Sequoia & the Hewlett Foundation on VCs NOT raising funds, Cisco's $1B AI fund, and more! | E1973

David Weisburd intros Konstantine Buhler, Ana Marshall, and Jason Calacanis (0s)

• Konstantine Buhler from Sequoia, Ana Marshall from the Hewlett Foundation, and Jason Calacanis from the Launch Fund are introduced as guests on the Liquidity podcast.
• David Weisburd, co-founder of 10x Capital, moderates the discussion.
• The number of venture capitalists (VCs) who have decided not to raise another fund has doubled from the same time last year.
• Cisco is investing $1 billion into the AI startup ecosystem.
• Konstantine Buhler and Jason Calacanis share their latest three investments.
• Ana Marshall from the Hewlett Foundation and Konstantine Buhler from Sequoia have known each other for many years.
• The Hewlett Foundation has been a part of the Sequoia family for over 20 years.
• Ana Marshall and Konstantine Buhler have deep conversations about the latest technology trends, such as AI and crypto.

VCs not raising new funds, market impact, and the current state of venture capital (3m4s)

• The number of VCs not planning to raise new funds has doubled from 6% in H1 2021 to 13% in H1 2022.
• 38% of VCs have disappeared from deal-making, leaving only 2,725 active firms in the market.
• Sequoia is not facing fundraising issues but is affected by the weaker venture market.
• Pricing and valuations:
  • AI valuations remain high, similar to 2021-2022 levels.
  • Traditional software-as-a-service, consumer businesses, etc. are experiencing valuation corrections.
  • Fundraising processes for these companies are more involved, and valuations reflect this.
• From an LP perspective, the pacing of new investments (AI or non-AI) is affected by the current market conditions.
• Great companies in non-AI sectors are being funded at reasonable valuations.
• The current pace of venture fundraising is considered normal compared to the last 20 years, in contrast to the frenetic pace of the last 3-4 years.

Challenges for new fund managers, power laws, and investment strategies (5m32s)

• Sequoia Capital and the Hewlett Foundation are discussing the current state of the venture capital industry, which is experiencing a period of "capitulation" due to high expectations from limited partners and a large gap between private and public company valuations.
• Many venture capitalists are not actively investing and are instead managing their existing funds, leading to concerns about the ability of new VCs to succeed, especially those who started investing at the peak of the cycle.
• The current market conditions are also challenging for founders, resulting in thicker preference stacks and longer operating times for companies.
• Cisco has announced a $1 billion AI fund, while the correction in 2022 may not be fully resolved until 2024.
• Sequoia Capital and the Hewlett Foundation are concerned about the current state of venture capital.
• They believe that too much money is being raised by VCs, which is leading to higher valuations and less focus on profitability.
• They argue that VCs should be more selective about the companies they invest in and should focus on helping them to become profitable.
• Cisco has announced a new $1 billion AI fund.
• The fund will invest in early-stage AI companies that are developing technologies such as natural language processing, machine learning, and computer vision.
• Cisco believes that AI is a key technology for the future and that these investments will help to drive innovation in the field.

Capital deployment, returns, and portfolio assessment (12m1s)

• Sequoia Capital and the Hewlett Foundation discussed the current state of venture capital funding and the challenges faced by startups.
• Startups raising large amounts of capital may not have a clear exit plan, leading to questions about the return on investment.
• Sequoia focuses on understanding the purpose of the capital raised by startups and evaluates its use for future market share gain or strategic investments.
• Sequoia's recent portfolio assessment categorized companies into three groups: those showing growth, those shutting down or merging, and those still in the process of development.
• Sequoia encourages underperforming startups to wrap up operations and consider new ventures, as their second investment with a founder is often more successful.
• Some venture funds that have not achieved desired performance may face challenges in raising future funds or may need to shut down.
• Sequoia and the Hewlett Foundation are among the venture capital firms that have recently announced they will not be raising new funds.
• Cisco has launched a $1 billion AI fund to invest in startups developing artificial intelligence technologies.
• Some venture capitalists are being more realistic about the current market conditions and are cutting their commitments while waiting for better investment opportunities.

Emerging managers and market trends (17m28s)

• Sequoia Capital continues to invest in emerging managers despite fundraising challenges, finding high-quality companies in seed and Series A rounds.
• Sequoia partners with specialized early-stage funds focused on specific verticals or global expansion, addressing the difficulty emerging managers face in demonstrating DPI or TVPI for subsequent fundraising.
• Sequoia's ecosystem fund supports emerging managers' growth beyond initial Scout status.
• Sequoia's accelerator and pre-accelerator programs provide funding and support to early-stage founders.
• Sequoia emphasizes finding founders early, even before fully developed ideas or pitches, and values loyalty and being the first investor in successful companies.
• Sequoia Capital's Alfred Lin highlights the importance of access, reputation, and strong networks for venture capital success.
• Sequoia Capital and the Hewlett Foundation prioritize early engagement and long-term partnerships with founders and investors, providing support and guidance from the inception of an idea.
• Both organizations focus on fostering long-standing partnerships and helping their partners achieve their full potential, recognizing that firms evolve over time.

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• Cisco is launching a $1 billion fund to invest in AI startups.
• The fund aims to accelerate the development and adoption of AI technologies.
• Cisco will collaborate with startups to integrate their AI solutions into its products and services.
• The fund will focus on areas such as cybersecurity, networking, collaboration, and customer experience.

Cisco's $1 billion AI fund (31m36s)

• Sequoia Capital's Constantine expresses concerns about the sustainability of the numerous AI funds being raised and questions their aggregate returns.
• Despite this, he acknowledges the potential for exceptional individual investments due to the transformative nature of AI technology.
• Sequoia focuses on identifying outstanding application layer companies in artificial intelligence that enhance user engagement and retention.
• The rapid evolution of AI technology demands careful consideration of changing business models and capital deployment strategies.
• Cisco's $1 billion AI fund may serve dual purposes: exploring potential business development opportunities and educating their team, given their history of acquisitions.
• The AI industry is at a critical juncture where companies must demonstrate the revenue-generating capabilities of their AI applications.
• AI is poised to revolutionize efficiency across various industries, and its integration by founders is leading to increased productivity and efficiency gains.
• AI-powered tools empower founders to create content, videos, code, and organize data more efficiently.
• AI has the potential to impact everyone's job, enhancing efficiency and potentially affecting salary growth for middle managers and product managers.
• Unlike crypto, which faced skepticism as an intellectual grift, AI is widely recognized as a genuine and impactful technology.
• Sequoia Capital and the Hewlett Foundation are concerned about the current state of venture capital.
• They believe that too much money is being raised by venture capitalists, which is leading to higher valuations and less focus on profitability.
• They argue that this is unsustainable and could lead to a bubble.
• Cisco has announced a new $1 billion artificial intelligence (AI) fund.
• The fund will invest in startups that are developing AI technologies for use in various industries, including healthcare, manufacturing, and transportation.
• Cisco believes that AI is a key technology for the future and that this fund will help to accelerate the development of AI-powered solutions.

AI applications and business models (41m21s)

• AI investments are substantial, but business models are often unclear, leading to potential winners and losers, similar to the early 2000s tech boom.
• Hyperscalers have a clear business model with cloud computing, while the viability of AI-related apps and services remains uncertain.
• AI-native architecture offers advantages over traditional software with AI features, enabling faster development and cost-efficiency.
• The recent surge in AI investments marks the beginning of a new era, similar to past technological revolutions associated with major companies like AT&T, General Motors, IBM, Cisco, and now Nvidia, which became the most valuable company in 2024.
• Sequoia Capital and the Hewlett Foundation emphasize the importance of long-term AI investments and choosing the right companies to partner with.
• A more vibrant M&A ecosystem is needed, as many great companies are not suitable for standalone IPOs but could be valuable acquisitions for larger tech companies.
• The current dysfunctional state of M&A hinders innovation and prevents mid-market companies from finding suitable landing spots where their technology and teams can be fully utilized.
• Not every company needs to be a legendary standalone company; some create valuable technology that can be better commercialized by larger platforms.
• Sequoia's sale of YouTube to Google for $1.6 billion and Google's subsequent acquisition of YouTube for $19 billion exemplify successful exits, highlighting the importance of taking risks and recognizing when a company's technology is better suited for integration into a larger platform.

Investment strategies for M&A vs. IPO (50m27s)

• Sequoia Capital and Hewlett Foundation do not specifically invest in companies with the sole purpose of being acquired.
• They acknowledge the high probability of an M&A outcome when aiming for ambitious growth.
• They focus on building great teams, customer bases, and solid technology rather than relying on potential acquisition as a backup plan.
• The venture capital industry has shifted from being primarily focused on early-stage investments to also including growth-stage investments.
• Growth-stage investments may have smaller at-bats but involve larger dollar checks compared to early-stage investments.
• Venture capitalists like Sequoia Capital and Hewlett Foundation typically aim for massive multiples, with a 3X return being considered too low to justify the risk.
• The industry has evolved with the influx of money, leading to a blurring of lines between growth buyout and growth pre-IPO stages of venture capital.
• Sequoia Capital and Hewlett Foundation maintain a high underwriting standard, aiming for a minimum 500x return on their investments.

Lightning round on latest investments (53m19s)

• Sequoia Capital and the Hewlett Foundation are discussing trends in venture capital, including the challenges of raising funds and the importance of selling to long-lived enterprise customers.
• Cisco has announced a $1 billion AI fund to invest in startups developing artificial intelligence technologies.
• Sequoia Capital focuses on thoughtful decision-making, prioritizing multiple developers, builder founders, product velocity, and great design when investing in companies.
• The Whisper Network connects promising startups with interested parties and venture firms based on specific preferences and criteria.
• Dust.tt, a productivity suite that uses AI to enhance communication and information access, was founded by experienced entrepreneurs and researchers.
• FourPost, a computer vision startup, aims to bring AI-enabled body cameras to the private security market.
• A stealth go-to-market oriented AI agent integrates with existing CRM systems like Salesforce, providing real-time decision-making assistance to sales teams.
• Dust, a new AI tool, consolidates queries from different AI platforms like Claude and ChatGPT, offering a more streamlined user experience.
• Sequoia Capital's diligence process involves examining a startup's top 10 customers, including details such as start dates, churn rates, and acquisition methods.
• Founders should focus on customers acquired through genuine efforts rather than relying on friends, family, or cohort mates to boost their customer count.
• Founders should avoid using corporate cards for personal expenses, as it can lead to tax issues and damage their reputation.