My mother was fond of reminding my brother and I of the lopsided ratio of ears to mouth we possessed, and God’s intent behind that imbalance. Despite her attempts, the maxim of listening twice as much as talking continued to fall on deaf ears (sorry) far after I had left my parents home. Now, as a parent, as well as a venture capitalist, I feel her pain acutely everyday.
In this week’s news, I’ve decided to share a few observations and trends which have materialized from conversations with other capital allocators over the last sixty-days. Of course given our syndication model, speaking with other VC firms is the first priority of each Partner here at In Revenue perpetually, but still it helps to bring some value to those interactions as is also one of our core values. AI’s transformation of the early-stage startup ecosystem and its implications for our business seemed a pertinent topic – and so off I went, with two ears and one mouth in tow. And as usual, I learned far more by listening than I did expounding on my selected insights. My mother would be proud. So, here they are, selected easter eggs, hidden in plain sight, loaded with value, hunted down using the maxim I learned when I was five years old:
Easter Egg #1: AI has made everything more efficient, including the way founders start and build companies, which preserves ownership for everyone – welcome to “Seedstrapping”.
What does it really take to found a company and create an MVP solution these days? Thanks to AI, the answer is, not a whole lot. Of course, identifying an acute pain point worth solving and then communicating that value-prop to a market remains one of the hardest things any of us will ever do – but more on that in a bit. However, speaking purely in terms of leveraging open-source and hyper-low-cost models to build applications, and conducting all of the necessary workflows to productize said application, the time, resources and capital required to create have never been more efficient. This has moved the constraint of funding far down the lifecycle, frankly to the point where it is most beneficial to everyone. This low-barrier, self-funded onramp allows founders to commercialize their product to a point where proof of life is evident. With our desire to fund vertical SaaS companies with traction of 500k – 1.5MM in ARR as well as maximize equity for founders as well as our investors – this frankly is a perfect storm of fit.
This is a huge value-creation trend.
For ‘seedstrapped’ founders that have grown by leveraging extreme efficiency and at the same time achieving strong indications of product-market-fit, the end-game optionality completely changes. By avoiding early and highly-dillutive funding rounds based on vapor, these Seed opportunities help to avoid the very venture fallacy that In Revenue was created to circumvent. Optionality and efficiency are the core tenants we both look for as well as foster in our portfolio companies. With those tenets already embraced, Seedtrapped companies avoid undue dilution. After our Seed investment, a typical founder expects to raise another 2 – 3 rounds of financing, leading to 50-60% of additional dilution. In the AI driven world this changes fundamentally as we are already seeing many of our investments with the potential for profitability in 12 – 18mo. Post our Seed round. Even if profitability isn’t the path we choose to take, that optionality creates massive value – in fact, a Seedstrapped company can exit with the same founder and investor returns at half of the valuation necessary in a ‘traditional’ VC backed org.
By backing efficient companies with lower burn and higher ownership, we can drive meaningful returns without relying on unicorn outcomes.
Easter Egg #2: Despite AI’s accelerations in bringing meaningful companies and products to market, the true friction point (and moat) remains GTM – the value-add we supercharge our companies through. When product becomes ubiquitous, GTM and distribution become the differentiator. We get this question all the time, ‘what’s the moat’, and despite the fact that we only invest in vertical SaaS organizations which have captured deep, proprietary data within a niche market via usage of their solution, those barriers for other market entrants only grow so high. Technology is the universal equalizer but the traction that technology achieves with buyers is the king-maker.
The only problem with our model, frankly, is the market perception that all investors bring value-add offerings. This is no surprise as visit any VC website, or listen to their pitch, and you’ll find those words strung up in bright lights. Frivolity. Untruths.
The Operator Immersive model was designed to stand alone – and it does – but even we could not have predicted the demand and true impact of our model. In our now seven investments, each one has seen not only the daily commitment, but outsized impact our GTM operator model delivers. By applying the knowledge we acquire during the diligence phase to architect bespoke project plans and augmentation to each company, we transform the black hole of fundraising time founders and teams spend raising capital into a launch pad for growth.
Beyond even our own augmentations of GTM skillset, our Operating Partner Network has proven to be an even more valuable cheat code as we selectively place proven talent within our portfolio companies from that base, tailored not only to the skillset gaps previously present, but also the culture and personality of the organization and its buyers. We are doing the work recruiters have promised and failed to deliver on for decades, and we’re doing it extremely well. As a footnote to this point, we are always hiring for sales talent, please take a look at the positions listed in this communication – referrals are not only welcome, they are required in order to maintain the level of fit we promise to our companies.
Easter Egg #3: The ‘Fund’ is beginning to crack
Two years ago when we were launching In Revenue, each time I would share our model with a prospective VC partner noses would turn up when it came to our financial model. In VC, it’s historically been all about size – size matters a lot. AUM and Fund size is the headline for most capital allocators. However, in the last six months the same noses have headed south. We embraced the SPV (fundless sponsor) model with great intention, as an alternative to what has been a low performing norm. Granted, this bet could have gone two ways – and now I’ve never been more confident we picked the right horse.
Time after time, as I speak with our partner VCs over the last two quarters, their outlook on raising another BIG fund has soured. Due to many of the reasons I’ve mentioned above, VCs are looking for better and better companies, even in the early stage. They are looking for companies not with powerpoint pitches, but proven growth and traction. The reduced barriers in building software naturally reduce the capital necessary for startup costs. This changes the very definition of early-stage and thus the bar for early stage investment. Only 4% of startups ever get to $1MM in ARR, the sweet spot in our investment thesis. As others move the bar to align with our outlook, as we’re seeing them do, that simply means there are fewer companies competing for the seed-stage pie.
The economics behind large funds, and really all funds, are ‘deploy, deploy, deploy’. Eroded decision-making aside, that strategy simply is not possible in the coming environment. And VCs are realizing this – over 75% of the VC partners we spoke with expressed that they are either reducing fund size or abandoning the ‘fund’ model altogether in favor of SPV investing. That is a monumental shift from two years ago – and an encouraging one. When decision-making is driven by fundamentals and fit – LPs, investors, and startups, everyone wins. So, here’s to the welcome death of fund economics – and the rise of architected returns.
What? No Easter Egg #4 on tariffs?
While we’re closely monitoring market reactions to the proposed tariffs, it’s premature to determine mid to long-term effects as trade negotiations continue. Our focus on strong, sustainable companies that solve acute problems, remains unchanged. We see GTM excellence continuing to drive differentiation, in any market. Ultimately, we don’t anticipate material impact to the early-stage, US-focused companies we work with. In fact, for all of the reasons listed here, we see the unique asset class created by our model as a notable hedge against the current market volatility.
Here’s to the hunt!
