“It’s just becoming two different asset classes.”
We just wrapped up our latest virtual event on Q2 market trends, and something Reed McBride said that I’m still mulling over:
Reed, Managing Partner at Mintaka VC, called out an “AI fever.”
Here’s what he meant: while everyone’s chasing the flashy AI deals, some genuinely great companies with strong growth and happy customers are finding it harder to raise than they should.
Why? Because investors are so distracted by the “big, frothy AI deals coming through their pipeline” that they’re missing solid businesses right in front of them.
Our panel dove deep into the Q2 data and market dynamics, featuring Reed alongside Sebastian Quintero from Aumni (J.P. Morgan’s venture data arm) and Tanvi Lal from Intuit Ventures.
What emerged was a picture of a market in transition – with some surprising trends that every investor needs to understand. Watch the event below, or on to get a summary of the highlights 👇
This virtual event was presented by Aumni
Aumni, a J.P. Morgan company, is a leading venture capital portfolio management platform and data solution provider. Venture firms use Aumni’s features to collect, structure, monitor, analyze, and report their portfolio data.
Down Rounds Finally Peaked (Probably)
Here’s the first bit of genuinely good news: down rounds appear to have peaked in the first half of 2024, particularly for Series C+ companies.
Sebastian’s data from Aumni tends to back that sentiment up.
“Down rounds appear to have peaked,” he confirmed, “particularly for Series C-plus companies, so later stage, deep in the first half of 2024, seem to be on the downtrend for down rounds, which is a positive thing.”
But, he did make a point to note that to officially call a peak, a peak, he’d need the follow-on quarter’s data to know the slope on both sides of it.
We’re also seeing a reduction in bridge rounds, though Sebastian noted they’re still digging into that data for the next Venture Beacon report.
Series B: Still the “Sucker Round”?
Rob Go’s famous “sucker round” blog post from over a decade ago was put to Tanvi from Intuit Ventures.
While she wasn’t aware of the post itself, here was her take on where things currently stand:
“Any company that is showing signals that they could be a good candidate to just pour fuel on the fire gets preempted, and then someone hops in, another person hops in, the price goes up and up and up, and by the end of the term sheet, it’s just a hard price to swallow.”
She’s seeing this play out in real time in fintech, pointing to companies like Basis (which raised a $34 million Series A from Khosla) and Rillet (Series A from Sequoia, then Series B from Andreessen months later) as examples of “larger funds kind of crowning and taking a bet that that startup is gonna be the next NetSuite.”
The result? “It is just hard to get allocation, candidly speaking.”
The Capital Efficiency Revolution
Perhaps the most significant structural change happening right now is how much more companies can accomplish with fewer people, thanks to AI coding tools.
Reed shared a fascinating insight:
“I have some companies in the portfolio that aren’t hiring product managers, don’t plan to hire a product manager at all… and so they’re just getting a lot more done.”
This is about organizational efficiency. As Reed explained:
“If you go from 4 to 8, you may actually be slower and ship less code, because there’s just a higher human coordination cost.”
Sebastian noted they don’t track bootstrapped companies in their data “because these companies aren’t raising capital, but I’m going to be curious in a couple years to see how many founders are bootstrapping more.”
Reed’s prediction:
“I think there will be some companies that start to scale pretty significantly and may never raise again, or may not need to.”
Series FF Nearly Doubles as Founders Get Smarter
One of the most interesting data points from the Venture Beacon: Series FF (Founder Preferred) has almost doubled in two years, from around 6% to about 11%.
Sebastian attributes this to “founders that are maybe now on their second or their third company that have been through the wringer,” since “they have a good legal team that’s guiding them on tax implications.”
Reed, whose old firm at Orrick claims to have invented Series FF, doesn’t have a problem with it – with one caveat:
“If the founder takes a bunch of money off the table this way, it still adds to the pref stack. Even though that money didn’t go into the company. So that’s kind of a weird feature that I don’t think people talk about enough.”
2 VC Asset Classes: “AUM Collectors” &. Traditional Venture
A sobering theme from our conversation was the recognition that we’re witnessing the split of venture capital into two distinct asset classes.
Tanvi put it bluntly:
“I really don’t know that I would call a lot of these funds venture capital anymore. You’re really just an asset manager, you’re thinking holistically, and VC is one of the ways you can make some money.”
Reed agreed:
“It’s just becoming two different asset classes. There’s AUM collectors, and then there’s… funds like mine that are kind of a throwback to Venture, and we’re just playing fundamentally different games.”
The math bears this out. When Reed looks at deals with $50-60 million seed valuations, “so much has to happen and go extremely well for that to be a fund returner” for his fund size.
“the incentives are just extremely different if you have a billion or multi-billion dollar fund… the kind of outcome that moves a fund like that has to look dramatically different.”
But there’s a silver lining for emerging managers: Reed recently met with an endowment manager who shared:
“They’re only doing funds like mine. They’re not doing big funds anymore.”
The market is sorting itself out. The question is where you want to position yourself in that new reality.
