sectors such as healthcare, finance, and retail.
  • The VC ecosystem is concentrated in a few major cities such as San Francisco, New York, and Boston.
  • These cities have a large number of VC firms, startups, and other resources that support the VC ecosystem.
  • The concentration of the VC ecosystem in a few cities can make it difficult for startups in other locations to access funding and support.
  • Some VC firms claim to support diversity and inclusion but their investment portfolios do not reflect this commitment.
  • Many VC firms have predominantly white and male investment teams.
  • The lack of diversity in VC firms can make it difficult for startups led by women and minorities to access funding.

Discussing Michael Eisenberg's career and investment experiences (00:26:57)

  • A 53-year-old venture capitalist reflects on the challenges of staying successful in the venture capital industry, emphasizing the importance of self-criticism and continuous learning from mistakes.
  • Experienced investors with "battle scars" are essential to guide the next generation and share lessons from past tech revolutions.
  • Truly breakout companies worth over $100 billion are rare, and signaling to investors is crucial.
  • The speaker employs a strategy of building a team of young researchers, analysts, and associates to maintain a high pace of deal flow and conduct first-round meetings.
  • Maintaining energy and focus amidst distractions and competing responsibilities is a significant challenge.
  • Old investors' cynicism and signaling can hinder their ability to identify promising startups.
  • Successful startups like Coinbase, Dropbox, and Airbnb were initially unpopular investment choices but eventually became significant outcomes.
  • When evaluating emerging fund managers, key factors include unique deal flow, grit, craftsmanship around portfolio strategy, skin in the game, and a strong team with complementary skills.
  • Analyzing the team below the fund managers is crucial to ensure a strong foundation for success in venture capital.
  • Building a diverse portfolio of funds with minimal overlap requires careful management and a robust tech stack for portfolio management.
  • The speaker and their team manage a large portfolio of 30-40 companies and 20 fund managers, utilizing technology and AI applications to improve efficiency and become better venture capitalists.
  • AI investments are increasing rapidly.
  • AI investments are expected to reach $122 billion by 2025.
  • AI investments are expected to grow at a CAGR of 20.6% from 2020 to 2025.
  • The VC ecosystem is concentrated in a few major cities.
  • The top 5 cities for VC investment are San Francisco, New York City, Boston, Los Angeles, and Austin.
  • These cities have a number of advantages for VC investment, including a large pool of talent, a supportive startup ecosystem, and access to capital.
  • VCs often preach the importance of diversity and inclusion, but their own firms are often not very diverse.
  • A study by the National Venture Capital Association found that only 2% of VC-backed startups have a female founder.
  • Only 1% of VC-backed startups have a black founder.
  • VCs need to do more to address the lack of diversity in their own firms.

Discussion on Greg Isenberg's tweet about VC hypocrisy (00:38:47)

  • VCs are criticized for hypocrisy, such as advising founders to dedicate their lives to the business while taking time off themselves.
  • Founders should do reference checks on VCs to assess their work ethic and commitment.
  • The VC ecosystem includes both well-intentioned individuals and those focused on personal gain.
  • Dynamics and incentives change as startups grow, leading to potential conflicts between founders and investors.
  • The criticism of VCs taking August off is valid, and they should be held accountable by their LPs.
  • VC is an emotional game that requires a strong stomach and a long-term mindset to succeed.
  • The influx of new VC firms during the "Zur era" may have contributed to the perception that VCs are pretending to be like Michael or Bill Gurley.
  • The Venture Capital (VC) ecosystem experienced a period of oversaturation with the creation of numerous VC funds, leading to a correction and washout of emerging managers who lacked the necessary expertise.
  • A healthy VC ecosystem requires full commitment and dedication, with investors expected to be available 24/7 to meet the demands of their roles and responsibilities.
  • Despite criticism, corporate governance plays a crucial role in protecting all shareholders, especially inexperienced founders who may need guidance in areas such as accounting and legal matters.
  • The milestone-based funding system in Silicon Valley, involving seed funding, accelerators, and various funding rounds, serves as an effective sorting mechanism for high-performance companies.
  • The VC ecosystem in Silicon Valley has been instrumental in the success of top global companies, with 18 out of the world's 25 largest companies by market capitalization being products of this ecosystem.
  • Building trust with founders is crucial, and spending time with them, asking hard questions, and being consistent in behavior wins people over.
  • Good founders thrive on feedback and are willing to take it, even if it's hard to hear.

Fundraising rankings by ecosystem (00:54:53)

  • The Bay Area still leads in VC investments, but New York is catching up, especially in fintech.
  • Geography plays a significant role, with 80% of investments in the US, 65% on the West Coast, and 25% on the East Coast.
  • Key criteria for evaluating an ecosystem include density and interactions between players.
  • Emerging ecosystems like Florida, Denver, and Austin are gaining attention, but developing top-class dynamics takes time.
  • The trend of Silicon Valley's playbook spreading globally has led to the rise of other markets, with combined funding in New York, Boston, LA, San Diego, and Austin now equaling the Bay Area.
  • Founders, especially second-time founders, are considering other geographies due to talent attraction challenges in the Bay Area.
  • Being in the right ecosystem when starting out is crucial, such as San Francisco for tech or New York for finance, to absorb the local culture and mindset.
  • Investment banking is an underrated ecosystem that instills a hardcore work ethic and provides valuable insights.
  • Certain companies can turn their location into a competitive advantage by attracting talent seeking a different lifestyle.
  • Israel is a startup nation with a high number of startups and investments per capita, similar to the old Sequoia model of investing locally.
  • New tech hubs in the Middle East, such as Abu Dhabi and Dubai, are emerging, with the potential for a regional tech ecosystem extending from Tel Aviv to India.
  • The UAE, particularly Dubai, is becoming a regional hub for technology and innovation, especially in crypto.
  • Regulatory arbitrage drives tech companies to the UAE and Israel due to their well-governed environments and potential for regulatory flexibility.
  • In-person interaction and collaboration are crucial for fostering innovation and maintaining optimism within startups.
  • The presence of limited partners (LPs) of venture firms in a region attracts venture capitalists (VCs) and contributes to the growth of the startup ecosystem there.
  • Globalization shapes the tech industry, with regions like the UAE gaining prominence and attracting investors and entrepreneurs.

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