#194 State of Venture, VC Incentives, & AI Scaling Insights
#194 State of Venture, VC Incentives, & AI Scaling Insights
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State of Venture, VC Incentives, & AI Scaling Insights
This past weekend, I listened to a recent BG2 podcast (Bill Gurley, Brad Gerstner) that also featured Jamin Ball (Clouded Judgement). This was one of the best commentaries I’ve heard in a while on a number of key topics (full links above). Here are some quick takeaways, summaries, and links to deeper insights / analysis:
State of Venture
Unicorn update: 1,400 companies right that 90% of which are going to have to do a Down Round IPO or otherwise in order to get through the system.
VC Deployment: we peaked at $700b in 2021; we’re back up to $300b / yr driven by AI (VC has not learned its lesson; see visual below)
VC Fund Longevity: these days, funds last 15 years, not 10 years
More Dollars Feeding to Bigger Funds, Not Smaller Ones
VC Incentives
Changing focus from carry to management fees: As fund sizes have grown significantly, many GPs are now optimizing for the 2% management fee rather than the 20% carried interest. Management fees are typically guaranteed for 10 years. Carried interest is highly variable.
Impact on investment strategy: The focus on maximizing assets under management (AUM) has led to a "deployment game" for venture capitalists. This approach prioritizes deploying large amounts of capital quickly, potentially at the expense of more thoughtful, long-term investment strategies.
Math on 2% management fee and 20% carried interest: let’s use an example of a $100m fund that gets to a 3x. In this scenario the GP will collect ~$2m annually (used to pay fund operating expenses and salaries of the team), and $40m of carry ($100m fund turns into $300m, which translates to $200m of profits, and 20% of that is $40m).
Math for big funds: at a 2% mgmt. fee, a $1b fund generates $20m/yr in fees for 10 years (slight decrease in later years). If that fund achieves a “measly” 2x, it generates $200m of carry ($1b turns into $2b, or $1b in profits, 20% of which is $200m). Bigger guaranteed fees and lower returns required.
Macro Bullet & AI Scaling / CapEx Insights
Rates are up: the 10yr is now at 4.3% (up from 3.7%) - big jump! Labor market strength, positive jobs and economic data reports have caused investors to revisit their expectations for future Fed rate cuts. The likelihood of aggressive rate cuts in the near future has dropped.
Microsoft on AI: “We're excited that only 2.5 years in, our AI business is on track to surpass $10 billion of annual revenue run rate in Q2. This will be the fastest business in our history to reach this milestone.” Q3 CapEx (excluding financial leases): $15B vs expectations of ~$16B.
Google on AI: “Today, more than 1/4 of all new code at Google is generated by AI, then reviewed and accepted by engineers. This helps our engineers do more and move faster.” Q3 CapEx: $13.1B vs expectations of $12.7B.
Meta on AI: “We’re training the Llama 4 models on a cluster that is bigger than 100,000 H100s, or bigger than anything that I’ve seen reported for what others are doing.” Q3 CapEx: $9.2B vs expectations of ~$11B.
AWS on AI: “AWS's AI business is a multibillion-dollar revenue run rate business that continues to grow at a triple-digit year-over-year percentage and is growing more than 3x faster at this stage of its evolution as AWS itself grew." Q3 CapEx: $22.6B vs expectations of ~$17B. CapEx was $17.6B in Q2 and $14.9B in Q1)
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