The Billion-Dollar Exit Could Be Dead. What Comes Next for Venture Capital?

And look, a $500 million to a billion dollar company is still very significant. It just isn't as meaningful to the largest venture capital funds as it used to be. I think we're going to have to rebuild all the infrastructure for how we support and advise those companies because it's a different world.

It's the week of May 19th. Welcome to the Learning Corner, a Precursor Ventures podcast.

Welcome to the Learning Corner by Precursor. I'm Nia Farnham and I'm joined by our GP and Managing Partner Charles Hudson, where we will be talking through the articles. And good that caught our team's attention over the past week and we've also got Leon back in the studio this week.

Excited to kick off. So our first topic was written by David de Clark, who's the CIO of Vencap International. He was reflecting on Packy McCormick's post about the growth in feast backed exit values and as a result, fund sizes. In Packy's post He highlighted how $1 billion outcomes today are less extraordinary than they used to be. A $1 million exit in 2000s was in the 99th percentile. By today's standards it's roughly in the 85th percentile. David builds on this analysis and projects the data forward to estimate that top percentile exits could reach 20 billion by 203040 billion by 2035. So we see that the VC power law is alive and well and David implies that funds today should prepare for the exit environments of tomorrow. Charles, question for you. What do these assumptions mean for GPS looking to raise funds in Today's market and LPs allocating capital? And how do their considerations differ?

Yeah, I think as we've talked about before, these funds are 10 to 15 year enterprises. So if you are raising a fund today, most of your companies are going to exit in the mid-2030s. I think there's value in saying what do I think the world looks like? Also, I think every fund size has a set of assumptions that have to be true in order for those funds to be attractive. And if you're going to raise a multi billion dollar, multi stage venture fund and you say, hey, I want to give people a reasonable return, you're talking about returning tens of billions of dollars to them. And the only way to do that I through really large outcomes, two things have to be true. There have to be 30 to 40 billion dollars outcomes and your specific venture firm needs to be in those. And my hunch is that it's zero sum since there's only 100% to buy it is impossible that every large venture firm can own 20% of every meaningful exit. Interesting thing will be of those really large firms who does the best job of capturing meaningful ownership in the companies that ultimately matter. And I think if you're a really big venture fund, that's the only game that matters to you because it's the only game that moves. And as the post says, the median exit doesn' doesn't do anything for a big venture fund. It simply isn't big enough. Even if they own 200 of that company, it wouldn't matter.

To that point there's only been around like 10 non IPO related exits that have surpassed 20 plus billion dollars. And so that's one per year. If you kind of average it out to even max that out to what Diva was mentioning up to $40 billion I'm assuming also for the large funds you'd want also exposure in as many companies as you possibly could within the areas that you think could possibly return that. How do you marry to having exposure into and then enough that you can.

Have that I scary thing and look this is not a problem I have to deal with because Precursor is not a multi billion dollar multi stage fund. But if you think about it, you need two things. You both need to be in we'll just take whiz, you need to be in Wiz and you also need to own enough and this is the scary part, those outcomes are large and relatively infrequent. So like I don't think the frequency of outcomes of that scale is going to change which really means when they happen you have to own enough of them to matter. So the two ways you can do that. One is what you suggest India which is everything that seems interesting. Go try to buy 10 or 15% of it at C or at Series and hope that you stay close enough to the stuff that's working that when it starts to grow and scale you can maintain or expand your pro rata or if something appears to break out and you missed it, grab it as quickly as you can. So if you didn't win the A make sure you really pile in in the B and maybe you can't buy the 15 to 20% that you wanted, but you can get something I would.

Imagine also all without maybe having full conviction in the metrics etc. Oh yeah, you just want to be.

Part yeah you want to be part of those rounds and I think it's going to create an even more stark feeling of have and have not adventure. There will companies that people are like oh, for whatever reason, it could be metrics, it could be team. This one feels like a winner. Everybody wants to be in it and you have other businesses that are perfectly fine and good and nobody cares.

Leaning back into some internal conversations that we've had, which has been wonderful on the team, we've spent a lot of time thinking about and discussing these market shifts. We've covered the steep drop off in the C to series A graduation rate, how most founders are subject to this three year and seven to $10 million Runway to test how vendors scalable their ideas, and then kind of like the PE off ramp concept. So tying this all together, how do we advise founders on navigating this environment while also thinking about fund managers and their expectations and what they need to see from an outcome perspective?

I think the question's going to be if you're a fund manager and you see a company where the math works for your fund. So maybe I would be very happy owning 5% of a billion dollar outcome given our fund size. That would be great if you know upfront the company that you're dealing with is big, but not capital B. Big as in it will catch the eye of multi stage venture funds. Like what is the funding ecosystem instead of options going to look like for those? And I'd argue we don't have that solved yet. If you want to be a hyperscaler or you want to become one of these companies that raises a ton of money and shoots for the moon, we have a pretty good set of products for you to do that. If you're like, no, I'm building something that I think will be pretty significant. And look, a 500 million to a billion dollar company is still very significant. It just isn't as meaningful to the largest venture capital funds as it used to be. I think we're going to have to rebuild all the infrastructure for how we support and advise those companies because it's a different world.

And I assume it'll be more around coaching our founders into walking through how big TAM looks like and kind of how to storyboard that out for those types of investors who need to know that that outcome is possible. Whereas before I feel like that was something you could gradually grow into because the outcome just didn't have to be so large so early on.

And I think my hunch is investors are going to make decisions also just about teams like, do I believe this team? And that's obviously highly subjective. Do I think this team has what it takes to build and run a multibillion dollar company? And I hope we don't miss out on some awesome people because they don't look like they can want a central CA and day one, I think in.

The majority of people's minds that archetype looks like two three time X founder who's already raised and exited. So in an optimistic way, like if you are a smaller fund, you now have this awesome window of opportunity to capitalize on stellar founders who don't look like that well, our next topic is a piece written by Colin Wallace, GP at Lobby Capital, opining on the growth of Vibe investing. It's the process of feeding sentiment and historical data into AI models to generate investment decisions. He highlights that the value created by Vibe is limited if investors don't understand why specific decisions are being made. The rise of AI has also dramatically increased startup creation and homogeneity, making it increasingly difficult to identify outlier opportunities. A large portion of his piece focuses on the importance of a founder's ability to generate perishable knowledge and an investor's ability to identify it. Ultimately, his conclusion is clear. AI should be a tool that enhances but does not replace investor judgment. So getting more specific into perishable knowledge, Colin compares the processing power of the latest AI models against that of a human brain. And obviously the AI model currently surpasses the human brain from a speed perspective. However, it's the context and quality of insights that have been processed that AI perhaps has trouble accessing today, which makes a human in the loop important for today's investment decisions. So I would love your thoughts on that.

Yeah, I mean I like this piece because I always like reading about how other people are integrating AI into their decision making process, whether it's as a substitute for decision making or a compliment. And I'm of the mind that it's inevitable that there will be programmatically deployed capital in private markets, including early stage venture, just because there will be somebody who's like, we can't afford to not run this experiment. And I think right now we're in a place where I don't know many VCs who aren't using AI in some way, shape or form to augment their workflow. It might be as simple as, oh, we just dump all of our work in here and it writes a memo that synthesizes a decision we've already made to hey, generate a bunch of due diligence questions or what did I miss? There's a bunch of ways people are using. Most people I know haven't yet said, I'm going to allow the algorithm to make a decision for me. But we have lots of other areas of finance on the public equity side where we've essentially done that. In some cases it's fully automated. In some cases there's a human supervising. But we're already letting computers make a lot of decisions. And I think it's inevitable that somebody will do this. And the thing that's curious to me is will the AI perform better or differently than a human? And if I think about a lot of our best investments, there were obvious flaws in them. And the thing that got me excited was something about the person. And the question is, will AI be able to find that spark about people? There's no doubt in my mind that on a quantitative basis that AI will be faster, more efficient, more thorough than a human at simply crunching through data. But at the early stage, the thing that is taste and feel, I think is people. And for me, the question is, what if somebody builds a really good AI clone that asks the same questions and understands how you think? And maybe there will be a point where the synthetic you can meet with the synthetic you of the founder and make a decision that would approximate yours. I don't think we're there yet, and I think that's still the missing piece because I think particularly for people who are doing it for the first time, a lot of who we back, it's actually hard to know who's going to rise to the occasion. Sometimes there are things in their background that would give you clues and sometimes the people just turn out to be fantastically awesome. But I'm pretty sure AI could replicate the median VC investment decision. But the median investment decision is to lose money, right? So that's actually not that useful.

The article also talks about perishable knowledge. Did you have thoughts on how AI can have an impact on that? Maybe from a founder's perspective?

I think one thing I'm always asking myself when I meet a founder is how much does this person know about the problem and what's the half life of that set of insights? Because very few things are true forever. And some things are so generally true. Like the Internet's going to be big. Yes, but what do you do with that insight? And I'm always trying to find people who have something that's going to give them a two or three year window that even if it ceases to be true at some point, or it's an insight that they understand that isn't widely understood yet, it'll be enough to get them a head start. Now, what they do with that head start is really up to them, but it will get them a head start. And I think one thing I'm always surprised by is how quickly you can get up to speed on the broad strokes of a topic using AI, which is very different than I've done it on a handful of topics, right? I think I know a fair amount and I'm like, wow, this is an 80% answer with no effort. But the 20% that's missing is actually the really important context and is it the effort required to get that is not trivial.

Like it does a great job of synthesizing all the things that I, I know and maybe puts it into words a lot quicker, but it didn't add as much value as I had maybe hoping for to get me to an end.

Love Colin's comparison of the importance of confidence in good investing. He compares it to grade school and the importance of showing your work for difficult math problems similar to investing, if you don't know how you arrive to an answer, it's difficult to have the conviction to act on or justify an existing position. And this is not the first time we've encountered people flocking to a thesis area or markets without a unique perspective or strategy. But what's at stake for venture if people continue to fail to, quote, unquote, show their work?

Just talked to somebody last night who's in a pretty high profile company and the person's like, I don't know if I can recreate the set of conditions that got me excited about that company. It was not an obvious investment, but it's doing quite well. And he's just like, I don't really know why or how I said yes to that company. And truthfully, I often look at some of our best investments and I'm like, I liked that person. It seemed to make sense. Maybe if I'd met them on a different day, I might have reached a different conclusion. And I think the importance of showing your work is at least it gives you a chance to recreate. This is why I try to capture so much this information at the moment that we're investing or before we've invested. Because hindsight has a way of rewriting the past. People would ask me, what did you see in that person at a series C company? I'm like, I kind of remember, but I'm probably romanticizing what I thought because the company's been successful or I'm filling in the gaps to make it sound like I maybe knew more than I thought I did because the company's been successful. And the person's asking me a question and demands an answer. And I found that like part of the reason I try to capture more of my thoughts up front is I don't actually know what's going to happen. And that's one of our summer projects actually that look at a bunch of this stuff ye and just think how good are we in the moment at predicting and I think if we were better the returns in venture would be.

Much higher for those specific founders that you're thinking of, Charles, I assume first time founders, many of that you were really taking a bet on.

I just think in most cases there was something about that person that made me believe that they had a ton of untapped potential and that putting them in the CEO and founder position was going to tap into something that they hadn't had to access in their previous jobs and that I had really strong conviction that that was the case for.

Our last topic in his recent Shatari Ess, Ben Thompson challenges the view that advertising was the Internet's original sin, arguing that it was a necessity for a human centered web. Marc Andreessen shared the same sentiment from his reflections on early attempts at building browser native payment layers. This model works when the purpose of ads was to monetize eyeballs, but with the rise of AI agents it presents a new challenge since they don't view ads and it really threatens the incumbent ad supported model. While Microsoft's vision of this open agentic web enables agent website interaction, we still need an AI native payment layer. This would be a built in system that allows AI agents to seamlessly make, receive or initiate payments without human intervention or legacy infrastructure like credit cards or banking. Rails and so Ben suggests that incorporating stablecoins or microtransactions between agents and creators is the solution and that without this layer the agentic web could be dominated by a few platforms instead of remaining an open ecosystem. First, do you think advertising was the original sin of the Internet?

I don't think it was the original sin. I largely agree with this article, which was if you think about advertising as a solution to a coordination problem, you have producers making content, you have consumers who want to be entertained, and you need a medium of exchange of value. Obviously you could have had subscription and I think the piece is a good job of articulating what does a subscription actually represent. Went down this rabbit hole a few maybe like 8 years ago telling people like a membership and a subscription are actually different value exchanges. You can be a member of a club or a program and your financial support Makes you feel good. And the value exchange is a tote bag. The tote bag isn't worth a hundred bucks, but it's a symbol gift and it's a signal. And I won't go down that rabbit hole. But I think advertising was probably the most effective way because it made the content free for the reader, which led to a great deal more consumption. And if you think about it being a sin, well, what are the taxes we had to pay? Well, the taxes were like occasional privacy blow ups like Facebook, Beacon and all of this stuff. As people started to see that, oh, the reason this stuff is free is because we're doing this stuff which we now have kind of accepted as just like generalized like ad targeting and SEO. And the spamification of the intern is the other byproduct where because traffic and advertising were linked. But I think for the most part Google has continued to fight the war on SEO spam, maybe not as effectively as they did 10 years ago. And I think the thing that was most interesting to me about this article is, you know, sometimes an idea gets in somebody's brain and it's really sticky. And this is I think why Mark Andreessen so obsessed with crypto. You know, if you've heard him speak, he often says, we've never had Internet native money. And I'd be like, hey, if I had been working on building a browser, I would've said, you know, Internet native money would make a lot of these things a lot easier. Easier. And I've met some agentic payment companies and I think a lot of them are looking into the future. I fear, as I often do, that there may be a little too early because I think most people are not yet ready to deploy an agent on their behalf to go spend real money. But I would argue there are lots of other ways you could solve this problem. You could give your agent the equivalent of a secured credit card or a Brex card.

Right.

We have all these other questions. What are chargebacks, disputes, fraud? If I authorize my agent to go buy me a pair of shoes and at checkout is that Bose is like, hey, for five more bucks you can have a pair of socks. Do I want my agent making that decision? I don't think we're going to go from old school web to agentic web. And the first thing we're going to do is go have agents buy first class plane tickets. I think the first thing is going to be, hey agent, go book me a restaurant reservation. Hey agent, go go do these like relatively low cost low risk things on my behalf and people are doing some of this now and I think we'll build up the payments and then we'll have to figure out what do you do with authentication, how much discretion do you give an agent, how do you settle disputes? You know all of the things Visa, MasterCard and like the payment Rails have all had to figure out for credit cards, we will have to figure these out for agents. If we do it, whether it's with cryptocurrency, stablecoins or with traditional car like we're going to have to figure all this stuff out. There's simply no way.

It's funny because New York, I'm sure San Francisco is the same way, is notorious for bots basically running their system restaurants. And so I tried to create my own to basically vibe coding and I used chat, gbt, use cursor and Twilio to basically try and get me an in. And I tried to construct a way to drop me the low hanging fruit reservation to pressure test. How good is this? It got me how halfway there. But then when it got to the points of checking are you a bot? I kind of thought if I could just give that security clearance to it, I probably would have to just let it go. Like I trusted it at that point. But what are the chances that it gets me the wrong reservation? There's also credit card payments that need to be put down in order for you to get your reservations. What if it grabbed me the wrong reservation? I forgot about it. I'm now on the hook for 400, 500. It's not frictionless yet. And then separately, just from thinking about SEO and digital marketing, if we do end up migrating to an open agentic web web, it would completely upend everything we know about customer acquisition and digital marketing. So you have all the growth teams and growth shops that have been built to optimize for first click and digital marketing. I mean if you're trying to stay ahead of the curve as a marketer, what do you think you need to become really smart on in this environment? And I actually fear that the answer is that it might not be relevant because you also might be replaced by an agent.

Well, I think we've spent a lot of time figuring out how to influence humans and the question is, will agents be subject to the same influence as humans? So like photography, clever copy. So I think eventually we're going to have agentic marketers whose job is to influence agents. And the thing I think about a lot is, you know, there's a lot of Stuff that's produced on the Internet, that's designed to be consumed by humans. Visual content, written content. If agents do more of the work and spend more of the time online, like where does all this stuff go? Yeah, who finds it and how do they find it?

And how do you replicate surprise and delay which is typically how I find most of the things I'm scrolling. I never even thought I needed this and then because I saw it, now I do.

I've talked to a bunch of people who are on the forefront of agentic commerce and these are all the questions and as far as I can tell I've heard a lot of really clever hypotheses but I'm not sure anybody's actually far enough along in solving this problem to have a true point of view. We live in interesting times Charles.

You've also talked about how AI companies are still trying to correct monetization. There seems to be this rekindled interest in fintech, increase access to stablecoins, shift away from traditional SaaS models. Does this point to the next generation or evolution of AI companies?

Most people I've talked to seem to think that this usage tokens model model is a bridge to wherever we're headed. It's not as I say it's not the AdWords moment, it's not the big unlock for AI and I think that's probably true. I also have found that these business models once they stick tend to stick around longer than people like I mean ah, Proceed is a hack, it's a hacky way to like get at and it kind of stuck around for a really long time on prem stuck around. It's still around and for some software products. So I'm not sure what the end state business model will end up being for a lot of these AI products but I suspect that token consumption and token usage and sort of usage based pricing be around longer than people think until and unless we find something that we think works better and what that something is is unclear to me at the moment.

More to come. We are all out of time for today. Thank you Charles and Leon for stopping by to our listeners. Please like and subscribe and we will talk with you all next week. Thank you.

Bye.