The venture market is in flux. AI is booming while the rest of venture is in the dumps. Venture capital as an asset class is evolving and retrenching. Fewer deals are happening at higher prices. New marketplace types are emerging. AI is impacting marketplaces in unexpected ways. New technologies are coming of age. In this episode, I cover it all!
For your reference I am including the slides I used during the episode.
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Transcript
Hi, everyone. I hope you’re having a wonderful week. So, two weeks ago, I was in St. Tropez and we were doing the FJ Labs offsite. And for that offsite, I basically prepared an update of how the venture market is going and realized there are actually really profound trends and changes that are afoot.
From, the bubble and AI and kind of the tale of two cities between venture as a whole, like doing terribly except AI, that is like an absolute bubble to new technologies emerging to frankly, the, the nature of venture capital firms and venture capital funds changing profoundly. And as I was putting all this material together, I figured, okay, needs to be shared because things changes or a foot.
And so without any further ado, let’s get going. Welcome to Episode 50: Venture Market Update.
So the first thing I wanted to do is basically cover with you guys what’s been going on in venture capital and the venture market as a whole. And if you look at like what’s been going on, from a macro level, a global level, it feels like venture capital is recovering from the doldrums. So this is global venture investing.
You see Q3 to Q4 and massive growth and Q4 to Q1 and massive growth. But actually, when you start delving deeper into the details, you realize it really is a tale of two cities. We didn’t see an increase in investing in Europe, in Latin America, in Southeast Asia, in Asia writ large.
It’s all in the U.S., it’s all late stage, and it’s basically all AI. On a global level, AI, represented 53 percent of funding in Q1 and 71 percent in North America. So, AI is completely dominating the investment and all the other categories. It’s really hard to get funded right now. And, if you look at what’s been happening, basically, there are fewer companies that are raising, more money at higher prices, right?
So this is the median. So, the mean is higher by the way, because the extraordinary deals, the bonkers deals are moving everything up. But the median seed deal is being done at 18, and this is pre. The median series A at 55 and the median series B at 131. But the bonkers deals are so like two standard deviations of the right of the mean and there are more of them happening than ever before in a way, mostly in AI category, mostly with repeat founders or people that were at Open AI, et cetera.
And AI is really eating the market. So this is the premium in valuation if you’re an AI company in every vertical, and it goes from 69 percent to 314 percent premium just for being in AI. So basically, AI companies are eating the world from that, from that perspective. Now, what’s really cool is FJ Labs itself has actually remained disciplined in a way we’ve been contrarian on AI.
I actually covered our AI thesis in a prior, Playing with Unicorns episode, so I’m not going to rehash it here. But the one line summary is instead of competing on the core LLMs, we’re investing in applications of AI at reasonable prices. But if you look at actually at our history, even in 21, we remain disciplined, or median, and this is U.S. only, obviously, because if I included other countries that would be skewing the results. But our median valuations have remained, you know, like around 16 at seed around like 40 at series A. Both in 21, by the way, and in 24. And our series B, [even 20 and, whereas like in the eighties to hundreds, I mean, smaller sample size, so it moves easier, but we remain well, well below, the U S media and partly also because we haven’t been focusing on the super-hot, AI ideas.
Now, the exit market has been recovering a little bit, and there’s been a few more IPOs, and of course, recently we saw the Chime and the Coinbase IPOs, but for the most part, relative to the exuberance and the massive number of exits in 2020 and 2021, the markets are still much more close, and we were hoping, I suspect, that in 2025 we were going to see the M&A markets, the IPO markets open up, but between the geopolitical tensions, the tariffs, et cetera, it hasn’t really happened yet.
Now I’m hoping that the political turmoil calms down as, they try to get reelected for the midterms next year and maybe stop doing as much disruptive things. So TBD, if that happens by now, I’m hopeful that things will improve for 26. But you know, TBD, this is exogenous to the market, and not endogenous to it. And so we are market takers, not market setters.
So nonetheless, it’s a little bit better and I’m hoping it’s going to continue to improve with a, you know, slightly declining rate environment and better liquidity conditions writ large as I’m sure they’re going to be pushing for fiscal expansion and maybe creating a little bit less disruption. That’s a hope, not a reality, but TBD, and hopefully it’s moving in the right direction.
Now what’s more interesting is venture capital as an asset class is undergoing fundamental transformation and I would say there’s a schism, right? Like the top 10 firms have basically raised 50 percent of all capital and the top 30 firms have raised like 75 percent of all the capital.
So it feels like there is a market where on the one hand you have like massive capital accumulators in Andreessen Horowitz, Thrive, General Catalyst that are accumulating billions and billions of dollars. I’m not even sure I would call them VCs anymore. They’re investors across the life cycle, the companies they invest, they stay active investors when the company is public, and so I’m sure that the IRR is that they’re going to be getting is more like 10/15 percent than the historical 20/25/30 percent that people were shooting for in in venture capital. And on the other hand, the emerging managers that have less than three vintages they’re getting less and less capital, and all of them combined are getting like 23 percent of the fund, which is a 10 year low.
So we’re seeing more and more mega funds that are over a billion, and that are capturing more and more of the capital. And then you have like minnows and small funds. And so you need to be hyper specialized and small or you need to be big. Everyone in the middle is not doing well. And as a result, we’re seeing a massive decline in new funds and a 48 percent decline in venture funds rate, new funds, 68 percent decline over a three year period.
And as I said, nine firms raised 50 percent of all venture capital. Essentially 2000 VC firms closed since the peak in the last three years. And we’re seeing a lot of GPs leaving, retiring, et cetera. So massive consolidation, venture as an asset class is retrenching writ large.
And the reason is, of course, IRRs have been declining. Now, part of the reason IRRs have been declining is people came in and way too high prices in 2020-2021, maybe early 22. And companies did not grow in these valuations. And so the returns are declining, especially since there have been no exits, right, the markets, the M& A markets, because antitrust have been closed 22/23/24/25. And there haven’t really been many IPOs. And as a result, DPIs are very, very low. So the LPs, the investors into the funds have not been receiving distributions. So they have no capital to reinvest. And as a result, you know, you haven’t been getting the benefit of investing in privates.
Back in the day when you’re investing in a venture capital, you would get a premium to the public markets. But over the last 20 years, Nasdaq has actually done better, obviously mostly driven by the Magnificent Seven and the AI companies in the last few years. But you’re not getting the liquidity premium.
Now, of course, this is venture as an average class and the top quartile is doing, doing a lot better. But even though the top quartile is doing a lot better. It takes forever. What we’re seeing is the best companies are staying private longer. And so what is really happening from a mega trend perspective is companies are saying private 18 20 plus years, right?
I’m an investor in Founders Fund II which invested in SpaceX. I think in December 2007, like an 80 million valuation or so. It’s 18 years ago and obviously SpaceX still private and that’s compounding is doing amazing, but venture funds were marketed as 10 year vehicles plus one year and one year extension.
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