No Runway - That Was The Week 2023 #46

It's been a week....

For a start, on my return from travel, I tested positive for Covid 19. Although a test was barely needed, I felt decidedly ill on landing. That was Tuesday; today is Saturday, and the end is in sight. Not the end of the runway, the end of the Covid. I'm out of bed and writing.

But speaking about the end of runways, as depicted in this week's DALL-E image, we have evidence of the scale of startup closures this week and a very high-profile venture fund closure - Openview from Boston.

As I began writing, The Information published a story about D2IQ - an A16Z-backed unicorn - running out of runway. Openview's closure was reported a few days earlier.

Kyle Harrison has one of the Essays of the Week, 'Revisiting the Death of a Venture Fund,' which views the state of play. He quotes Delian Asparouhov of Founders Fund:

I think venture capitalists are starting to awaken to the idea that ultimately what you need to be aiming for is the most long tail of outcomes. And if you look at the top 5 companies in the NASDAQ right now--Apple, Nvidia, Tesla. People are starting to realize that in order to build these long tail outcome companies you actually need to build things that tend to be a little bit more capex expensive and so that tends to mean that its something that is easier done when you have venture capitalist effectively as a co-founder. And so I think you'll see some more of it, mostly because I think the most interesting companies are going to be more capex intensive over the next decade.

In the context of the end of Runway, he then comments:

Comfort around capital intensity is not the only product that can keep a venture fund alive and thriving. There are a myriad of ways to stand out as a firm. But increasingly, the stakes have been raised. And now its not just a question of facing superiority or irrelevance. It's a function of facing qualification for the right to survive, or death.

Carta covers the accelerating shutdown rate of startups.

And to reinforce the context, we have spoken a lot here about the massive impact that the market reversal of 2021 has had on the value chain of venture capital. 57% of startups on Carta's platform must raise new capital in 2024. most of them will likely fail for a variety of reasons.

The New York Times piece - From Unicorns to Zombies: Tech Start-Ups Run Out of Time and Money - sums up much of this. Erin Griffith is a wonderful reporter and analyst of the ecosystem. She writes:

Venture investors say that failure is normal and that for every company that goes out of business, there is an outsize success like Facebook or Google. But as many companies that have languished for years now show signs of collapse, investors expect the losses to be more drastic because of how much cash was invested over the last decade.

From 2012 to 2022, investment in private U.S. start-ups ballooned eightfold to $344 billion. The flood of money was driven by low interest rates and successes in social media and mobile apps, propelling venture capital from a cottage financial industry that operated largely on one road in a Silicon Valley town to a formidable global asset class akin to hedge funds or private equity.

During that period, venture capital investing became trendy - even 7-Eleven and "Sesame Street" launched venture funds - and the number of private "unicorn" companies worth $1 billion or more exploded from a few dozen to more than 1,000.

But the advertising profits gushing from the likes of Facebook and Google proved elusive for the next wave of start-ups, which have tried untested business models like gig work, the metaverse, micromobility and cryptocurrencies.

Now some companies are choosing to shut down before they run out of cash, returning what remains to investors. Others are stuck in "zombie" mode - surviving but unable to grow. They can muddle along like that for years, investors said, but will most likely struggle to raise more money.

Jason Lemkin writes that this is normal, and he is right. But we have never had so many companies, with so much sunk capital and so many employees, make up the high percentage of failures as we will in the next period. It should not be a long-term ecosystem concern, but it certainly is a short-term issue.

That said, where it is common for startups to fail, it is rare for venture firms to close down. We will see more of that in 2024 as LPs that invest in funds are reluctant to do so due to a lack of liquidity or over-indexing on venture and needing to rebalance.

Openview is a staggering closure as it still has over $1bn of assets under management. Some partners do not want to spend the next several years managing an over-valued portfolio on the last round through the inevitable corrected valuations and closures that will produce.

By contrast, Calpers - the California Public Employees Retirement Fund - has significantly increased its commitments to venture capital. As always, more than one trend is in play simultaneously. Out of death comes growth and renewal.

Talking of that, OpenAI's over-reported death and rebirth has spawned a new aggressive marketing campaign from Google for its Gemini competitor. Perhaps too aggressive. A characteristically understated Google stepped over lines in producing a highly edited video showing capabilities Gemini does not possess - at least not as depicted - an extensive and free win for OpenAI.

That said, Google Gemini is a decent product. Like others, it is highly constrained due to Google's paranoia about doing things that would draw unwanted attention. Its web reading is somewhat limited. It seems able to be given a single URL to summarize. However, it cannot read RSS feeds or crawl links. It has been constrained when it comes to politics. Imagine if we limited our children's brains in this way.... Oh, wait.. :-).

And more regulation news, which seems to grow each week. The EU agrees on an AI regulation act destined to render the continent irrelevant as builders engineer the next version of human ingenuity. The FTC wants to look into Microsoft's OpenAI investment and will have as much luck as it has had with its many 2023 failed efforts with other companies.

Apple releasing its AI tools as open source got some attention but will likely do more than the FTC in curbing AI centralization.

My editorials are not surveys. They are opinions, so it behooves me to state that I believe the new green shoots in 2023 are more significant signposts to the future than the gloomy stories in this week's edition. Google will produce a compelling AI platform, and OpenAI will go on to even greater things. A blossoming of new applications leveraging AI developments will revolutionize work and the human learning and building experience. Optimism is the proper framework for understanding current trends.

OK, enough said. My Covid recovery wants me to stop writing so I am out of Runway, too - more in this week's video.

Essays of the Week