📶 MANG is eating VC

How Microsoft, Amazon, Nvidia, and Google are taking over the venture world

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Good morning 👋

You’ve heard that software is eating the world, but we’ve reached the point where software (companies) are now eating VC.

Microsoft, Amazon, Nvidia, and Google are aggressively investing into startups, and they’re doing it on their terms.

We break down those terms, give out two cents on why it matters, and predict what happens next in this week’s piece.

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TL;DR:

NEWS
New VCs in town 👀 

Microsoft, Amazon, Alphabet, and Nvidia have officially started their takeover of venture investing.

In 2023, ~8% ($25+ billion) of the total venture capital raised in North America came from at least one of these CVCs.

This is a huge trend for the entire startup ecosystem, but it should be TERRIFYING for traditional VCs.

Why it matters:

The amount itself is staggering, but the structuring of these deals is what really matters.

Instead of traditional equity financing, most of the capital commitment is in the form of cloud credits (not cash).

“Only a fraction of Microsoft’s $10 billion investment in OpenAI has been wired to the startup, while a significant portion of the funding, divided into tranches, is in the form of cloud compute purchases instead of cash, according to people familiar with their agreement.”

These cloud credits are then used by the companies to save costs on computing (one of the largest costs especially for LLM companies).

In other words, nearly half of the capital committed in these rounds translates back to revenue for each of the corporates financing these companies.

In the short term, this allows Microsoft, Amazon, Alphabet, and Nvidia (MANG) to create a circular loop that boosts their top line while making these venture-backed companies more reliant on their own services. Not to mention, it also gives them an edge to win deals over other VCs who can only offer capital and ~their value~.

In the long term, this creates a massive amount of enterprise value to each of the MANG companies participating in this type of financing. Each dollar of revenue generated has a multiplier effect (~10x for MSFT at the time of writing), so each dollar invested has a 5x effect on market cap ($1 × 50% cloud credits x 10x revenue multiple).

What happens next:

The “adapt of die” adage is already playing out for many traditional venture capital funds, and this is just making it harder for the same old-school funds to compete.

This type of financing structure gives founders distribution advantages, a lower cost of capital, and access to state-of-the-art infrastructure from these corporate VCs that most other VCs can’t possibly compete with.

That said, the biggest concern we have with this type of financing is the misaligned incentives between investors and founders.

CVCs are strategic investors (not purely financial). This difference in incentives can rear its head in the form of blocked acquisitions, product direction, or even placing limits on who can become a new customer. Not a deal breaker, but definitely something to note.

If you want a deeper dive into all of this, I highly recommend checking out this piece by Apoorv Agarwal.

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P.S. Here are the results from our poll question in last week’s piece:

Would you still use Carta today?

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