A Product Market Fit Show | Startup Podcast for Founders
00:03:02 · Peter Walker, Pablo Srugo
[00:03:02] S0: Well, depending on where you are, it's kinda gone, like, parabolic, man. It's like it's it's kinda tough to keep track of because so much of the attention is being driven by ten, fifteen, 20 names within privates. Or even if you're just talking about, like, seed stage, there's always this cohort of mostly, candidly, AI infrastructure companies that are building foundational models or building, like, the tech around foundational models. And they are getting valued at just astronomical numbers. You know, I call it a 160, hundred and seventy, hundred and eighty, $200,000,000 post money on a seed stage, which is just bonkers. And that just affects everybody else's, like, mood and vibe. [00:03:42] S1: This is, like, the category of where you see, like, a $2,000,000,000 seed kinda falls into this well. Right? Ex OpenAI, a person
00:03:42 · Pablo Srugo, Peter Walker
[00:03:42] S1: This is, like, the category of where you see, like, a $2,000,000,000 seed kinda falls into this well. Right? Ex OpenAI, a person [00:03:49] S0: A 100%. You know, it's always we talked about this before. It's always the legible founders. They're spinning out of the right places. They're building something that is, like, there is no more consensus theme right now than LLMs are good. We should have more LLMs. Like, it's not something that you have to fight over. And so it doesn't become a it's not really a question of this business is gonna work out. It's like, do I have the capital and the access to play in this space or don't I, if you're a fund manager? And that's just a different kind of thing. Like, seed stage is not usually about that, but it's so I don't know. I have a feeling that what's gonna happen is a lot of these companies are gonna flop, and we're gonna do what we did in 2021 with some major, major outliers that really work. And maybe that's the whole point, but I think there's pain coming for this. I really do.
00:04:34 · Pablo Srugo, Peter Walker
[00:04:34] S1: The 2021 analog, we'll get more into the numbers for the rest of the market, but it's one I've been thinking a lot about a lot. Like, for me, for what it's worth personally, you know, I was VC through 2021, '22, and obviously now as well. And it's lived differently in a way where I'm way more receptive to higher valuations now than I was then. Back then, my play was ignore a lot of the hype, and that might mean I do. And you talked about legibility, like founders who maybe are missing that spark on the fundraising side, but still have something solid in terms of the business, and you try to play that game, which is not an easy game to play at all, it's got its pros and cons, but just paying so much for a lot of companies that were fundamentally There's a whole fintech thing, which was like, oh, we have this fintech innovation, and really it was just cheap interest rates. That was a huge category. Then you had other companies that were selling a dollar for 90¢ and getting growth that way. Just something was broken about the model. Whereas this time, you think great founder with clear value prop and the AI wave behind them. And a lot of times I'm finding myself saying, you know what? Maybe it is worth paying what seems like an absurd price, not a 150,000,000, but still above median price, just because the opportunity of creating these $100,000,000 AR businesses seems clearer than ever. [00:05:47] S0: So you don't think that people are selling dollars for 90¢ right now?
00:05:47 · Peter Walker, Pablo Srugo
[00:05:47] S0: So you don't think that people are selling dollars for 90¢ right now? [00:05:52] S1: Well, not in the same way. I guess to the extent that your your margins are tight because of the tokens and these sort of things, like, there I have more of a belief that, the token price will just continue to drop and you'll hit a point at which whatever you need to deliver crosses that good enough threshold for a certain number of tokens, and then that goes down in a way that if you were doing it in the physical world before, thinking like a normal physical business and just being like, oh, now we're gonna, you know, do it for less or doing something in finance and not mining the numbers. There wasn't like a clear technological shift happening behind that. [00:06:25] S0: Yeah. I think you're right. And I think that the the debate about margins in this AI world, I think, is candidly a little overdone. Like, we're pretty early. There's every indication that the economics might continue to change. I do think that some of the valuations are just completely off kilter, but it's also there's tons of competition. I mean, if you are a hot engineer spinning out of OpenAI, you have term sheets coming left and right. You know? So, like, everything is priced to perfection, and there's mega funds with billions to deploy. This is the market you get. I think it's kind of an output of the the inputs that we have currently.
00:06:25 · Peter Walker, Pablo Srugo
[00:06:25] S0: Yeah. I think you're right. And I think that the the debate about margins in this AI world, I think, is candidly a little overdone. Like, we're pretty early. There's every indication that the economics might continue to change. I do think that some of the valuations are just completely off kilter, but it's also there's tons of competition. I mean, if you are a hot engineer spinning out of OpenAI, you have term sheets coming left and right. You know? So, like, everything is priced to perfection, and there's mega funds with billions to deploy. This is the market you get. I think it's kind of an output of the the inputs that we have currently. [00:06:59] S1: So if you're a founder right now, let's say, not in that AI infra category, but you're in AI AI native startup like most are, and you're raising a Preseed, Seed, Series A, what can you expect?
00:06:59 · Pablo Srugo, Peter Walker
[00:06:59] S1: So if you're a founder right now, let's say, not in that AI infra category, but you're in AI AI native startup like most are, and you're raising a Preseed, Seed, Series A, what can you expect? [00:07:10] S0: So Preseed, I mean, it depends on the definition here. You're still raising probably less than $2,000,000 for an AI application company. We would call that a pre seed. You're talking about a 10,000,000 to $12,000,000 cap. Hasn't changed that much. Maybe it's gotten a little higher. If you're talking a seed round, you're raising between 4 and $5,000,000. You're probably valuing the company at 20 to 22 post. You know, that's expensive. That's expensive relative to history, but it's nowhere near the AI infra stuff, so it kinda feels cheap at the moment. And then series a, you're getting pretty you know, these are hefty rounds. Like, you're talking $1,415,000,000 dollars raised. You're talking 75,000,000 or so post money valuations on that. So that's already big money, and you're only at series a. And then I have to question for the investors. If you raised your fund two years ago and these round sizes have gotten so much larger, does the portfolio construction still work? Or, like, how do you adjust for the new size of rounds? [00:08:09] S1: So the series a is the part of the market that is most interesting to me right now because it's changed so much. Just to to get a handle on the data, like, two, three years ago, five years ago, like, what's been the trend of series a sizes and series a valuations? My mind remembers them being, like, very different.