Good morning 👋
And Happy Friday.
Big week - lots of recaps:
YC told us exactly what they’re looking for in their next crop of founders
Crypto played a big role in the election - here is why
Why you shouldn’t take all VCs advice as gospel
Why the future of healthcare will be proactive and much better than the current state
I’m off to a wedding today, so there is a chance that Monday’s piece goes out late. Don’t say I didn’t warn you.
Let’s get into today’s piece.
P.S. 💰 Are you a full-time investor AND do you want to get paid more?
Today’s highlights
New fund math breakdown
What great founders do according to Sam Altman
A megathread on three years of running a business
Klarna is going public
TOP
More focus on distributions = new fund math?
There are two conflicting forces that have been plaguing VC over the past few years:
The IPO window has largely been closed
LP allocations have been going towards other asset classes with an easier path to distributions
Venture math relies on huge wins to outweigh a much larger number of portfolio losses. That works well when the good times are rolling, but when the music stops, LPs are stuck holding the bag with marked up positions but no liquidity on their investments.
So without market demand to go public, VCs have turned to secondary sales and private equity buyers to create some liquidity and show DPI to their LPs.
And that has changed fund the fund math equation.
Here's a simple example of how:
Traditional Venture Model (IPO or bust)
~15/25 companies fail (60% loss ratio)
~8 companies have modest returns (2-5x)
~1-2 massive wins carry the entire fund
More emphasis / risk weighted towards performance of top companies
New Venture Model (prioritize DPI > everything)
~10/25 companies fail (40% loss ratio)
More consistent, modest 2-5x returns on remaining investments
More-predictable outcomes + earlier liquidity for LPs
Why this matters: It looks like the economy may finally be back, and the IPO may be opening again soon. If that’s the case, most of this will probably be ignored by investors that prefer the traditional fund model vs. the newer model shown above.
But maybe there will be some early-stage funds that change their structure to more of a "move smart and generate cash” approach.
Those investors will prioritize companies that:
Can control their own distribution and / or acquire customers more profitably than their competition
Remain lean with high revenue-per-employee compared to the rest of their market
Can become cash flow positive within 1-2 rounds of capital
Operate in markets with strategic buyers / private equity interest
Tip: If you want to play around with how this can impact expected returns, we’d recommend modeling it all out using this portfolio construction sheet from the Weekend Fund team.
COMMUNITY
What do investors from a16z, Bessemer, Founders Fund, and Insight have in common?
They’ve all joined this private investor community.
Here are a few reasons you should think about doing the same …
👥 Member directory: Venture is a networking game after all, right? Join 2,250+ other investors already inside and get access to the entire member directory once accepted
🔎 VC resource library: 400+ VC-specific templates, prompts, and other resources to become a better investor
📋 Dealflow-as-a-service: 1,000+ investment memos (and counting) so you never run out of companies to look at
🗣 Investor-only Slack: Where venture, growth, and private equity can answer hard-to-find questions and gather signal through the noise
LINKS
⌛️ Time Management by Randy Pausch: Pausch, a professor at Carnegie Mellon University, who was diagnosed with pancreatic cancer and knew his time was precious and limited, centered his approach around four quadrants
🔥 The Trump Bubble: Not Boring by Packy McCormick, “The line is not Democrat vs. Republican, but those who think the American people can make America, and the world, better and those who think we need government bureaucracy to do it for us
👓 Becoming an AI PM: Lenny’s Podcast brings us a conversation with Aman Khan, Director of Product at Arize AI, who shares tips on becoming an AI PM, excelling in product management, and avoiding common pitfalls in AI
🌱 Here’s What You Can Really Expect When Pitching Your Seed-Stage Startup at a VC Partner Meeting: First Round Partner and former founder Liz Wessel shares her playbook for seed-stage startups tackling one of fundraising’s most opaque processes
🌞 Sam Altman’s 9 Things That the Best Founders Do To Build a Great Company: Ruben Domingues Ibar posts
TWEET
HEADLINES
FBI raids home of Polymarket CEO Shayne Coplan (Axios)
Klarna files for long-awaited US IPO (Pitchbook)
Venture Investors Stirred the Political Pot This Year. LPs Weren’t Thrilled. (WSJ)
Quantum Computing Funding Hits Record High With Apparent AI Boost (Crunchbase)
Wonder snaps up Grubhub for $650M as owner Just Eat stomachs steep loss (Pitchbook)
MEME
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RECS
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POLL
Which model do you think will be represented by more funds over the next five years?
Thanks for reading this far and giving us a little bit of your attention this week.
Feel free to unsubscribe whenever this stops becoming valuable to you.
- Clay
RESULTS
Here are the results from our poll question in yesterday’s piece:
Which YC request for startups are you most-bullish on?
🟩🟩🟩🟩🟩🟩 Government software (4)
🟨🟨🟨⬜️⬜️⬜️ Public safety technology (2)
🟨🟨🟨⬜️⬜️⬜️ Manufacture in the USA (2)
🟨⬜️⬜️⬜️⬜️⬜️ Stablecoins 2.0 (1)
⬜️⬜️⬜️⬜️⬜️⬜️ LLMs for chip design (0)
🟨⬜️⬜️⬜️⬜️⬜️ Fintech 2.0 (1)
🟨⬜️⬜️⬜️⬜️⬜️ New space companies (1)
⬜️⬜️⬜️⬜️⬜️⬜️ AI-aided engineering tools (0)
🟨🟨🟨🟨⬜️⬜️ One million jobs 2.0 (3)
14 Votes
