After the releases of ChatGPT and GPT-4, as developers dove into building applications powered by foundation models, two broad application paradigms were discussed: copilots and autopilots. The “autopilot” terminology quickly morphed into the concept of an “agent,” which is how...
Fire and Plenty
After two years of pessimism, investor sentiment appears to be changing from “mass extinction event” to a “Great reawakening” (great summary by Erin Griffith here, love the quotes Tom Loverro). This is a positive development for founders – much of venture is driven by psychology after all. But a fire is still burning in most of startup-land even as a sea of plenty is rising for all things AI. If you are a founder who has survived the last two years, read on: you want to stay away from the fire, so you get to ride the tide, not drown in it. (Amazon acquihires Adept founders).
The Fire: The third in two decades. Dot com bust aftermath (long); ’08 financial crisis (shorter); zero-interest-rate-fueled-market-rise-and-bust: this one will burn until interest rates decline. Therefore, we don’t know exactly how long. If you have made it two years into this fire, you have done all the right things: cut burn, pivoted, embraced large models etc. Keep standing. Stay laser focused on the numbers and stay away from debt. If you are selling product and have revenues, there is no reason to die an artificial-death-by-cap-table now (or hand the keys to the bank by taking debt). If you haven’t already, you must become the founder-by-the-numbers, this can’t be delegated. If you understand viscerally the cost and value of every dollar spent in your business daily, you will know where to cut deeper to break-even, and when to raise sooner to go on the offense and seize the hill. Cash is still king – take action (raise or cut) when you still have at least one year’s runway. Yes – a year’s runway. At least. That’s the discipline needed to stay away from the fire. Forget “an M&A process” as a way out– it’s a mirage. Interest rates have shut the PE M&A market, strategics are inundated with supply. So, the only thing you can rely on is business fundamentals: Revenue, P&L, B/S. Financial plan towards breakeven, while mentally psyching and leading your team towards growth. Yes, sounds hard, but that’s how you ride a rising tide without getting singed. I have seen businesses cut to the bone and grow back to thrive from prior fires. Some of your investors may abandon you but most will applaud. There is plenty of money out there for a business that can show a path to breakeven with a believable growth plan. You can grow faster when you actually have the cash in the bank.
The Plenty: I love rising tides, I am in venture after all. The AI tide is very real that will lift a lot of new boats and create dizzyingly tall new tech giants. Investor enthusiasm is hyper-real: $27B raised by AI startups April to June, biggest haul in three months. But its end-customer enthusiasm that I am keeping a close eye on and there the early news is very promising: across the Converge portfolio, our AI native companies are seeing rapid customer adoption – that’s the music I like to hear. The danger for founders, however, is when some of our legit VC enthusiasm turns into magical thinking – that if we pour millions overnight into a new market, revenues will appear magically. No matter how break-through the tech, building a strong, consistent revenue engine takes time and discipline. And time equals cash in the bank and patient investors. Especially in a market where fundraising is still tight for most companies –i.e. the high interest rate fire. The future is indeed bright, time for optimism. But keep the good habits you developed the last two years, they will serve you well as the tide swells.
