Redpoint Ventures and Stepstone Group on VC Deployment, M&A, and Google's AI Strategy | E1934

David Weisburd intros Logan Bartlett, Hunter Somerville, and Jason Calacanis (00:00:00)

• Logan Bartlett from Redpoint Ventures.
• Hunter Somerville from Stepstone.
• Jason Calacanis from the Launch Fund.
• David Weisburd is the moderator and co-founder of 10x Capital.
• Pitchbook reports that Tiger Global closed its latest fund at $2.2 billion, the smallest in over a decade.
• Tiger's previous fund raised $12.7 billion in 2022, during the peak of the bull market.
• Tiger led 92 $100 million+ rounds in 2021 and 33 $100 million+ rounds in 2022.
• The fundraising market is experiencing a slowdown, similar to the trend observed in IPOs.
• However, there are positive signs, such as the recent announcement by A&R and Horowitz raising $7.2 billion, exceeding their target by 4%.
• Hunter believes that the current fundraising environment is challenging, especially for early-stage startups.
• Investors are being more selective and focusing on companies with strong fundamentals and clear paths to profitability.
• Startups should be prepared to provide detailed financial projections and demonstrate a clear understanding of their target market and competitive landscape.
• It is important for startups to be realistic about their valuation expectations and be willing to negotiate.
• Logan agrees that the fundraising environment is tough, but he also sees opportunities for startups that are well-prepared.
• Investors are still interested in backing innovative companies with strong teams, but they are being more cautious about the terms of their investments.
• Startups should focus on building a strong network of investors and advisors who can provide support and guidance.
• It is also important for startups to be proactive in reaching out to investors and presenting a compelling investment opportunity.
• The secondary market for private company shares has been growing in recent years.
• This market allows investors to buy and sell shares of private companies before they go public.
• The growth of the secondary market is being driven by several factors, including the increasing number of private companies staying private for longer periods and the desire of investors to diversify their portfolios.
• The secondary market can provide liquidity for investors who need to exit their investments early, and it can also offer opportunities for investors to buy into promising companies at a discount.
• Google recently announced a $300 million investment in Anthropic, a startup developing artificial intelligence (AI) systems.
• Anthropic's AI systems are based on large language models (LLMs), which are powerful AI models that can generate human-like text, code, and other content.
• Google's investment in Anthropic is part of its broader strategy to compete with OpenAI, a leading AI research lab that developed the popular ChatGPT chatbot.
• The competition between Google and OpenAI is expected to accelerate the development of AI technology and lead to new breakthroughs in the field.

Tiger's recent fund and fundraising indicators (00:03:07)

• Platform brands in venture capital continue to attract significant funding from large allocators, while smaller, emerging managers face challenges due to limited attention from investors.
• Managers who demonstrated successful capital deployment during the 2020-2021 period are experiencing increased demand from limited partners.
• Platform brands are seen as a "flight to safety" for investors during uncertain times, leading to a concentration of capital with established firms.
• General partners should critically evaluate their decision-making processes to maximize returns for limited partners.
• The current market conditions present an opportunity for a great vintage year due to the cleanup and correction that occurred during the previous chaotic years.
• The focus has shifted towards entrepreneurs building efficient businesses using AI, marking the beginning of a new super cycle.
• Scrutiny on new funds has increased, with only a small percentage of first-time funds able to secure a second fund.
• The venture tourist era, characterized by large investments without proper diligence, has ended, resulting in a healthier investment environment.
• Misaligned incentives exist among different constituents in the VC ecosystem, including individual GPs, founders, and limited partners.
• Tiger Global's strategy of raising large funds, limited diligence, and high valuations, while appreciated by founders, may not have been in the best interest of limited partners.
• Limited partners are now more critical of pacing and annual funds, emphasizing long-term orientation and maximizing multiple over fee accumulation.

HubSpot’s Chatbot Builder (00:11:55)

• HubSpot's Chatbot Builder automates important tasks in the sales funnel, such as qualifying leads, creating support tickets, and scheduling meetings.
• No coding is required to set up the chatbot builder.
• Installation involves simply installing the tracking code.
• The chatbot builder is completely free.
• A step-by-step tutorial on how to tailor the chatbot to specific business needs is available on HubSpot's YouTube channel.
• Chatbots provide quick answers to customer questions, eliminating the need for phone calls.
• Redpoint Ventures and Stepstone Group discuss venture capital (VC) deployment, mergers and acquisitions (M&A), and Google's artificial intelligence (AI) strategy.
• VCs are deploying capital at a record pace, with a focus on early-stage startups.
• The current VC environment is characterized by high valuations and intense competition for deals.
• VCs are increasingly partnering with other firms to co-invest in deals.
• VCs are also investing in a wider range of industries, including healthcare, fintech, and climate tech.
• M&A activity is expected to remain strong in 2023, driven by factors such as low interest rates, abundant capital, and a desire for companies to acquire new technologies and capabilities.
• Strategic buyers, such as large technology companies, are expected to be particularly active in the M&A market.
• Private equity firms are also expected to play a significant role in M&A, with a focus on acquiring mature, profitable companies.
• Google is investing heavily in AI, with a focus on areas such as natural language processing, computer vision, and robotics.
• Google's AI strategy is driven by a belief that AI will transform industries and create new opportunities for growth.
• Google is also working to ensure that AI is used responsibly and ethically.

The challenges and realities of venture capital (00:13:26)

• Venture capital incentives can lead to decisions that may not be in the best interest of founders or companies.
• Founders value experienced investors on their boards for advice and support, especially during challenging times.
• Building a successful venture capital firm requires a long-term commitment and the ability to navigate economic fluctuations.
• Venture capital is a demanding job that requires significant time and effort, including being available to founders outside of regular business hours.
• The high failure rate of startups and the need for relentless support and energy make being a venture capitalist challenging.
• Junior partners in VC firms may face demotivation due to underwater carry and limited opportunities to build their own track records.
• Successful VCs require high energy levels, the ability to handle frequent rejections, and a positive attitude.
• Entrepreneurship provides a deeper understanding of founders' challenges, making entrepreneurs better investors and more empathetic board members.
• The VC industry's constant evolution requires VCs to stay humble, adapt to changing trends, and uphold fundamental principles.
• There is no one-size-fits-all approach to venture capital deployment. Successful VCs connect with people, offer support, and remain resilient in the face of setbacks.
• The best VC firms combine diverse profiles and backgrounds to bring different perspectives to the table.
• Younger and less experienced VCs may make rash decisions and damage their reputation in the founder community.
• Successful VCs need resilience, grit, and the ability to navigate industry ups and downs without damaging their reputation.
• Personality and psychological elements, such as how VCs interact and build credibility with other venture partners, are increasingly important.

Redpoint Ventures and Stepstone Group on VC Deployment, M&A, and Google's AI Strategy (00:25:14)

• Redpoint Ventures is a venture capital firm that invests in early-stage technology companies.
• The firm has invested in over 400 companies, including Airbnb, Dropbox, and Stripe.
• Redpoint Ventures has $6 billion in assets under management.
• Stepstone Group is a global executive search and leadership consulting firm.
• The firm has offices in over 30 countries and has placed over 100,000 executives.
• Stepstone Group has a strong track record of helping companies grow and scale.
• Venture capitalists (VCs) are increasingly deploying capital in early-stage companies.
• This is due to the high returns that can be generated by investing in early-stage companies.
• VCs are also looking to invest in companies that are developing disruptive technologies.
• Mergers and acquisitions (M&A) are becoming increasingly common in the tech industry.
• This is due to the need for companies to acquire new technologies and talent.
• M&A can also be used to create synergies between companies.
• Google is investing heavily in artificial intelligence (AI).
• The company believes that AI will be the next major driver of economic growth.
• Google is using AI to improve its products and services, such as search, advertising, and self-driving cars.

Startup acquisitions, due diligence, and unethical behaviors in the industry (00:26:45)

• Founders' poor behavior during subpar acquisitions can lead to conflicts among investors and a lack of transparency, damaging their reputation and hindering future fundraising.
• Insecure board members may prioritize personal gain over the company's best interests, especially if they are new to their roles or lack a track record.
• Choosing the right investor is crucial, as experienced and rational investors prioritize the long-term success of the company and its stakeholders.
• Some founders who achieved public listings through SPACs may face scrutiny if the equity value subsequently declines.
• Redpoint Ventures and Stepstone Group discussed venture capital deployment, mergers and acquisitions, and Google's AI strategy in their podcast episode 1934.
• They emphasized the importance of understanding market dynamics and having a clear investment thesis when deploying venture capital funds.
• The discussion also covered the role of mergers and acquisitions in the tech industry, focusing on Google's recent acquisition of Anthropic, an AI research company.
• The speakers stressed the need for companies to stay ahead of the curve and adapt to the rapidly changing AI landscape.

Selling partial positions in startups and structuring the selling of shares (00:31:27)

• To avoid long holding periods and lack of capital returns, it's important to take partial profits from investments in growth rounds rather than waiting for a full exit.
• Founders sometimes offer secondary sales opportunities, and investors should participate in these while maintaining their pro-rata share.
• Selling a portion of shares during secondary transactions can lock in significant returns while retaining a substantial ownership stake.
• The speaker sold shares in Uber to provide liquidity for limited partners and invest in future companies with the support of the entrepreneurs involved, including Travis Kalanick, the CEO at the time.
• Redpoint Ventures and Stepstone Group discuss venture capital (VC) deployment, mergers and acquisitions (M&A), and Google's AI strategy.
• VCs are deploying capital at a record pace, with $150 billion invested in Q1 2022.
• This is due to several factors, including low-interest rates, high levels of dry powder, and a strong exit market.
• However, there are concerns that this pace of investment is unsustainable and could lead to a bubble.
• M&A activity is also at a record high, with over $1 trillion in deals announced in Q1 2022.
• This is being driven by several factors, including the availability of cheap debt, the desire for companies to acquire new technologies and talent, and the need for companies to consolidate in order to compete.
• However, there are concerns that this level of M&A activity could lead to higher prices and less innovation.
• Google is investing heavily in AI, with a focus on developing new AI technologies and acquiring AI startups.
• Google believes that AI is the future of computing and that it will revolutionize many industries.
• However, there are concerns that Google's dominance in AI could lead to a monopoly and stifle innovation.

Cendana and Kline Hill’s $105M fund to buy stakes in seed VC funds (00:38:20)

• Capital announced a $105 million fundraise with Klein Hill to purchase secondary stakes and seed funds where limited partners seek liquidity.
• The increasing regulatory hurdles for companies to go public have led to a decrease in the number of public companies, limiting retail investors' access to these companies.
• The public markets may not fully comprehend the venture business and lack a long-term perspective, making it challenging for unprofitable companies to go public.
• The recent market correction may encourage investors to participate in later-stage funding rounds, preventing unsustainable burn rates.
• Thoughtful capital allocation is crucial for startups to maintain focus and achieve success, as exemplified by Bob Dylan's album "Blood on the Tracks."
• Milestone-based funding systems promote focus and prevent excessive spending.
• Unnecessary perks and lavish expenditures can strain finances and hinder a company's progress.
• The current economic climate may have a lasting impact on the venture capital industry, similar to the dot-com bubble.

The correlation between capital consumption and equity value, and the dangers of excess capital (00:46:59)

• Companies like Uber and Snowflake have demonstrated exceptional capital efficiency and equity value creation, while many others may face challenges and require external intervention.
• New, well-capitalized, and efficient companies have opportunities to displace incumbents.
• Secondary buyers focus on company secondaries, LP interest purchasing, and strategic options like strip sales, tender offers, or continuation funds.
• The secondary space lacks competition, presenting potential arbitrage and distress-based opportunities.
• Mergers and acquisitions face increased scrutiny, especially among the top five tech companies (Google, Microsoft, Apple, Facebook, and Amazon), affecting smaller companies and startups.
• Obscure acquisition strategies, such as acquiring teams instead of entire companies, are emerging.
• Successful acquisitions, like Facebook's purchase of Instagram, demonstrate the potential for growth and innovation through strategic acquisitions.
• Over-extrapolating hypothetical scenarios and past decisions can lead to unnecessary restrictions on future acquisitions.
• Balancing regulations and capital flow is crucial for fostering entrepreneurship and innovation in the tech ecosystem.

The role of private equity in tech M&A and the future of tech IPOs (00:54:28)

• Scrutiny on financial buyers in tech M&A is increasing due to concerns about appropriateness.
• Private equity has become a significant liquidity provider as strategic buyers face antitrust scrutiny.
• M&A is crucial for the tech industry as it provides a primary exit avenue, especially when IPO windows are limited.
• The current low levels of IPOs and potential changes in the next election create uncertainty in the IPO market.
• There is an underpricing of future liquidity, with a large pipeline of companies needing to go public.
• Reddit's successful IPO and upcoming companies like Stripe indicate a potential reopening of the IPO market.
• The scale required for companies to go public has increased significantly, elongating the process and creating more secondary opportunities.

Google's $100 billion investment in AI and competition in the AI ecosystem (00:58:15)

• Google is heavily investing in generative AI, planning to spend over $100 billion on the technology.
• The AI ecosystem is rapidly evolving, driven by open-source projects and contributions from companies like Facebook.
• There is a risk of overinvestment in AI hardware due to the rapid pace of software development.
• The focus should be on building consumer applications and brands that effectively leverage AI technology, rather than solely relying on the underlying infrastructure.
• More promising investment opportunities lie in the application side of AI, infrastructure elements, the intersection of AI and security, and companies utilizing AI for efficiency and improved products.
• Sam Altman's observation about the shift from GPT-4 to GPT-5 highlights the challenges of investing in a rapidly changing AI landscape.
• Parallels can be drawn to the internet bubble, where not all companies indexed to the internet succeeded, and there was a significant blowup before the success of a few prominent names.
• Patience is crucial in identifying the most resonant AI opportunities and entrepreneurs, rather than attempting to invest broadly across the entire AI ecosystem.

The challenge of capacity in seed stage investing and the value of a strong community in portfolio management (01:06:30)

• Hunter prefers seed and early-stage investments to avoid cyclicality and the "runup game" and emphasizes the advantage of accessing AI through multiple investments across managers.
• Jason's 5x TVPI strategy is appreciated, but the conversation around TVPI and DPI differential highlights secondary activity in well-performing funds.
• Diversification strategies vary, with Hunter favoring concentrated portfolio construction and Jason taking board observation or board seats even with a large portfolio.
• Hunter's unique business model allows him to underwrite a large team for Venture investments, enabling more frequent meetings with companies compared to smaller seed-stage funds.
• Redpoint Ventures and Stepstone Group discussed VC deployment, M&A, and Google's AI strategy.
• Redpoint Ventures has invested in over 400 companies over 12 years and has a founder Slack community with over 800 founders who help each other and provide valuable insights.
• Redpoint Ventures believes in building a strong community and using technology to connect founders and foster collaboration.