A (37:16)
Worst part is that all of this is happening during a generational increase in the amounts that startups need to raise, thanks to the ruined endless costs of generative AI and the negative margins of AI powered services. Now I'm going to quote myself from a December 5 newsletter called the Ways the AI Bubble Might Burst. Cursor Anthropic's largest customer and now its biggest competitor in the AI coding sphere, raised $2.3 billion in November after raising $900 million in June. Now these are for 2025 and I should add these are on revenues of $83 million in the month of, I think November or October because they said annualized revenues of $1 billion. Is dogshit perplexity. One of the most, and I, I say this hesitantly. Popular AI companies raised $200 million in September after raising $100 million in July, after seeming to fail to raise $500 million in May, after raising $500 million in December 2024 for a search engine, Cognition raised $400 million in September. After raising $300 million in March, Cohere raised $100 million in September, a month after it raised 500 million. That's a lot of money. And that's a lot of money in a very small amount of time. And that's taking money away from everyone else because they need that money. You need the money to invest in the startups. But none of these companies are profitable, nor do they have a path to an acquisition or ipo. And why do you say why? Why do you ask? Ed, you're being so horrible. Well, it's because even the most advanced AI software companies ultimately prompting OpenAI or anthropics models, meaning that their only real intellectual property is those prompts, their staff, and whatever they can build around the models they don't control, which has been obvious from the meager acquisitions we've seen so far. Another fun fact, Anthropic ended up cutting off people that worked at XAI that were using Cursor from using their models. So just to be clear, Cursor, completely different company, Anthropic. If you work at a company Anthropic doesn't like, and I know we don't, we don't like Elon Musk, I get that. But if Anthropic can arbitrarily cut off their models from somebody's completely independent product just because they're deciding to cut off a competitor, they're just going to broaden the term competitor to mean anyone they don't like, anyone that gets in the way. Now, Windsurf, which was allegedly being sold to OpenAI last year, ended up selling its assets to Cognition in July 2025, with Google paying $2.4 billion just to hire its co founders. And this nebulous licensing agreement, similar to the thing it did with character AI, where it paid $2.7 billion to rehire Noam Shazir, who. He was one of the authors of the attention is all you need paper that started this farce, license its tech and pay off the stock of its remaining staff. This is also exactly what Microsoft did with Inflection AI and its co founder Mr. Suleiman, who, and I quote, someone who messaged me recently, is a huge fucking asshole. Now, Mr. Suleyman, if you hear this, I'm just quoting someone that works for you. If, if they're saying that about you, perhaps it's worth asking why are people calling me a big fucking asshole? I don't know Mustafa. Come on the show and ask me yourself now. OpenAI's acquisitions of Statsig $1.1 billion, IO Products $6.5 billion and Neptune $400 million were all in stock. Every other major acquisition of this era, Wiz, Confluence, Confluent, even Informatica, and so on is either someone trying to pretend that something is related to AI like Wiz, or trying to say that a data streaming platform is heavily AI related because AI needs needs data. Which may be true, but it doesn't mean that AI companies are selling and they're not, by the way, which is a problem. As 41% of US venture dollars in 2025 went to AI as of August and according to Axios, the global number was around 51%. A crisis is brewing Nerd Lawyer back in October wrote about the explosive growth of secondary markets and I quote, enter the secondary market, a once niche corner of venture capital that has transformed into a primary liquidity mechanism. What's remarkable is how quickly this market has matured. At least five major venture funds have hired full time staff dedicated to manufacturing non traditional exits. As Hans Swilldens, CEO of Industry Ventures explained, all the brand name funds are all staffing and thinking through liquidity structures and professional buyers have flooded in. Megafunds specializing in secondaries have raised unprecedented amounts of Lexington raised a record $23 billion, while Harbourvest, Adyen and Collar Capital have raised funds in the 10 to 20 billion dollars range. In simpler terms, there are now hot potato funds where either another limited partner buys another's allocation, the companies themselves buy back their stock, or the stock is resold to other private investors who are building venture capital firms out of shit the venture capitalists can't sell. You're seeing where the problem might be. Eventually someone's going to be it's like Bomberman. It's not good. Now from the same Nerd Lawyer piece and I quote again, and they're not alone. The secondary market is projected to handle $122 billion in assets in 2025, yet that still represents just 1.9% of the total unicorn value. As an insider, unicorn is a company worth a billion dollars. There's six plus trillion dollars in untapped liquidity potential. As an aside here, that's a really nice way of looking at this. The transformation of the secondary market from emergency tool to standard operating procedure represents the most significant structural shift in venture capital since the rise of unicorns. It's not a temporary fix. It's a permanent evolution driven by misaligned time frames between fund life cycles 10 years and company maturation 11 plus years. I read that it's not just a temporary fix thing. I'm like is this AI? Anyway, anyway, back to quoting for better or worse, this is the new reality of startup funding. VCS can no longer afford to simply spray and pray and wait for exits. They need active liquidity management strategies and that fundamentally changes what kind of companies are getting funded and how I'm just going to be honest, that last part's bullshit. I wrote this in the newsletter. That last part is Wang. This is not changing anything about what companies get funded or how they're still funding these unprofitable monstrosities. Nothing has changed, and I would argue this piece frames that as a positive when the reality is far grimmer. Venture capitalists are sitting on piles of immovable equity in companies worth far less than they invested in, and the answer, it appears, is to find somebody else who is able to buy the dead weight. I assume because they're stupid. Like, I mean, I realize someone is going to say, well actually it means maybe they see, maybe they can afford to hold it for longer. No? Now if you're buying anything since 2021, you're probably getting swindled. And according to Newcomer, only 1117 venture funds closed in 2025, down from 2100 in 2024, and 43% of dollars raised went to the largest venture funds per the New York Times and Pitchbook, suggesting limited partners are becoming less interested in pumping cash into the system at a time when AI startups are demanding more capital than has ever been raised raised. How long can the venture capital industry keep handing out 100 million to $500 million to multiple startups a year? Because all the signs suggest that the current pace of funding must continue in perpetuity, as nobody appears to have worked out that generative AI is inherently unprofitable and thus every single company is on the Silicon Valley welfare system until somebody or everybody gives up or the system itself cannot sustain the pressure. I've read too many people make offhanded comments about this being like the.com boom and saying that lots of startups might D But what's left over will be good. And I hate them. I hate them so much. I hate them both for their flippancy and for their ignorance. None of the current stack of AI companies can survive on their own, meaning that the venture capital industry is holding them up. If even one of these companies falters and dies, the entire narrative dies with it. If that happens, it will be harder for other AI companies to raise and even harder to sell an AI company to somebody else. And if you can, you'll be selling it for less. This is a punishment for a decade plus of hubris where companies were invested in without ever considering a path to profitability. Venture capital has made the same mistake again and again and again, believing that because Uber or Facebook or Airbnb or any number of other Companies founded nearly 20 years ago were unprofitable at some point with paths to profitability, I might add, it was totally okay to keep pumping, pumping, pumping. I'm just saying it pumping up companies that have had no path to profitability which eventually became had no apparent business model. See the metaverse or web3, which eventually became have negative margins so severe and valuations so high that we will need an IPO at the mark, a market cap higher than Netflix at minimum. This is Silicon Valley's rot economy. The desperate growth at all costs, attachment to startups where you and I quote really like the founder. Where, and I quote again, the market could be huge. Who knows if it is and where? You just don't need to worry about profitability. Because IPOs and exits were easy. Yeah, you see, venture capital used to be real easy because we were still in an era of hyper growth. You could be a stupid asshole who doesn't know anything, but there were so many good deals and the more well known you were, the more likely be brought them first. Guaranteeing a bigger payout, guaranteeing more LP capital, guaranteeing more opportunities that were of a higher quality because you were a big name. It wasn't about being smart or knowing the fundamentals. It was about being handed things. It was easier to make a valuable company to too easier to get funded and easier to sell because the goal was always get funded, grow as large as possible or well, go public. And here's the thing about that as well. There were just more ideas. There were more ideas to do. Like I said with the rock com bubble, they were just. There were more things that people could create. That's the thing that ideas are a finite source. And when you incentivize this kind of thinking, you eventually, basically stop incentivizing good ideas. You incentivize growth and as a result, venture capital encouraged growth at all cost, thinking above everything else. In 2010, Ben Horowitz said, and I quote, that the only thing worse for an entrepreneur than startup hell, which was bankruptcy, is startup purgatory. And I quote, when you don't go bankrupt, but you fail to build the number one product in the space, that's purgatory. You have enough money with your conservative burn rate to last for many years. You may even be cash flow positive. However, you have zero chance of becoming a high growth growth company. You have zero chance of being anything but a very small technology business. From the entrepreneur's point of view, this can be worse than startup hell since you're stuck with the small company. What a noxious, ugly, horrifying thing to say. Let me put it like this. If you want a good business that people like and it's profitable and you have good your employees like it, your customers like it, that's a good company, that isn't hell. And if you think that way, you're a psycho, you're an actual nutter. And this poisonous theory sadly paid off for him in that startups got used to building high growth, low margin companies that would easily sell to other companies of the markets themselves. Right up until it didn't, of course. Per nerd lawyer, IPOs have collapsed as an exit route along with easy to raise capital. Per Pitchbook. Since 2022, 70% of VC backed exits were valued at less than the capital put in, with more than a third of them being startups buying other startups. In 2024. The money is drying up as the value of VC's assets is decreasing at a time when VCs need more money than ever because everybody is heavily leveraged in the single most expensive funding climate in history. And as we hit this historic liquidity crisis, the two largest companies, OpenAI and Anthropic, are becoming drains on the system that in a very real sense are participating in a massive redistribution of capital reserved for startups to one of a few public companies. Not really. Hear me out. OpenAI is trying to raise as much as $100 billion in funding so it can continue to pass money to one of a few public companies. $38 billion to Amazon Web Services over seven years, $22.4 billion to Cor Weave over five years, and $250 billion over an indeterminate period on Microsoft Azure. If successful, OpenAI's Venture Telethon will raise more money than has ever been raised in a single round draining funds the actual startups that need. Anthropic has agreed, as I mentioned, to over $70 billion in compute and chips deal across Google, Amazon and Broadcom. And that's not including this Hut 8 compute deal that Google is backing. That I don't even really want to think about. Think about it just real simple for a second. Instead of venture capital going to startups, you know, early stage companies taking a risk, that money is going to OpenAI and anthropic so they can hand it to big tech. This is big tech stealing from Silicon Valley. And to see it as anything else is naive. And this money will come from what remains of venture capital, private equity and whatever hyperscalers will hand over yet elsewhere. Even the money that goes to regular startups is ultimately being sent to those hyperscalers. That AI startup that needs to keep raising $100 million in a single round isn't sending that cash to other startups. It's mostly going to OpenAI, who sends it to Microsoft, Amazon, Core, Weave or Google Anthropic, who sends it to Google, Microsoft or Amazon or one of the large hyperscalers such as Amazon, Microsoft or Google. Silicon Valley didn't birth the next big tech firm. It incubated yet another hyperscaler level parasite. Except instead of just spending money on hyperscaler services and raising money to do so, both Anthropic and OpenAI actively drained the venture capital system as well. Well as they both burn billions of dollars and need those billions of dollars to keep running the model so that the AI startups can pay them. By creating something that's incredibly expensive to run, so destructively expensive to run, they can naturally create startups more dependent on the venture capital system. And the venture capital system has no idea what to do other than say, just grow baby. Both OpenAI and Anthropics models might be getting cheaper on a per million token basis, but they use more tokens, which increases the cost of inference, which in turn increases the costs of startup business, which in turn means OpenAI, Anthropic and all connected startups lose more money, which increases the burn on venture capital. This is a doom spiral. One that can only be reversed through the most magical and aggressive turnaround we will see in history. And it will have to happen in the next year without fail. And it won't. It's not going to happen. And to find out why, you just have to join me tomorrow for part three of the in shitify financial crisis, I'm better offline this is Ed Citron. Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osalski. You can check out more of his music and audio projects@matasalski.com m a t t o s o wski.com youm can email me at ezeteroffline.com or visit betteroffline.com to find more podcast links and of course my newsletter. I also really recommend you go to chat wheresyoured at to visit the Discord and go to R betteroffline to check out our Reddit. Thank you so much for listening. Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, Visit our website CoolZone Media or check us out on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.
