How LP Deployment to Venture Will Change in 2025 & Are Endowment Funds in Trouble?
OpenAI Strategic M&A Intent: OpenAI is evaluating the acquisition of coding platforms like Windsurf ($3B rumored) or Cursor to address a perceived weakness in the coding sector compared to Anthropic, viewing this as a strategic necessity given OpenAI's $300B+ market cap.
- The "1% rule" is cited as a benchmark for executive-level bets (SVP level), whereas "10% bets" represent "betting the farm" (e.g., Adobe/Figma).
- Acquisitions are seen as a hedge against uncertainty in a market where "no one knows nothing," with a bias toward action to secure ownership of key use cases.
Market Dynamics & Valuation Trends:
- AI hype has reached a consensus level of belief surpassing the PC and Internet eras, driving rapid adoption among 95% of early adopters.
- Valuation multiples are shifting: Forward multiples for $7M revenue companies are cited around 33x, down from the 100x multiples of the 2021 bubble.
- The "whiz" outcome (a single massive exit) remains the primary goal for fund returns, as 1x or 2x outcomes are insufficient in the current environment.
Venture Capital Structure Shifts:
- Seed Compression: Multi-stage firms (e.g., Green Oaks) are squeezing out pure-play seed funds by leading Series A rounds immediately, forcing seed deals to be smaller (2-3% ownership vs. historical 12%) and more dilution-sensitive.
- Fundraising Environment: LPs are delaying commitments to new funds due to market uncertainty, though there is still appetite for "designer funds" spun out from successful GPs at top-tier firms (e.g., Bucky from KP).
- Endowment Stress: Ivy League endowments face liquidity crises due to a combination of public market volatility, illiquidity in Private Equity, and potential reduction in federal funding, leading to potential secondary asset sales (e.g., Yale reportedly selling a $6B asset pool).
Investment Strategy & Decision Making:
- High Conviction Rule: Investment firm leadership (Jason) argues that deals with 100% conviction of a 5x return should be executed regardless of valuation or ownership percentage.
- Role of the Founder: Investors prioritize founders with outlier growth rates (top 0.1%) and high personal passion over market competition, admitting that competitive landscapes are often understood only post-investment.
- Geographic Centralization: Despite the rise of remote work, the Bay Area remains critical for deal flow due to the density of "hot rounds" and the necessity of in-person relationship building for high-growth deals.
AI Business Model Critiques:
- Roll-up Plays: Skepticism exists regarding AI-accelerated roll-ups in services (legal, accounting) because acquired customers often chose vendors for reasons unrelated to the new AI tech, leading to high churn; success is limited to cases with identical customer needs (e.g., real estate management).
- Vertical SaaS: The vertical SaaS market is considered under-invested, as the AI wave in these categories is just beginning, promising fewer competitors compared to saturated horizontal AI tools.
- Capital Efficiency Paradox: Venture capitalists prefer investing in capital-efficient companies that don't need their money, yet are compelled to deploy capital at astronomical valuations to participate in these deals.
Sector Observations:
- Competition: Enterprise software tends to form oligopolies with multiple winners, whereas consumer software and infrastructure tend toward winner-take-all dynamics.
- Due Diligence: Modern diligence has intensified, with founders conducting hundreds of customer references to secure meetings, often driven by the high cost of entry for $7M ARR companies.
- AI Utility: AI tools are being leveraged internally by firms to automate initial deal screening and feedback, with growth metrics serving as the primary trigger for partner review.