Generative Quarterly with Semil Shah: Seed Markets, Vibe Coding, and the Flappy Bird Effect
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Hey, everyone. Welcome to Generative Now. I am Michael Magnano. I'm a partner at Lightspeed. And for today's episode, we're bringing back friend of the pod, Sameel Shah, for our quarterly podcast that we do every couple of months. Sameel comes on and we talk about everything that has evolved since the last episode in terms of VC, seed investing, AI, tech more broadly. Sometimes we dabble in some other non-tech topics.

And just as usual, this was an awesome conversation. I had a blast talking to Samil and I think you will enjoy it too. So check out this conversation with Samil Shah.

samil michael good to see you sir it was great to hang out in uh in new york new jersey yeah a couple weeks ago that was fun yeah love love having you on the east coast we got we got to get you out here more i also brought great weather i think you did a couple days yeah it was really nice when you were here i know you're i know you're a big fan in new york you love uh

You love the food in New York. I feel like you love a lot of things. Yeah. I mean, you're you're basically from here, right? Yeah. So always have a great time, although I just went to L.A. and I would say had a New York esque experience in the sense of like how expansive it is.

And yeah, I hadn't hadn't had that in a while. So it was a good reminder. Like just how big it is and how many people there are. Like, what do you mean define expansive in this context? It just felt like a mishmash of different cities. So like in New York, I can walk through the neighborhoods and I kind of know where to go and I know what to expect. And I'm a lot more familiar. But here it's just kind of Ubering, Ubering between neighborhoods and having a totally different scene, you

you know, was, was kind of wild, especially like one night I stayed in Korea town cause I had a dinner there. Um, and then that whole scene, you know, I've been to Korea town many times, but never been out at night with people who know it, you know, in LA, yeah. One question that's coming up for me, you obviously live in the Bay area and you know, that's your, that's your primary area for work. Uh, and there's, there's a lot to be said about

Bay Area for tech right now, obviously, given everything that's happening in AI, it really feels like that's where the gravity is. That's where the talent is. And then you just spent a few days in New York and you just spent a few days in L.A. I feel like these two cities, New York and L.A., they sort of they go through phases in terms of their relevance to tech. I feel like a few years ago, you know, maybe during like the creator economy era, you

L.A. had like a big center of gravity. Social media also similar like for L.A. Obviously, tech, fintech is a big thing in New York. Having juxtaposed the three cities just over the past couple of weeks, give us the state of...

tech in LA and New York and how it relates to SF. Yeah, I mean, one man's opinion, you know, everyone take with a grain of salt, but I've been pretty public about this. I think New York, if you think about every May, June, whenever there's college graduation, you take like

your 2,000, 3,000 smartest kids graduating. The share of those people, I think, moving to New York post-COVID versus the West Coast, I think had gone up, except that with the rise of the ChatGPT moment and the amount of money people are making or can make in the Bay Area, it has this massive sort of counter-reaction

gravitational effect or counterforce against what was happening to New York. So that's kind of one thing. I think in New York, if you ask a lot of seed investors and people that we kind of co-invest with a lot, there's a lot of like health sort of fintech you mentioned, health tech,

these more vertical applications that we see and obviously there's consumer. Then in LA, I feel like we should get Moritz in here. I love your opinion. I don't know the tech scene as well in LA. Obviously, there's a pocket of things happening in and around El Segundo, Culver City,

Kind of that SpaceX, people kind of going off SpaceX and Anduril and that whole thing, which is very real, but like contained in a neighborhood or two. And then I think obviously there's the Snap ecosystem, which is still a thing. I don't really track that. My kind of theory or how I explain it to other people, although I don't swim in this world, is that the new way to touch space

consumers with consumer products is going to be through gaming. And if you really strip that down, it's basically like if you combine all the trends in technology, which is, you know, all these co-pilots and code generators and multimedia model development. I'm sure you see this on your Instagram or TikTok now when people are showing how they actually can create commercials now, you know, and

and doing all that. So could gaming be the interface for how people buy things in Fortnite or go out or make plans with people? I don't really know, but that's kind of my sense. And if that happens, it feels like that will be an LA phenomenon because of the talent

the talent will like move there, you know? But again, big theory. I don't know if it's true. No, super, super interesting. So if I could summarize what I just heard from you, post-COVID, New York had a lot of momentum, a lot of gravity sort of pulling away from Bay Area, but then AI just sort of flipped it back. I think it's the salaries. Yeah, the salaries, of course. L.A.,

Obviously, we've got like the hard tech thing, robotics, SpaceX that, you know, defense tech.

thing happening, which is, I would say, obviously a massive opportunity, but it's a small slice of the overall tech ecosystem. But maybe LA is the place for consumer and social moving forward if gaming and AI become a big way that consumer develops over the next couple of years. I'd love your opinion on that last piece because part of my thinking has been partially influenced by just reading what Moritz writes and thinking about it, but also just

Seeing my kids interact with games, you know, it's like an undeniable thing.

Yeah. You know, if you think they're all into Mario stuff now. Right. So I've got you can see my Mario wheel back there. Yeah. They're all into that. And it's like, yeah, if that keeps going, they're in that world. That's how they interact or like we'll play games on it. And it's super social and even even without the functionality. So once they get into like bigger games and stuff like that, I can see it being a thing. Yeah, I think.

I think the gaming phenomenon is super interesting. And for me, the thing that has gotten me thinking about gaming again, because I, frankly, I like sort of stopped thinking about it, although obviously folks like Maritz never left. But the thing that has gotten me, has reignited my interest in the category is this whole idea of like vibe coding and specifically vibe coding games. I'm sure you saw this Levels.io thing on Twitter. Did you see this? This guy Levels.io, yeah.

you know he's vibe coding these games he's got this flight simulator he's doing like hundreds of thousands of i want to say revenue i don't i may totally get this wrong either a day or a month or whatever and he just just threw this game together through vibe coding and there seems to be a little of a little bit of a movement now taking place of people just throwing these games together really quickly through vibe coding they're starting to be hacking

And there's a little bit of a community forming around the idea of just like quickly developing games, which is funny because obviously games are one of these things historically that have taken far longer to create than like your traditional software, be it SaaS or consumer applications. You know, you have to invest money.

in huge, huge teams of brilliant designers and creatives and storytellers. And you spend years developing this game and then you ship it after a few years and it's either a hit and it goes to the moon or it's a total bust. And you wasted like three to five years building this thing. And now you have people just like throwing these games out there. I think in gaming, it can be too much of a catch-all, right? Because what

You know, there's like, there's like the Diablo of like immersive technical gaming. And then there's a, you know, Flappy Bird. I'm just thinking everything you just said is like history rhyming. You know, like when the iPhone came out, people were making these casual games like paper toss and totally, you know, all that stuff. So now, you know, now it's a little bit easier to go spin up those apps and, and the technology is helping it. So you can see,

people, you know, doing that. Like maybe you have a high school kid who's really entrepreneurial 20 years ago, he would have had, or she would have had three little side jobs and now they're just making side apps. It's the same thing. Yep. Just different venue. I always remember a flappy bird. I almost feel like I'm, I'm old talking about flappy bird now, but that guy was like a internet sensation, you know? Yeah, he was. Absolute like,

That would be an amazing guest for your podcast. Actually the flappy bird guy. Yeah. You got to book Moritz and you got to book the flappy bird guy. I think it's a good idea. So, yeah, I don't know. And, and, and, and maybe, uh,

interesting point that's coming from what you're saying now is like, you know, maybe this whole like vibe coding of games is just going to produce these casual games. And granted, casual games are far easier to distribute and monetize than they were in the Flappy Bird era. But maybe we get to a point where even the Diablos of the world can be created via AI very, very quickly. The way I think about it is, is that like, um,

A tweet is kind of like an envelope and it opens if you like someone's tweets or their Instagram posts or whatever, you're just looking at the envelope. But if you are curious, you can open the envelope and go into their world, you know, or their online world. There could be something similar for set play with these casual games. Someone who creates a casual game that hits something could be the start of a franchise. You know, you never know.

So I think of it as like you let a thousand flowers bloom, let people create. I mean, this is the tech optimist version of this. And then, yeah, maybe the next Diablo comes from the storytelling insight and sort of very casual gameplay of a V1 of somebody who, you know, could be a barista or could be a garbage man or could be whatever, you know? I totally agree. And

I think that concept can and will apply to not only gaming, but software more broadly. I have this very specific app idea. It's not a groundbreaking thing, although I'm not going to talk about it on here yet because I might not ever do it. You're in stealth? Yeah, I'm in stealth on a project that could take me three hours on a weekend to build using Cursor, where I just have this idea of this utility I want for my own personal needs.

And I'm like, I think I could build that with cursor in a weekend. Maybe I'll do it this weekend if I could carve out the time. And I think if I did it, I would also just throw it up on the app store. And I think you're seeing a lot of people doing this right now. And some of these things, you see these examples all the time of people quickly generating, you know, 50 K MRR, whatever awesome, you know, random silly app. So I think the, the sort of, I don't know what the right word is, but the, the sort of trend going around is that like,

if you don't, you know, if you learn how to use some version of AI creation tools, not all, but some, you're more marketable, you're going to make, you're more hireable, and you're going to have more output and you have these opportunities, right? So all of it makes sense. I think, and it seems like people in general aren't afraid of the technology. They're like,

everyone i talk to even outside the barrier they're like excited about it i mean of course yeah they're concerned but the the sort of chats at the bar and coffee shop with people who are not steeped in it or have like a deep economic incentive is like pretty exciting yeah i've been talking to some some young folk you know because we are we are old you mentioned flappy bird i think we're dating ourselves by by talking about flappy bird um

And something I'm hearing from a couple of kids in college, like thinking about their future and also kind of what they can do while they're in college. And there's an interesting divide is I'm hearing, well, I'm seeing all these people make money online from crypto and meme coins and sports betting. It's so accessible online.

Should I go down that path? Like, should I lean into sort of like degeneracy? I don't know if that's a word. This sort of like degenerative culture and YOLO my way to a fortune on sports betting and meme coins or...

You know, should I be building things with AI? And the theme with both of those things, for better or worse, I hate to say it, is a little bit of like a get rich quick mentality. It's like, how do I leverage these tools, you know, these things that are now at my fingertips, be it some form of gambling or some form of speed running, building, you know, a startup.

to make some extra money in college, or should I do this when I graduate? And I find that to be kind of interesting. It is fascinating. I feel like that pull has been going on for a couple years, but it's getting more intense, you know? Yeah. And I also, like, really...

really try to stop myself from like trying to give advice even to a specific person versus generalizing, even though like sometimes I have an impulse to, it makes me feel uncomfortable. And I also wonder like how many people are thinking either, either they're

they're more hardscrabble themselves of like pulling themselves up and like maybe even paying for college or, you know, who knows? Or they, you know, they don't have a net safety net. Right. So it's like, yeah, like, okay. I think also on top of that is like, it's pretty exciting kind of global remote culture that you can kind of steep into. And I guess what I would say to those kind of people is,

is like, what's the intersection between like what you like to do, you know, one where you can earn a living so that you're not eating like packaged ramen, right? Because then you're going to end up in the doctor's office, but also like creating value for somebody else. And how do you compound that last one over time? And then you would

then I would engage in a conversation like, okay, on the crypto side. But what's crazy about the crypto side is you could, your mental model is you can go in and view it as, this is why it's so powerful. Like I'm building a new money for the unbanked, new money rails for the unbanked. And that could be your motivation of creating value. Or you could wake up the next day and say, well, actually, no, I changed my mind. I'm going to like,

um create like a stable economic um

uh currency that will like not deal with like congressional oversight and all this budgetary stuff or you can wake up the next day and say um you know hey i just want to like um trade these things because it's a liquid market and it's open and there's no rules and i can live my life wherever i want so there's so many ways to slice that yeah it's like mind-boggling um

I randomly, as an aside, when I was in New York, I met a colleague's friend who's been a crypto trader, but he just manages other people's money. And he has these different books, he calls them. And he works by himself. The way he described the economics of it, it sounded like he was doing extremely well for being under 30. Very put together, Ivy League education, very organized in his thought.

And I was like, wow, maybe that's just a new job. And what's the difference if you're trading soybeans? Right, right. You know? Yeah, it's probably a lot easier to get started. And I don't know much about the regulation regarding that, but probably less red tape to get through to launch a career like that. You know, being like a...

you know, some formal like financial advisor, Morgan Stanley or something. Yeah. I think it's just trading. Like, um, you know, I don't think, I don't think any of us would, would advise someone out of college to be like a sports collectibles trader, like probably not a great idea, but you know, some people do it and it's, it's a really funky market. Um,

But at least this one, like you can, you can measure down to the decimal, just like soybeans or gold. So before this episode, we went to the timeline on X and asked people to send in some questions and we have a few grab bag grab bag before we do. I have a question for you. Yeah. So this one's coming from me. I didn't post this on X, but I, it's something I've been thinking about.

So when you were in New York, we hung out with a bunch of seed investors. Awesome time. Great meeting and talking to so many seed investors that are working on lots of different things and have lots of different perspectives. And one thing that kept coming up for me as I was talking to some of these people, and I figure who better to answer this question than you, is how are you thinking about seed investing now?

as it relates to sort of the entry price of many of these companies, which seems to be getting higher and higher. But obviously your funds are fixed in a moment in time. And for your funds to work, not just A-stack, but seed funds, you have to hit certain ownership thresholds, but you only have so many dollars to do it. And with AI, these rounds are just getting so out of control, especially even at the seed stage.

How do you adapt? How do you change your strategy? Do you not? Do you just wait for the perfect opportunity? It's probably the biggest question that as a seed investor I wrestle with or like my friends and colleagues, peers, mentors in seed wrestle with because this is the biggest dislocation I've experienced in pricing ever.

in my 12-year career of doing early stage investing. So it's wild. And I think you see people taking different approaches. One approach, since you mentioned the ownership, is people have just said, hey, if my fund is relatively small, it's more about picking the right companies and the ownership matters less. There will be dilution and all that stuff, but...

"Hey, I got to be in this company and I got to work with this team and look who's investing," and all that stuff is happening. There are a group of people who are what I call playing the game on the field. The game on the field is that a really hyped up team pre-product can raise anywhere from five to $500 million without having written

a line of code for their product. I think there are another set of people, and maybe we fall in this bucket and we can talk about it, is like the fund size is a strategy and you are contained to the strategy. And you have to find opportunities within your opportunity set that makes sense for your limited partners in building a portfolio, which means that you can break the rules sometime, but also you have to give

the portfolio, you're hired, like we're hired as managers to build a portfolio and give it a chance to win when everyone knows that nobody can predict the outcome. And I think then there are other people who are rethinking their strategy and fund size

in the moment to sort of say, hey, I at least want to play in some of these rounds and write, you know, before my seed check at 2 million would get me 10% ownership. It may need to be four to five now, but that creates a cascade of problems and commitments that you have to go through because then you have to go to your limited partners and say, well, you know, our last one was 120, but we think the next one should be 250. Then they have a whole different math equation that they need to run to and your GP commit goes up and

It's not that easy of just turning the dial. And so for us, maybe I'll just end on the way I've approached it, is that because we're primarily driven and interested in people and we follow interesting people,

that, of course, some of them we're going to meet are going to be playing with AI in some way. We're probably priced out of around like an SSI, where they're raising hundreds of millions, or I can't remember, like a billion off the bat or something. That's probably not for us. That's not what our LPs are paying us to do. But then also we look at deals that are not

true native AI deals. And that has a cost as well in the sense of like right now, in terms of the follow-on funding environment, it's a little bit harder for the true non-native AI companies to raise. So, I mean, I'll stop there, but that's kind of a quick...

quick way yeah i think that makes a lot of sense and you know i think what i'm about to say is probably a flavor of one of those which is you're also seeing seed funds take different approaches to getting in earlier and earlier like it seems like lots of seed funds are now saying oh we're going to try an accelerator program we're going to try some you know some some new mode of investing where we spray a little bit more to find the winners like at the pre pre-seed stage right um and maybe that's just

Maybe that's just one, you know, another example of some of the things that you mentioned. Yeah, I mean, that's been percolating for a while. I want to say that has been percolating for 10, 15 plus years, and it's now coming to a point where there's some geographic changes.

dispersion on that there's some competitive pressure in terms of money financing there's uh different flavors of ice cream so you have south park commons where like right create technical creatives hang you have hf0 where now they're just focusing on all ai and second time founders um you know get what gary's doing with yc and like changing the um the pace of it

right? And the frequency of it. And, you know, there's so many other places that are trying to do their demo days and things like this. In one sense, I think it's great because it's a free market and people can experiment and it's more choices for founders, blah, blah, blah. For me personally,

I like meeting people in an organic as way as possible through other people. And so the, those formats of like the factory format or like the batch format, even though I think it's helpful to a founder to have the peer pressure of that is not the, is not the way I like to get interested in the person or idea. Yeah. Yeah. Makes total sense. So I struggle with that.

Yeah. And it's a different motion, right? And it's different requirement in terms of sort of operations, how you run your fund. Like, it's just a completely different thing, I have to imagine. I don't know the way HF0 runs, but it's probably way different than Haystack. It's a different beast. It's a different beast. And again, I think like Dave and those guys who run HF0, like, it's amazing. Like, I couldn't do, even if I had like extreme focus, I don't think I could do what they do.

The way I invest is I just get, I try to get into a series of deep conversations with the founder. And I think deep conversations don't really happen around batches and demo days. So it's just, it's not a criticism of those. It's just more like I struggle. I struggle to connect in those venues. Yeah. Let's go to a question from our friend, our mutual friend Knuckle tweeted at us.

As mega firms get used to writing $100 million plus checks in companies that are scaling fast already, how do they retain the DNA of doing series A's where taste and patience is required? Seems like a structural series A crunch brewing. My quick, like, so if I could, like, add some context, I think what he's saying, you know, there are some of these companies, you know, that are raising at such large scale and, you know, successive sort of growth

up around so quickly, it's almost like a different investment strategy, right? Yes, you have to have the fund capability and you have to have kind of the risk tolerance to just fire, say, like $100 million shot. But the reward is that in three months, that $100 million may be worth $300 million, at least on paper. Whereas you invest in a standard Series A, it might take five years, seven years for it to have that kind of multiple, you know, different game.

different level of effort and work. Yeah. I mean, where to begin? I think that like, let's talk about like what the, what the potential, uh,

outcomes are of this you know what is what i call like a gravitational effect of money once you start writing 50 100 million dollar checks it's hard to focus on a 5 million dollar check it's like in a casino when you go into like that velvet rope high limit room you know there's there for a reason and those people need certain stakes to get to get on but so one one scenario is that um

The HFOs, the Y Combinators, the new seed funds, the people spinning out. And you're already seeing this in the market. Fill that gap and it becomes territory to fight over. Right. So if you think about it like like a risk board game, you know, it's like, you know, do you fight over that territory or do you let other people fight in that territory and be around to pick off the things that are working? Yeah. Sounds easy, you know.

So that's one approach, right? I think like in the previous era, and I don't want to necessarily speak for them, but my impression of a firm like Benchmark, which came out very clearly in the late 2000s, 2010 and said, we're only doing series A's and a few series B's. That's it. We'll be your first board member, write a big check. We don't do follow-ons outside of like supportive stuff.

and we work with you on the board." It was a very clean stage specific pitch. They didn't want to play in the seed ecosystem. They said, "You guys do that. If it's working, call us." A lot of people called them. I think now these firms will have an incentive and a hunger

to be able to do everything, everything from a secondary strip sale continuation vehicle all the way down to like a million dollars and the next person who leaves OpenAI. I think how do firms can do it? They can create their own separate vehicles, they can do carve out vehicles like a company would. They can hire people who are like that and enable them to do that. They can say, "Hey,

Let other people do that. That's a lot of work. HF0 to put on the batches and then it'd be great.

And let's, let's attract people to our brand with, with our know-how when the time is right. So that's kind of a survey of like how different people view it. But let me share, let me share like what is actually happening, which is what are LP dollars moving towards? And they're definitely filling that gap. So there are funds being raised 200, 300, 400 million, lots of funds under 200 million.

Where a lot of LPs are voting with their feet, voting with their dollars to basically say, I want smaller funds, right? I want experienced managers doing the smaller funds. Because look, if I put $20 million in a $200 million fund, the worst that can happen is I lose $20 million.

Yeah. And then, you know, they're basically calling the bluff of these larger firms and saying, you guys are so big now. You're so you got so many people. You're trying to do so many things. You're not going to have the patience or awareness or care to do the seven on 32 in something because you track this entrepreneur for six months and you're obsessed with him or her.

Right? It doesn't make sense. But CounterPoint, then they can't get in some of these rounds, right? They can't get these LPs, I'm saying. They can't get exposure to the SSIs of the world. They can't get exposure to the XAIs of the world. Well, that's why they have a portfolio too. So like most LPs who have been in the game a long time that are truly institutional,

they usually have two to four, what I call platform relationships that they will never give up. And if you think about like the platforms today, right? Where you have kind of Lightspeed, Excel, General Catalyst, Sequoia, and Andreessen.

where there's some global footprint, there's billions of AUM, they all started as technology VC funds. There are amazing funds that are not at that scale or ambition, like Founders Fund, Thrive, Benchmark. There's plenty of funds that are amazing, but it's hard to see there being another platform fund created.

Right. Maybe maybe there's somebody out there. So I think when you're an LP, you don't want to give up that real estate if you've been there 20, 30, 40 years. Right. And so that's that's what they're doing. But then they're sort of saying maybe funds in the middle. I should mention Spark. I mean, they've just been incredible. They're basically saying, hey, like, you know, I have my two or three platform funds. I'm good. It's a huge hurdle. I'm trying to catch, you know, the Zoom going at a billion to

to 120 billion. And for the rest, where the returns are driven, I'm going to get them in these smaller funds. Yeah, so that bifurcation will only increase, it feels like, as a result of this trend that Knuckles is talking about. Yeah, you could almost like taking the risk strategy, like an analogy of maybe a little too far. It's like a land where there's a proxy war being fought and the main powers, the mega funds, the founders funds,

and all that, they'll have different approaches, but they don't necessarily, I think there's attempts to try with like Sequoia arc and then speed run and people will try different things. But ultimately I think it's the, the great powers will fight only proxy wars there, but really the real fight is what comes out of it. That's working. Yeah. Yeah.

Let's go to Juana. She has less of a question. She has a couple of things that she wants us to talk about. The first thing is sort of with M&A, early startups getting eclipsed by OpenA's next release and consolidation happening so early in this market.

And then separately after that, we'll quickly touch on Series A's. VC is chasing shiny AI from Stanford and comparing founders with prosumer AI that gets to revenue quickly and artificially raising the bar for Series A. I have a thought on that second one. Maybe you could share some thoughts on the first, just like there's consolidation happening. OpenAI with every subsequent release is like,

Sherlocking a bunch of startups, just like wiping them out. How are you thinking about that at the seed stage? I never think about the open AI wipeout piece because usually in conversation, you can tell if a person's thought around, like looked around the corner about what could be a threat. Not that they know the roadmap, but they're just

they're more paranoid than you are. If they're not, that's a problem. That's probably a flag. But also, I also feel like the M&A, I do think an AI will pick up purely just because of talent. So there's some angle where you say, oh, your product is now obsolete because of this release. There's another angle where you say, there's still not many people in these large Fortune 500 companies who can handle this stuff.

Yeah. And so I think that you're already seeing some of the talent market being like at a premium for this. So that would be my comment on the first. And then the brief comment on the second is like, this is what I was alluding to earlier. We had a founder who raised a nice term sheet, you know, from a good fund for series A. He went one to one to six or one to six in a year on doing something AI that's like dual use between government and

and companies. And one of, one of the investors who was engaging with him, who ultimately passed, and I think is a great firm said that they were really seeing things one to eight going one to eight. And they were, they were focusing on that. And so what Iwana is saying is that like, I don't, I don't think these, this was shiny revenue, but like, I do think the bar has changed a lot. Like

I do think a lot of Series A investors, they would never say this on Twitter, they would never say this publicly or at a conference. If they're an AI company and they're knocking on the Series A investor's door and they're not growing really fast, like a one to 10, they may say, are you truly a native AI company that's found demand? So what Awana is saying, I think, is both things can be true. The bar is being moved, but if you're that Series A investor, I don't blame them because their job is to find momentum.

Yeah. But what it means for a founder who isn't going one to 10 or one to eight is that you, you know, what we've been telling all of our founders is your, your top of funnel, the number of people you need to have a first zoom with has probably three to four X in terms of the funnel of getting all the way from that first zoom, you know, all the way to like a coffee lunch, deep dive offer. Yeah. Yeah.

What do you think on a second point? Yeah, so I think you're right. And I've noticed the same that the bar is getting higher. And I think it's not just at Series A. I think you see it at Series B and Series C. Like, you know, some of the boardrooms or conversations I'm in, you know, there will be a question raised. Well, what's it take to raise a Series B right now? And you go to the comps and you go to the...

the recent comps and where the number may be something insane relative to where it was even a few years ago right i'm just making this up but could be tens of if not hundreds of millions in arr so so i think the bar is getting raised it's just the reality like these rounds actually do get influenced by the comps however my second thought though

and I would love your take on this because you've been in this business a while, I worry about these revenue numbers a little bit because I think from what I've seen, I think the industry and the ecosystem is taking a little bit of liberty with the definition of these metrics. You know, what is ARR for one company versus what is ARR for another company? And I think we're now entering this sort of race to get to the highest ARR number as quickly as possible.

And I think the reality is that is often coming at the expense of like really durable revenue.

And in some cases, like it's coming at the expense of like negative margins and just like really, really bad economics on the business, just like reselling inference at a loss effectively. And I'm not going to pick on any, you know, individual companies because I think a lot of companies are doing this. But I worry a bit about these charts where it's like, you know, zero to 100 million ARR in four months, zero to 100 million ARR in three months.

because I think as the value in the economics around sort of inference and selling AI credits evolve, these businesses may end up in like very, very bad territory where the AR actually just gets wiped out. So I guess what I'm saying is what Luana is saying is happening. And separately, I fear there could be trouble brewing for the companies that sort of chase that dynamic.

Well, let's think about it like there is a logical cogent bear case. Even if someone believes in the transformative power, lasting power, the continuous improvement of AI opportunities. So both things can be true. Somebody could look at the data center investment, all the fixed costs,

the billions and billions of dollars and say, well, what's going to happen to that at sunk cost? I think there are also VCs who could say, hey, I'm going to just chase the one to 10. And if a couple of them work, great. But I'm really trying to lean into demand. And even if they're losing, I'm buying the signal that

that people want this thing and I'll think about over time reducing the cogs. Actually, there is a case for cogs reduction in AI where you say, yeah, maybe the cost of, like you mentioned, inference goes down or maybe people are using a model that is cheaper, more efficient, even if it's less secure.

You know, all these sort of vectors where you can, once you get the demand and lock in the behavior and workflow, then it becomes just a race to like optimize it. It's optimized. Yeah. And get your costs figured out. Get your economics. Yeah. And I think that that series A, B investor who's chasing the momentum is in a tough spot because if you're thinking too far out, you can talk yourself out of these things. But then would you want to be in something

That's a slow grower. You know, I struggle with this where it's like, are we making a long-term investment or are we like trying to catch something right before it inflects? And I think there's the long-term investment, there's a cost and benefit. The cost upfront is that like, it's not going to seem cool to most people, or you got to go touch, you know, instead of 20 investors to get one term sheet with the first year, maybe it's 60. But over time,

We have a lot of companies that will probably be acquired between 500 and a billion where they haven't raised more than 25 million bucks. But you've got to wait through that initial issue when you're not the hot thing. What's the cost and benefit of doing those high flyer rounds? The cost is what you articulated earlier, which is, is it a fad? Is the revenue a fad? Yeah, totally.

But the benefit is that you're getting into a demand signal where if you have six in your portfolio over a fund and you're part of the fund,

Maybe one works out. Would you take the bet that one works out? Yeah. Yeah. Let's go to Sagi. He asks about, and this touches on something we were talking about earlier with vibe coding. He asks about bootstrapping versus VC funding and AI app. Please try to stay as neutral as possible on this topic. Probably a good shout out given we are both VCs, so probably quite biased. But yeah, what do you think about this? Like is bootstrapping becoming a more realistic path? Yeah.

for like a truly venture scale. I think when I think about this podcast, sometimes I like, it's like a reminder that I've been doing this for a while, where that also feels like a history, not repeating, but rhyming comment. I feel like I've heard that refrain for a while. And, you know, people love to hate on VCs. And so I get it. In the terms of AI apps, yeah.

If someone can build and ship an app on their own and they're comfortable with it, why raise VC funding? I think VC funding, if you strip away the people that do it for vanity's sake or because they read something on Twitter and they want to do what their friends are doing, it's two things. It's getting upfront cash to make investments because you want to take something in a direction and you don't have the cash flow to do it.

Right. So it's sort of a loan in a sense that doesn't really have a penalty if it doesn't work because of the risk associated with it. And it's up to the agent in that sense or the person raising the money to invest the capital smartly to see their vision through. So I have no problem with that. The other benefit, maybe this is a more romanticized version, is that like

When you're going on the journey to have either at minimum someone who has a financial stake and also you achieving that outcome, being a small part of it is actually a good governor on behavior. Or at its best, it's someone who can really guide you either as a person and or in the product or in the journey of having a single app that you just ship to the store versus like having a team or having multiple offices or whatever journey you're going to go on. So yeah.

That's how I think about it. I think most people probably think about it more as cash, and it's never that simple. I do think if you're in the Bay Area, for example, and you're pretty good, people will give you money to just let you do your thing. But when you ask, I would say the first dollar is easy. It's asking for the second dollar that's hard.

That's what makes the Bay Area and parts of New York and LA great, right? There are people who want to do that. So going back to this person's question on AI apps, I think the same thing holds true in any situation, which is you have a vision for bringing this company. Someone's going to give you the cash up front so you can make the investments to increase the likelihood that your vision will come to fruition. And the next time you ask for the money,

they'll be benchmarking you against what you said you were gonna do. Yep. Makes a lot of sense. So I think there's an interesting question here that is coming up related to something we talked about earlier. So earlier in the episode, we talked about this notion of, you know, young people

increasingly exploring these sort of speed running opportunities uh which is not exactly this question but i think it's related if this comes from uh zoomazon uh who says with everything you can learn online for free and the fact that you can network and meet people online too what's the real point of a university degree these days i think this question is super interesting and um

you know, something I certainly think about with, I have young kids, they're not off to college anytime soon, but I often wonder what, if they will be at some point in the future, you have kids as well. We both think a lot about AI. So how are you thinking about this question these days? I'm probably in the camp where even before I had kids and the whole Peter Thiel, Thiel Fellows thing, like I actually remember

exactly what the, when the Teal Fellows came out, how controversial that was. And I, I just personally remember thinking like, I just totally agreed with the sentiment, like the statement he was making with Teal Fellows. So I've, I felt that since day one,

that the overhead in these places makes no sense. And that all the other problems that we all know around it, the predatory loans, the lack of training, all that stuff. I mean, partly I experienced it and partly it just felt very evident to me. So when my kids came around 2013, 2015, I never was like, oh, they need to go to college. Like, I don't believe that.

Um, so I believe the spirit of this person who tweeted this, I can't remember their name. Like, I think that everything is accessible now. There are certain things that are probably, um, valuable that are not accessible in independent learning. Uh, you know, this is a common, common refrain around, uh, collaboration group projects, working through problems. Um, I think it's also like, yeah, you can go home and learn music and like,

produce a multi-track song? People do that, but can you go form a band? Can you go do that? Can you go have collisions with people and come up with interesting things? There's probably some element of co-location and having a shared experience that matters. Should it cost $85,000 a year to go to a school that's not even in the top 100 schools? No.

And what's crazy about that is like that is happening because there's a market for parents who have money or have access to means or who want to take this approach. And, you know, people are filling that market. So I don't think that market will sustain. I don't. I kind of, I kind of feel the same way. Um, almost exactly. You know, when I was building my company, hired a lot of people without college degrees, like I never considered it a requirement. Yeah. Um,

And, you know, I think my college experience, I view it as positive. I learned something. I learned-- You know, I was a computer science major. I learned, like, a hard technical skill. But I also got, and I think probably the thing that was more rewarding for me was, like you said, sort of the co-location, sort of introduction to living independently from my parents and my family.

Is that worth tens of thousands of dollars per year? Probably not. But was it super valuable? Yes. So I feel similarly. I also feel similarly to you that there continues to be a demand from wealthy families to want their children to have that experience. And if they're willing to pay something, the market is going to price it that way.

I do think there still is. And this this was not me like I didn't go to an Ivy Ivy League school or anything like that. But I do think that college today still is a bit, you know, about status seeking and, you know, people wanting to pay the top dollar, the market price that we just discussed for college.

the seal of approval of an Ivy League school. I see this in my social media feeds. In my feed came up like a friend of a friend and their kid was on their bed and the bed was decorated with blankets, hats, balloons of like the school colors and then like an Instagram pose. And I was like, wow, like it's a

It is a total statement. It's an identity. Yeah. It's a statement. It's a statement. And yeah, I don't, I don't really know where it goes. If I'm thinking about my kids and like, you know, obviously like everyone has their own philosophy is like, Hey, how do we, how do you raise them at that stage? And we're not at that stage to be self sufficient in some way, have hard skills, but also these social skills. But then also like,

be able to like go back to that first thing of like, where, what do you like to do? Where can you create economic value for other people? And where can you do something that's somewhat self-sustaining, right? Because that should be the path. And so I just don't know if like,

spending that kind of money, I think there are other ways to get that experience of like leaving the home, learning how to do your own laundry that don't require an $85,000 price tag. Yeah, I mean, the thing that's a shame, though, is I do think a large part of our society still does value that stamp of approval. And I'm not talking about the parents and the kids that go and pay for it. I'm talking about the institutions that reward it.

Even in our industry, personally, I'll just put it out there. When I'm meeting founders, assessing founders that are pre-product or whatever, I don't really pay attention to that. But I know lots of VCs, right? I think our world is different where people don't. I do think what you're saying is...

is true outside the tech startup world, where, yeah, can you imagine somebody getting a job at BlackRock without having gone to like a top 100 college? Like, probably not. That's a filter they use. But I think the same thing in startups, right? Especially in AI right now, it's like, oh, did they, you know, did they do research at Stanford or? Here's my theory is like in the next 10 years, the people applying for jobs at BlackRock

they're probably already going to be doing some form of like entrepreneurial financial trading investment activity in high school. Yeah. And they're going to be on the radar before they even go. And I think it's like, show me your book. You're like 18. It's like, show me your book. And also, I think, I think, I think like it's also incumbent upon the Black Rocks of the world to be like

do I need to hire from just these schools? Like who said I need to hire from these schools? Right. Yeah. Now look, MIT is always going to be there. There's always going to be, but I mean like, you know, school number 89 out of a hundred, you know, maybe there's a great person in there, but is that really a filter that matters? Like, I think it goes back on the employer. Does it matter?

And if that person in high school is really talented and they don't get picked up by BlackRock, I'm pretty sure someone else will pick them up. - I wonder if AI, so I tend to agree with you, but I also, the cynical side of me is like, I wonder if AI actually sends this in the other direction, right? Where as human labor gets increasingly displaced for lower cost artificial labor, let's say artificial intelligence labor,

i does the bar go up for the humans and therefore does do the signals the ones that you know some of which we don't we don't really value as true signals but but the black rocks of the world might like do they become even more important um to those institutions right it's like well if we're paying a premium for human powered talent

We got to get the best and the best comes from Harvard or the best comes from Stanford. Again, it's a perception thing, I think is what you and I are saying, but I don't know. I think we all know that that's not true. Like it's not true all the way down. Like, and you know, the proof is in the pudding. So I, I don't, I actually think it's a great question. Like, I don't have an answer for this. I have more of a question, which is like a Blackstone or Bridgewater or,

Like, what are their talent teams thinking about for a 10, 20 year plan? Like, I don't know, but I can't imagine. I can't imagine it's just harvesting from five schools. Yeah. Yeah. We should ask somebody at one of those places. That would be cool to get somebody from there on the podcast. Maybe we could find. Oh, I can help you there. Yeah, that's no problem. I know people. Yeah. Yeah.

All right, let's go to Chirag. He's got the first question that we just do really quick. I don't really have a point of view on this first one. Yankees, torpedo bats, real advantage or not? I think it's too early to tell. I don't know how we can... One shout out to Chirag. He was one of the first, I think, 10, 20 people I met in the tech ecosystem when I moved to Palo Alto 15 years ago. Yeah, he's super, super nice, generous person. Torpedo bats. I think that like...

baseball is in a really tricky area and I like people changing the game and like the Yankees have all sorts of tricks up their sleeves. And, you know, it sounds like it's within the rules. So I have no problem with it. I just think baseball to me, it's like when this story pops up, it's a whiff of like baseball is a real problem. Baseball is a real problem.

And so to me, that's what I take away. That's yeah. Torpedo bats just are like, whatever, you know, if everyone has a Torpedo bat, then fine. Head pitchers will pitch around it and figure it out. Yeah, of course. Yeah. They'll come, they'll, they'll try to throw more outside. Right. So you like have to hit off the end of the bat or something, whatever. Well, they'll just start hitting people. Yeah.

Yeah, or they're just targeting people. That's right. I'm going to, just for the sake of time, we're going to skip his second question, but let's go to the third. YC will have four cohorts this year, about 1.5x startups compared to last year. Frothy seed market, FOMO, or real downstream demand? I just think that there are a lot of people who want to grab or take a shot at this opportunity and view it as a once-in-a-lifetime opportunity.

opportunity and in the 12 years I've been doing it, that's only intensified every year. Why would that stop? There's demand for it. YC is amazing at setting the price of what the standard seed round is after their investment and people pay it. To me, I think the question is, where are the best founders and best ideas coming from? I don't think there's any pattern. For example,

If you were to take 10 or 15 of the hottest AI startups right now, and you would say, "Hey, look, if I could be an investor in just one of these 15 companies." Amazing. I think most of those companies, one, didn't go through an accelerator, two, actually didn't go to a seed fund, they went to a larger fund, and three, they were started before ChatGPT was released.

Could something come out of the next batch of Y Combinator? Absolutely. That's the benefit of doing these batches. Every batch is a vintage. Instead of a three-year fund compressing all those 36 months into a vintage, they get three-month vintages so they can just move with the wind. But yeah, I think all of that's true. But again, YC is not cheap to run and they need really big outcomes because the pro-rata's are huge.

It's a big game. They spend a lot of money. All right, last one, and then we got to wrap, is a bit of an open-ended one. It comes from Pablo Pablo. He wants me to ask you about the most overlooked trends in seed investing right now. I think this one's kind of interesting because I feel like everything we just talked about, it was interesting, and I find your answers fascinating. But it feels like there are so many –

known knowns to investing right now? It's all around AI and what's the unknowns? That's going to be my answer, which is I don't think there are overlooked places because there's so many people trying different bespoke strategies.

Um, I don't know the answer to the question, but I would always point to, you know, a fund that I feel like was always a tick early in thinking about opportunities. And those funds are like Spark, Union Square Ventures. Really, really those two stand out to me. And I would say the answer to Pablo's question lies in their portfolios. Yeah. USP classically invests like all, like all the way out on the edge. Right. And they do a few of them.

And some of them look really funky, but historically, a couple of them end up working. And when they work, they work from home. I'm sure there are other firms that do that, but I think of them as like a... Those are two examples, Spark and USV, that do it well. But I think in the seed investing world, you have your crypto funds, you have your defense funds, you have your specialists, like...

It's really hard to think about something being overlooked outside of geography. What's like the oddest category of a fund that you've seen recently? Oh, we have a friend who used to, who works at, I think, Ramp. He's a remote employee at Ramp. His name is Nick Abouzed.

And he has a collectibles fund where he invests in like Pokemon and stuff you would buy on eBay. But he's really into it. In startups dealing with that stuff or specifically in the collectibles? In the actual assets. Oh, wow. It's really cool. It's cool. I mean, he's...

He's very authentic to it. So it's a lot of fun to like read his updates and stuff. And I slow has their creator fund. Slow has a creator fund. Yeah. Where they're investing directly in creators, like a venture style model in creators. Yeah. All right. So meal. Thank you. Okay. Have a good one. Thanks everyone.

Thank you for listening to Generative Now. If you like this episode, please rate and review the show. And of course, subscribe. It really does help. And if you want to learn more, follow Lightspeed at Lightspeed VP on X, YouTube or LinkedIn. Generative Now is produced by Lightspeed in partnership with Pod People. I am Michael McNano, and we will be back next week. See you then.