Summary of 20VC Episode: "Why Seed is for Suckers | a16z's $20BN Fund & Founders Fund's $4.6BN: What Makes Them So Good | Why Josh Kushner Is the Master of Venture Capital Strategy | Why Extended Private Markets Screw US Citizens with Jason Lemkin and Rory O'Driscoll"
Release Date: April 17, 2025
In this episode of The Twenty Minute VC (20VC), host Harry Stebbings engages in a profound discussion with venture capital luminaries Jason Lemkin and Rory O'Driscoll. The conversation delves into the evolving landscape of venture capital, contrasting traditional seed investing with the burgeoning trend of mega-funds. The guests explore the strategic imperatives driving funds like Andreessen Horowitz’s (a16z) $20 billion fund and Founders Fund’s $4.6 billion fund, while also addressing the broader implications of extended private markets on U.S. investors.
1. Challenging Traditional Seed Investing
The episode opens with a blunt critique of seed investing. Jason Lemkin provocatively states,
"[00:15] Jason Lemkin: Why struggle to pretend you can do 8x over 20 years on a seed fund when you can just write one big check into a winner and call it a day and achieve liquidity in a quarter of the time, the multiple will be lower, but the absolute return will be higher. Like, it's so stupid. Like, see this for suckers."
This sets the tone for the discussion, suggesting that traditional seed funding may no longer be the optimal strategy in today’s venture landscape.
2. The Rise of Mega-Funds
Rory O'Driscoll expands on the shift towards larger fund sizes, highlighting how firms like a16z and Founders Fund are adapting their strategies to deploy substantial capital more efficiently. He explains:
"[05:39] Rory O'Driscoll: ...the existing market saturated, so all the growth rates flattened out. ... and these new AI startups took off where unlike the SaaS thing where, you know, stuff was the same for 20 years, this shit changes every six months."
This rapid evolution, especially driven by advancements in AI, necessitates a departure from the slower, more methodical pace of seed investing.
3. Strategic Advantages of Large Capital Deployment
Harry Stebbings and Jason Lemkin discuss the strategic benefits of deploying large sums in promising ventures. Harry remarks:
"[12:09] Jason Lemkin: ...you're paying up so much that even that upside has been competed away, then it's a sucker bet."
They argue that while larger investments carry higher risks, the potential for significant returns justifies the shift away from smaller, seed-stage bets.
4. Risk Management and Portfolio Construction
The conversation delves into the complexities of managing risk within mega-fund strategies. Rory notes:
"[13:42] Jason Lemkin: You think we'll have more bimodal results where a lot of funds will just be massive unperformers because it's hard to assess the risk properly."
Harry concurs, emphasizing the increased individual deal risk and the extended holding periods required for substantial returns.
5. Impact on Limited Partners (LPs) and Capital Allocation
The guests examine how the influx of capital into large funds affects LPs and the broader investment ecosystem. Harry articulates a concern:
"[20:55] Harry Stebbings: ...if LPs are going to steer on the trailing 10-year returns and overshoot on capital in, and then at some point those returns will go the other way and then it'll take a while for the shoe to drop and then they'll start withdrawing capital."
This highlights the potential for a capital oversupply, which may not be sustainable in the long term.
6. Founder Secondaries and Market Dynamics
A significant portion of the discussion centers on founder secondaries, where founders sell portions of their equity early in their company's lifecycle. Jason Lemkin observes:
"[71:10] Unknown: ...founder secondaries are completely the new norm."
They debate the implications of this trend, suggesting that it may lead to increased risk for both founders and investors, as capital becomes more concentrated and liquidity preferences evolve.
7. Ethical Concerns and Transparency in Deals
The episode does not shy away from ethical considerations within the venture ecosystem. The guests discuss the prevalence of misleading practices aimed at winning deals. Jason Lemkin shares alarming insights:
"[78:14] Jason Lemkin: ...93% of 2000 B2B folks are lying in deals."
This raises critical questions about transparency and integrity in venture negotiations, potentially undermining trust within the industry.
8. Comparing Venture and Private Equity Models
Harry Stebbings draws a distinction between venture capital and private equity (PE), noting:
"[22:32] Harry Stebbings: PE guys just hate that because they can look at it and go, I get it, you're doing 100 million now you can grind it..."
He underscores that while both models aim for profitability, their strategies and risk appetites differ markedly, influencing deal structures and investment outcomes.
9. Future Outlook: Capital Trends and Market Sustainability
In contemplating the future, the guests ponder whether the current capital influx into venture will continue or retract in response to market dynamics. Harry predicts:
"[56:06] Harry Stebbings: ...at some point you'll see less. It boils down to this private for longer class..."
They suggest that while the opportunity set has expanded, there may be an eventual correction as LPs reassess their allocations based on ocurring returns and market saturation.
10. Concluding Insights and Strategic Recommendations
As the discussion wraps up, Harry emphasizes the importance of strategic alignment with fund size and investment focus:
"[43:43] Harry Stebbings: ...fund size is the strategy."
Jason Lemkin adds a practical takeaway for fund managers:
"[85:31] Jason Lemkin: I think you need a $4 billion fund... a hard cap around 5 or 6 because it's going to be hard to deploy in 24 months."
The episode concludes with a consensus that while mega-funds present lucrative opportunities, they also demand rigorous execution and disciplined portfolio management to navigate the heightened risks effectively.
Notable Quotes:
-
"Why struggle to pretend you can do 8x over 20 years on a seed fund... seed is for suckers." – Jason Lemkin [00:15]
-
"All the best startups I've invested in are working 7 days a week, 12 hours a day." – Jason Lemkin [10:51]
-
"The upside is there, and it's huge." – Harry Stebbings [12:09]
-
"The enemy of great venture returns is capital concentration limits." – Brian Singerman [49:01]
-
"93% of 2000 B2B folks are lying in deals." – Jason Lemkin [78:14]
Key Takeaways:
-
Shift from Seed to Mega-Funds: Traditional seed investing is being challenged by the rise of mega-funds that deploy larger capital sums into later-stage companies, particularly in high-growth sectors like AI.
-
Increased Risk and Complexity: Larger funds face heightened individual deal risks and require more sophisticated portfolio management to ensure sustainable returns.
-
Impact on LPs and Market Dynamics: The influx of capital into large funds may lead to market saturation, potentially pressuring LPs to reassess their investment allocations as returns fluctuate.
-
Ethical Considerations: The prevalence of misleading practices in deal-making underscores the need for greater transparency and integrity within the venture ecosystem.
-
Future Outlook: While mega-funds present significant opportunities, the sustainability of current capital trends remains uncertain, with potential corrections on the horizon as market dynamics evolve.
This episode provides a comprehensive exploration of the current venture capital landscape, offering invaluable insights for investors, founders, and industry stakeholders navigating the complexities of modern startup funding.