The State of VC in 2023 - a Techno-Realist Manifesto

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 50th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

Today, the Publisher's Parmesan discusses Sam Lessin's 84-slide presentation on understanding VC, finding real opportunities, and avoiding pitfalls.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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The Quote󠀢 💭

The Tweet 🐦

Last week, digital freight brokerage startup Convoy decided to shut operations. They had raised almost $1B during their lifetime. So what went wrong? This Twitter Note breaks down the crux of the problem - due to falling freight prices and long payment cycles, Convoy was faced with a liquidity crunch triggering debt covenants. With freight markets cooling off and venture capital drying up, Convoy had no option but to shut shop. There are indications that more such digital freight brokers risk going under in the current environment. Great read to understand the mechanics of digital freight brokers.

The Infographic 💹

If you take into consideration China's off-the-books military spending, it becomes evident that they are already allocating a comparable amount to that of the United States. However, when you additionally factor in purchasing power parities (PPPs), it becomes apparent that China is effectively spending significantly more than the United States.

The Short Read 📝

An Open Dialogue on the Open Network (ONDC) - by Mayank Jain, Rupali Goel

Mayank Jain and Rupali Goel (Stellaris Venture Partners) exchange their candid thoughts over a WhatsApp conversation.

Would ONDC be a real game changer and alter India’s e-commerce landscape in a big way? Would it lead to massive value creation by a host of new companies playing a key role in the unbundled supply chain? Or would its impact be limited & hardly needle-moving for the country’s millions of buyers & sellers?

The Long Read 📜

Reflections on Completing Five Years in Venture Capital - by Sajith Pai

Sajith Pai from Blume Ventures reflects on his learnings, evolution, and the ever-changing Indian venture and startup landscape. Get ready to delve into the fascinating world of VC.

This essay is divided into three parts. The first part discusses the Indian venture landscape and his involvement in it over the past five years, in chronological order. The second part explores venture practices and his understanding of them. The final section provides insight into his personal growth during these five years, as someone who initially seemed out of place but has now found a home in this field.

Publisher’s Parmesan 🧀

The State of VC in 2023 - a Techno-Realist Manifesto

Recently, Sam Lessin published his 84-slide take on how to understand what is going on in VC, where the real opportunities are, and what to avoid. You can read the full document here.

Sam Lessin is currently a General Partner at Slow Ventures and an intern writing at The Information. Before this, he was VP of Product at Facebook. He founded two companies - drop.io and fin.

As many have argued or continue to argue, the VC industry needs to rip up the playbook and start again. The boom is over but Silicon Valley’s optimism is masking problems with investor capital and returns.

Given this bleaker outlook, many of the so-called “tourist” investors who flooded into late-stage private markets in the late 2010s, have gone back home. Sam Lessin wrote this week in a “techno-realist” manifesto in The Information, that the VC factory line churning out standardised software unicorns (start-ups valued at more than $1bn) has shut down.

Here is an attempt to extract the key points from his longish deck.

Where We Are:

1. The ‘shutdown’ of the VC factory line & death of the ‘factory farmed’ unicorn narrative that dominated Silicon Valley for the last 10-15 years. In particular, what matters is understanding why this pipeline has stopped and why it is extremely unlikely to restart. The public market wants organic, pesticide-free, au natural

2. The mirage of AI and LLM startup investing fueled by magical thinking — make no mistake it is great great and impactful technology - but tech that is fundamentally an extending innovation rather than a disruptive one for incumbents

3. The awkward ‘crowd’ into seed investing by multi-stage firms (and even just late-stage firms) as they look for where they ‘can’ deploy capital given the factory ‘shutdown’ & based on the incentives of all the people they hired to ‘write checks’ to build a track record & get ahead

4. The post-pandemic fundamental cultural change impacting startups’ economic randomization, personal reprioritization, and the search for self-reliance and security are all dramatically shifting where talent goes and what it wants

What to Do As A Seed Investor:

1. Stay Away From the Seed Equity ‘Killing Fields’ of AI & companies and heavily capital-dependent businesses. These are the two hallmarks of disaster for early-stage capital in this new environment.

2. Prioritize Capital Efficiency Over Scalability of Investment ‘Opportunity’ Seed investors should focus on places where dollars are scarce and valuable to companies, they need not be concerned with which companies can ‘scale’ their dollar demand like late-stage funds. Spending money to create the opportunity to spend more money is seed-inefficient & businesses don’t need to ‘choose’ between early discipline and ultimate scale.

3. Prioritize Financial Optionality for Investments & As a Fund You can’t trust the next round will be there when you need it. You can’t trust the public market will be there when you want to exit. Companies can’t rely on the old pattern of building for the next ‘round’ vs. building companies and being opportunistic when capital exists. Funds need to actively develop liquidity options vs. just patiently waiting for an exit to the public market or an acquirer (as PE firms learned a generation ago)

4. Exercise Patience and Discipline and Work With Partners Who Do As Well You need to work only with founders who love what they do and embrace the marathon. You need LPs that trust you over the long term.

And Where to Invest:

1. Small Business ‘Platforms’ - Revenge of Existing Mainstreet It is easy to forget that an enormous per cent of the US economy is made up of small businesses, and with some noted ‘marketplace’ exceptions – platforms for small businesses are under-invested in and under-appreciated.

2. Businesses in a ‘Box’ / Franchises - Create New Entrepreneurs Capital light opportunities that allow them to own and operate small businesses. Don’t take employees and make them 1099, turn them into owners who are building wealth in equity and can earn $500K+.

3. Sneaky ‘Not-So-Lifestyle’ Businesses - The Real Future of SaaS / Software Entrepreneurship The economy is larger than you think. There are many companies where the ‘TAM’ might look ‘small’... but it is plenty big to generate single-billion dollar outcomes very capital-efficiently.

4. Creators / Communities - The Best Under-funded Entrepreneurs There will be many many more self-made billionaire creators in vertical niches that have built trust and relationships with specific deep fanatical audiences. Financing them to build faster better communities and products is great white-space.

5. What of Crypto? Crypto remains a deeply interesting seed area because it is one of the only areas where you can imagine a ‘next great platform’ which is seriously disruptive to incumbents. While disruption is unlikely in this era, it is important to stay open to any space which can generate $100B disruption.

The TLDR?

$1B Seed Backed ‘Small businesses’ FTW: It has never been easier for super small lean teams to build serious businesses with extreme capital efficiency and get profitable early. There will be more software and community-driven ‘billionaire’ founders of tightly held companies in the coming years than ever before & seed investors are ideally positioned to provide the single ‘shot’ of high-risk capital for liftoff and do very very well backing these shots.

$10B Factory-Farmed Unicorns & The Multi-Stage Firms Designed to Build Them Are F*ed: The 10B manufactured startup where multi-stage ‘Asset Managers’ charging VC carry could buy up and predictably manufacturer of the public markets is a broken thesis from the last decade. This goes away along with all the funds trying to profit off this model in a low-interest rate phenomenon, with the possible exception of regulatory capture-based industries (government contracting, etc)

$100B Platform Wins: were never manufactured… and never can be. This period is very very unlikely to yield platforms that look like this but you have to keep your mind open for where they ‘can’ happen (crypto, etc.) … probably NOT AI.

Oilo Jobs 💼

• Commerce Ventures | Remote - VC Analyst/ Associate

• Signals VC | Berlin - Venture Capital Associate

• First Round Capital | San Francisco - Insights Analyst

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We’ll be back in your inbox 2 PM IST next Wednesday. Till then, have a productive week!

Peeyush and Mohit

Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.