Digest

This episode of This Weekend Startups features a conversation with Rory Driscoll, a venture capitalist with 30 years of experience. The discussion centers around the challenges and opportunities in the current venture capital landscape, particularly in the context of AI and the impact of OpenAI's foundation models. Driscoll shares his insights on navigating overvalued cap tables, the importance of understanding investor incentives, and the need for founders to embrace risk and focus on building great companies. He also emphasizes the importance of working with high-quality people and the value of ethical partnerships in the venture capital world.

Outlines

00:00:00

The Cost of Failing Slow

This Chapter discusses the importance of failing fast in startups. Rory Driscoll, a venture capitalist with 30 years of experience, shares his own experience of failing to pivot his business quickly enough, resulting in three years of wasted time and effort. He emphasizes that time is a valuable resource for entrepreneurs and that they should not be afraid to fail quickly if a business is not working.

00:01:41

Advice for Founders: Passion vs. Profitability

This Chapter delves into the crucial decision founders face: prioritizing growth and venture fundability or focusing on profitability and sustainability. Driscoll argues that it's a binary choice, especially in early stages with limited capital. He emphasizes the importance of passion and aligning incentives with investors, but also acknowledges the need for founders to be realistic about their own commitment and the potential for a company to change the world.

00:13:38

The AI Platform Shift: From Cloud to Intelligence

This Chapter explores the evolution of the internet and the current AI platform shift. Driscoll and Mark discuss how the past 20 years have been about moving applications to the cloud, and they believe the next 20 years will be about adding intelligence to those cloud-based applications. They acknowledge the complexity of AI compared to the cloud migration, highlighting the rapid evolution of AI models and the challenges of competing with large incumbents.

00:21:30

Orchestration and AI: A Possible Play

This Chapter examines the potential of AI orchestration tools. Driscoll and Mark discuss the challenges of keeping up with the rapid changes in foundation models and the potential for companies to build workflow tools that abstract away the complexity for businesses. They also explore the role of AI in automating processes, particularly in industries like healthcare, where specific rules and regulations create opportunities for specialized AI solutions.

00:30:29

Momentum vs. Sustainability: Navigating the AI Hype

This Chapter addresses the challenge of distinguishing between genuine AI innovation and momentum-driven investments. Driscoll highlights the risk of investing in companies that are riding the AI wave but lack long-term sustainability. He emphasizes the importance of focusing on tasks that deliver real value and having a clear ROI model, particularly in industries like robotics and white-collar work.

00:37:11

Scale Ventures: Finding Traction at the Inflection Point

This Chapter explores the investment strategy of Scale Ventures, which focuses on companies that have achieved early traction but are still in the process of scaling. Driscoll explains that Scale Ventures aims to invest at the point where there is a step function reduction in risk, providing a more informed investment decision than early-stage investments. He acknowledges the challenges of finding winning deals in a competitive market and the importance of being right about the company's trajectory.

00:47:16

Picking vs. Pricing: The Art of Venture Capital

This Chapter delves into the debate between picking the right companies and paying the right price in venture capital. Driscoll emphasizes the importance of picking, arguing that it's more important to be right about the company's potential than to be overly concerned with valuation. He acknowledges the challenges of navigating the current market, where valuations have been inflated and the risk of overpaying is high. He also discusses the importance of understanding the long-term growth potential of a company and using that to inform investment decisions.

00:51:52

The Evolving Exit Landscape: IPOs, M&A, and Private Equity

This Chapter examines the changing exit landscape for venture-backed companies. Driscoll discusses the challenges of going public, the increasing scrutiny of large acquisitions, and the growing role of private equity. He argues that the IPO and M&A paths are becoming less likely, leading to a more concentrated return profile for investors. He also highlights the importance of understanding the impact of regulation and antitrust on the market and the need for founders to be realistic about their exit options.

Keywords

Q&A

• What is the biggest mistake Rory Driscoll made in his first startup?

  He failed to pivot his business quickly enough, resulting in three years of wasted time and effort. He believes he should have failed faster and moved on to a new opportunity.

• What are the two main options for founders when it comes to prioritizing growth vs. profitability?

  Founders can either focus on achieving a high growth rate to attract venture capital or prioritize profitability and sustainability, knowing that it may be harder to raise additional venture funding.

• What is the current AI platform shift, and how does it differ from the cloud migration?

  The current shift is about adding intelligence to existing cloud-based applications, which is more complex and rapidly evolving than simply moving applications to the cloud. It involves reinventing workflows and processes, not just changing the computing architecture.

• What are the potential benefits and challenges of AI orchestration tools?

  Orchestration tools can help businesses manage the complexity of AI models and workflows, but they may not be sufficient on their own. Companies need to consider adding specialized AI solutions and workflow management capabilities to address specific industry needs.

• How can investors distinguish between genuine AI innovation and momentum-driven investments?

  Investors should focus on companies that automate tasks that deliver real value and have a clear ROI model. They should be wary of companies that are simply riding the AI wave without a solid foundation.

• What is Scale Ventures' investment strategy, and why do they focus on that part of the market?

  Scale Ventures invests in companies that have achieved early traction but are still in the process of scaling. They aim to invest at the point where there is a step function reduction in risk, providing a more informed investment decision than early-stage investments.

• What is more important in venture capital: picking the right companies or paying the right price?

  Rory Driscoll believes that picking the right companies is more important than paying the right price. He argues that it's better to be right about the company's potential than to be overly concerned with valuation, especially in the current market where valuations have been inflated.

• How is the exit landscape for venture-backed companies changing?

  The IPO and M&A paths are becoming less likely, leading to a more concentrated return profile for investors. This is due to the challenges of going public, the increasing scrutiny of large acquisitions, and the growing role of private equity.

• What advice does Rory Driscoll have for founders who find themselves in deals with overvalued cap tables?

  Founders should understand the incentives of their investors and be realistic about the potential for a down round. They should not be afraid to have open conversations with investors about the situation and focus on running the company for the benefit of all shareholders.

• What advice does Rory Driscoll have for his younger self?

  He would encourage his younger self to embrace risk and focus on working with the highest quality people and companies. He believes that the difference between good and great compounds over time, and that working with ambitious people is the key to achieving significant upside.

Show Notes