Nothing ventured, nothing gained

TLDR; People who work in venture capital may have a lot of good advice and perspective, but they also have an agenda.

As I think more about lessons I’ve learned this year, I’ve noticed I feel more calm throughout my day. The internet is designed to wind us up. But I find I’m less interested in experiencing outrage, and more likely to seek understanding.

• What affordances, constraints, and incentives are people reacting to?
• What features are they optimizing for?

For example, I watch Y Combinator videos because they often have advice and perspectives that I can use. They have a Design Review series I like where they critique websites. But I also need to remember that they have their own incentives.

How venture capital works

I don’t know exactly how YC in particular works, but most VC firms operate like this. Rich people have lots of money, but limited time to figure out how to invest their money. Venture capital funds focus on providing expertise in finding high risk, high return investments in startup companies. The general partners (GPs) convince limited partners (LPs) to give them money now in exchange for more money later.

The GPs then convince founders to take money to build their companies in exchange for a stake in their company. This will change the affordances and constraints the companies operate under from that point on. Focus will be on a successful exit through acquisition or an IPO. It’s a bit like being at a party with a spouse who is eyeing the door and pulling you in that direction.

GPs typically charge fees from LPs in order to keep their business operating. Those fees are what they use to produce videos and run events where they provide advice. But the other purpose of those videos is to recruit founders to take wads of cash in exchange for equity. If those companies get a high valuation on the stock market or get purchased, then the GP will earn “carry,” which is carried interest. After paying back the LPs their initial investment, and a preferred return called a “hurdle rate,” the GPs take a cut of what’s left.

And given that most of the startups the fund invests in will fail, they need the succeeding businesses to make mad bank.

So it’s a numbers game for them. They are using money to make money. Most of the companies they invest in will fail, especially because they are not being encouraged to focus on existing customers, or build a sustainable business model that turns a profit. Often they need to hire lots of employees, and keep them (even during downturns) because the company needs to look successful. Firing employees looks bad to potential buyers.

Founders may flounder, but GPs get paid.

The AI erosion

But AI might be eroding the VC fund’s main supply, meaning founders. The main cost of building a startup are the developers who write code. When developers are using AI as a coding partner, their productivity rises and they can operate at a higher level. So when founders run the calculations on their operating costs, they are going to find that breaking even is a lot cheaper than it used to be.

The effective break even goes way down in a world where AI proliferates.
—Chamath Palihapitiya, All-In Podcast, episode 158 on YouTube

Will development get cheaper or will products get more complex? It’s hard to tell. But in the short run, it’s likely that a lot of founders are grabbing their own pick axes and running to the AI-enabled gold mines looking for that gold nugget.

And that might explain why Y Combinator recently sent buses out to Boston-area universities to round up students for a conference where they were giving “advice about how to start a startup.” That advice? Quit college now. Even if you don’t have an idea, come be a founder in our stable and we’ll help you find a product to build. Don’t worry about the bodies piled up in the maze, AI is going to open up a path through all that complexity. And if you want to build a trillion-dollar company, you have to start now.

The VC funds need baby founders who might not have realized how the landscape is changing under their feet. The labyrinth is opening up, and founders might be able to make it through the maze without VC funding. Maybe you do still need venture capital to build a trillion-dollar company. But maybe it would be a lot more fun to fully own a million-dollar company that you fully control.

I mean, what are you going to do with all that money your trillion-dollar company earns? Give it to a VC fund?