E281:The Tsunami of Pain Facing Venture Capital

Why do some venture-backed companies struggle to survive despite strong technology and teams? In this episode, David Weisburd speaks with Trey Ward about the structural differences between software and hard-tech businesses, the predictable “Death Valley” many startups face, and what recent data suggests about the future of venture funding. Trey shares how capital intensity is often misunderstood, why graduation rates are declining, and how profitability can create a path forward when fundraising stalls.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Before we go into the tsunami of pain, as you told me last time, that's facing the venture market. I want to go back to when you were in Ethereum, which is a company and is acquired. You put your earn out, you invested all in Tesla. This was back in 2014. What gave you the conviction to invest so much of your capital in one stock?

• 0:23Speaker 01

  I truly felt like I was watching a generational entrepreneur. And a lot of people were saying, you know, this is a car company. But if you were reading what he was doing, if you read the master plans, if you, if you listen to how he was approaching the problem, he was going after something much, much larger. On one hand, him being a great entrepreneur is one thing, but that doesn't make it a compelling investment, right? Because if everyone agrees with you, the value is already baked in. What made it special was I had strong conviction, but the market didn't, right? If you read the news articles, it was short positions. It was this is a car company that doesn't make money. And so to me, the best bets are something that you, you truly believe, but the market doesn't.

• 1:08Speaker 01

  He 14 is when he announced the Gigafactory. And that to me was the line in the sand moment of you think I'm building a car company? Let's go, right? And build a multi-billion dollar battery factory.

• 1:21David Weisburd?

  Last time we chatted, you showed me a graph about how revenues diverge in software and hardware companies. Tell me about that. And what ways are these two different types of businesses fundamentally different?

• 1:35Speaker 01

  The first element that comes to people's mind when you bring up hardware and software is they say hardware is so capital intensive. Like, that's the initial gut reaction. It really isn't true, and it might be surprising, but if you start to look at the data, if you look at exits over 250 million, right? Deep tech fundraising, it's about 13% of the exit value. If you look at more traditional technology investments, it's around 11% of exit value. And so the capital intensity of these business models is more similar than people believe.

• 2:11Speaker 01

  But David, what you pointed on is really where I view the difference is. It's speed to revenue and what the revenue ramps look like. So let's take software, let's start with software. If you have a successful venture-backed software business and you look at the revenue curve, two things are going to jump out. Number one is they can get to revenue very, very fast, right? And I think people know why, but the infrastructure and the toolset for software right now is amazing. I mean, you could build a product from scratch, start making revenue in six months, very realistically. And then beyond that, another great feature of software is if you start to look at the revenue curves further out, you end up with pretty smooth curves.

• 2:55Speaker 01

  And the reason for that is instant global distribution, right? So it's a great, really beautiful looking revenue curve. Now, I operate in the physical world and I'll be the first one to tell you that the revenue curves aren't as pretty. They just aren't. So that quick revenue, pretty much nonexistent. It's very typical that a hardware business could have no revenue for five or six years. I mean, look at Tesla, no revenue for five years. Why is that? Well, if you're building something complex, think a car or a robot or a drone, you just, it takes time, there's no way around it. Once you start to get revenue inflecting for a hardware business, it's also not as pretty.

• 3:37Speaker 01

  As opposed to a smooth revenue curve, you're going to get more of a step function. And the reason is you usually have to build up some sort of manufacturings or facility, supply chain, some capabilities to meet that demand. Once that demand is met, you don't just flip a switch, right? If you want to go to the next level, you're talking about greater manufacturing capabilities, maybe new facilities. And so in the early days, you kind of see it going in steps.

• 4:04David Weisburd?

  Walk me through the death valley that predictably hits most hard tech startups.

• 4:11Speaker 01

  We go back to the example that we just talked through. You're building some amazing technology for six years. In the very beginning, there's a lot of excitement, there's a lot of hype around it. Now, as time goes on, you are forced to continue to stay focused, stay leaned in on what you're building, right? Maybe you're getting some customer feedback, but you're not getting revenue because it's not complete. And so while, while maybe the entrepreneurs and the investors look internally at the company and they say, wow, this is incredible. What does the outside world see, right? Because right around this time, you're raising a Series B. And these Series B investors look at you and they say, all right, this is really cool,

• 4:52Speaker 01

  but you spent six years building it, you burned $40 million and you have no revenue. So I'll wait, right? Well, what happens if everyone waits? Well, these companies have no revenue, so they can't get profitable. So inherently, if they don't get a new funding, they will die. So what it comes down to is you reach this critical moment, right? Within Death Valley. And it's kind of the sink or swim moment. You're either gonna raise a big round, right? And be worth 100, 200, 300 million dollars? Or you won't and you go to zero, right? Nobody in the company knows when you reach that critical moment, if you're gonna get it done. None of the investors know, nobody in the market knows.

• 5:33Speaker 01

  And so it's just a very scary moment where everyone's kind of holding on to their seats thinking, is this thing going to the moon or is it going to zero next month?

• 5:43David Weisburd?

  So a portion of the companies might be raising those hundreds of millions of dollars. And then there's the rest. Some are just bad companies and some are just companies that haven't raised the necessary funding. How do you differentiate between those two?

• 5:55Speaker 01

  What we try to do is put them in buckets. The first bucket, and this sounds blunt, said with love to all you entrepreneurs out there, it's no chance, right? And it quite literally means these companies have no chance of survival. Why? Well, if you're building something complex and you can't get the technology to work, you're gonna fail, right? If the team hates each other, you're gonna fail. Maybe you're building this amazing thing and all of a sudden the unit economics weren't what you thought they were gonna be, right? You fail. And so ultimately, that is part of venture, but a certain number of companies will just simply lack the elements to continue. The next bucket, and I think these are the most interesting, are the, we call them

• 6:38Speaker 01

  the unmet potential, or kind of the unsure's. So what are those? Those are companies that have the fundamentals, right? They have de-rust technology, they have strong teams, they have great unit economics in large markets that they're tackling, but they don't have that extra X factor. They just have the fundamentals. And so you're not sure, right? Is the market going to see the vision of the founder and fund them a little bit longer or not? You don't know. David, what you mentioned, though, the best ones, the ones that really fly through Death Valley, are the ones that have the fundamentals and something extra, right? So what is that extra thing? Well, it could be pre-orders, right? If you have 10,000 pre-orders for what you're

• 7:21Speaker 01

  building, that's a pretty good indication. Maybe you have a deal with Amazon, that's a great indicator. Maybe the Department of Energy is giving you $200 million to build a facility, right? These companies have the fundamentals and they have something extra that gives visibility to the market that says, yeah, they have a pretty clear path to scaling, right? And so those are how we generally try to bucket those companies.

• 7:46David Weisburd?

  And last time we tried, you said there's a tsunami headed towards venture, and a lot of people are predicting this, but you said you have the data to prove this. Tell me about the data, and what does the data say about the future of venture? One thing that I've learned from talking to hundreds of investors, founders, and business leaders, is that planning for the future isn't just about growing assets, it's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love. Not sure what kind of life insurance you may need? Concerned about how much it may cost? Think life insurance is too complicated?

• 8:29David Weisburd?

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• 8:45Speaker 01

  Let me take a step back, because if we're talking about the future of venture, venture's always been driven by outliers. That's where the returns come from. Historically, that's where they'll always be. Those aren't going anywhere. I think the issue that's arising is once you go one step below there, there was some good value. Right now, it appears that there's going to be value destruction for those that aren't on that elite level. Right? And there are three pieces of data that I would point to that that indicate this. The first one is, we were looking at some CARTA data and CARTA tracked about 1,700 companies that had raised the Series A between 19 and 21 and since raised an extension.

• 9:28Speaker 01

  So think convertible note, priced extension, those things. Well, we're now in 2025. 80% of those businesses haven't raised the Series B. 80%. So if you start to look at this, you you see, all right, the cap tables from 2019 probably weren't planning on keeping these companies afloat for six years. Right? The companies probably aren't profitable. Why? That was never the intent of these businesses. That was never the business plan. They can't raise new money. So what's going to happen to them? And and that brings us to numbers, like larger numbers. So that was 1,700 companies.

• 10:11Speaker 01

  There were 10,000 companies that raised the Series A from 2019 to 2021. And the reason I know no one's coming to save them is data piece number two. Look at the amount of capital that venture firms have raised. Right? If you look at 2019 and 2020, it was pretty good. You look at 21 and 22, it doubled. Right? We're talking about $188 billion-ish per year in those years. Right? So a lot of money flows in. In 23, it dropped to half. In 24, it's down again. In 25, it's even lower. Right? There is not enough money. There really isn't enough money to keep servicing these businesses. It just doesn't exist. That brings me to the third data point, which is graduation rates, right?

• 10:56Speaker 01

  And you're going to notice everything keeps pointing to this gravity moment. You can't escape it. So the third piece of data would be graduation rates from series A to series B, right? The percentage of companies that raised the series A that then two years later raised the series B. And so if you look at the 2020 cohort, so look at a company that raised in Q1 2020. You go out two years, 42.6% of them raised the series B. That's an amazing number, right? And it makes sense, though. 2020 fundraising was all right, then it shoots up. You would expect graduation rates to go up, right? But then think about the companies that raised the series A in 22 or 23.

• 11:39Speaker 01

  If you start to look at those cohorts, the two-year graduation rate to series B is sub 15%.

• 11:46Speaker 01

  Sub 15%. Said differently, six out of seven companies that try to raise a series B can't, right? And it's the same problem. Where are they going to go? Well, a lot of them are going to go bankrupt. And so the tsunami that I see coming is kind of the hangover effect. It's the catch-up from the big venture funding downturn that we saw post 2022. It inherently is going to catch up with the companies that were founded before then.

• 12:13David Weisburd?

  You started a fund to buy these assets that won't make it. Tell me about that fund.

• 12:21Speaker 01

  Yeah, the strategy is incredibly simple, right? If you look at graduations going rates going from 42% to 15%, right? And maybe, let's say, the historical average is 30%. You have 15% of companies that historically would have raised and would have raised the series B.

• 12:42Speaker 01

  What is a Series B company, right? Anyone can raise a pre-seed round. Seed rounds are a little harder. You get to a Series A, you're getting into institutional money. By the time you get to a Series B, you're talking about companies that are underwritten to be worth hundreds of millions, if not billions of dollars at a pretty high success rate. And so the fact that 15% of those companies that would have received funding otherwise aren't, I mean, it's just a dramatic failure. And so what we're going to do is we're going to find the companies that have a significant amount of R and D, right? That have real customers, proven products, defensible IP, and we're going to acquire those businesses for a fraction of historical R and D spend.

• 13:26Speaker 01

  And then, once we've acquired them, you then can't rely on the venture markets we've talked about. And so what we're going to do is we're going to take the single best use case of that business. We're going to narrow the focus, and we're going to push those companies to profitability in 24 months or less.

• 13:42David Weisburd?

  How do you structure these types of investments?

• 13:44Speaker 01

  So, we've actually done this twice. The first business had raised $49 million, or rather, had $49 million of R and D. We invested $2 million, and for that $2 million, we received 53% ownership in the company in the first $44 million out. Well, the first calendar year after we made the investment, the company was profitable. We're on the doorstep of the largest contract in the history of the company, and in two years, we're up 17x, right? And I think people would say, that's a great story. Can you do it again? Well, the next year, we did. So, we took a company that had $100 million of R and D. We invested $2 million, and for that, we received 45% ownership in the first $20 million out.

• 14:29Speaker 01

  Same path. I'm looking at all the numbers, the financials, 2026 will be profitable. And so you can start to see just this fundamental mismatch of how venture is funding these businesses in the market conditions with what's actually the reality of the companies.

• 14:46David Weisburd?

  And you're oftentimes keeping the exact same management teams in place. How does that work?

• 14:51Speaker 01

  That's a core element of the thesis. We don't believe these companies are rotten fruit. What we believe is they're late bloomers. And so for us, we just think that these management teams need more time. Right? And the way you get infinite time is profitability. And so what we're really doing is we're going to the management teams and saying, hey, maybe the the burn money, go for a billion dollars approach isn't appropriate right now. Let's lean down. Let's get to profitability. And then you're going to have unlimited time to prove your market advantage with your product.

• 15:28David Weisburd?

  Does it require an about face from the management to go from wanting to build a unicorn, a deck of unicorn, to building a profitable business? And how do they adjust to the new reality of their business?

• 15:40Speaker 01

  A lot of that realization has already happened. Right? They've been trying to fund raise. They can't. But at the same time, the companies that we're targeting deeply, deeply believe in what they're building. Right? And so they're faced with an issue. And this is a big issue is you've raised a bunch of money.

• 15:58David Weisburd?

  It's almost definitionally because they've spent half a decade, six, seven years, building a business with low revenue. What's upstream of that? You have to really have passion for what you're building, or else you just get off the bandwagon and join another startup. So it's almost an intrinsic part of the startup universe you're going after.

• 16:19Speaker 01

  And it's actually the easiest off ramp of all time. Right? If a company and the founders have been thrown through the wringer and you say, hey, we've got a chance to let you go at this a few more years. If you don't believe in it, that's the time to quit. And people will. What we found talking with founders, I mean, you should look at some of the quotes. It's my team are warriors. I'm stronger than I've ever been. Like I'm bulletproof right now. We have hardened teams. It's not the first year of a startup, everything's going to be going great. You've been in it for six years. And if you don't want, if you're not truly believing in where you're going, you're not going to sign up for the journey. Right? You just won't.

• 17:01David Weisburd?

  How do those conversations go with their existing investors? They're essentially underwriting it down to zero. What does that look like?

• 17:09Speaker 01

  So what we believe and what we've seen actually in practice is this is a win, win, win. So from the outside, you might say, hey, your ownership is going from X down to, you know, a lower number. But put yourself in the shoes of that venture investor. I mean, that's what I do. I try to think if someone gave me this deal, what would I say? Right? So option one is the standard, which is, hey, you're, you're an investor in this company. You tried to fundraise. It didn't work. It's going to zero in the next three months. Right? You're getting wiped clean no matter what. But you get an actual, you get a special bonus on top of it. You're on the board, so you get the role of firing everybody. Right? You get all the liability. You got to take this thing through a bankruptcy or through a shutdown.

• 17:54Speaker 01

  So not only do you get a zero, but you also get a huge pain along the way. We come in and we say this. Hey, um, as opposed to a zero, you will get some upside. Right? A hope note, you will get a chance. You know, if the company goes to a billion, which was probably unlikely, um, they'll actually make a fair amount of money, but, but you have a decent chance to recoup your investment. That's great. But also we're going to relinquish you of the board because we're going to restructure the board so it's focused on the industry, not on, on financial investors. We're going to take you off the board. And so what you get back is freedom. Right? You don't have to spend your next three months going through this hellish process, to be frank. You can go spend time with your winners, which is where most venture investors want

• 18:39Speaker 01

  to be anyways, because that's where the economics are usually made in your winners. And so if you structure and you communicate it that way, the, the output is pretty obvious. And we've seen it in practice, right? In the two companies where we performed this on, we have venture investors asking to invest in the fund, sending us deals. Right? The value to them is clear.

• 19:01David Weisburd?

  What does success look like for Roke over the next decade? What are you trying to build?

• 19:08Speaker 01

  If we succeed in our vision, we look like Constellation Software in 10 years. There was a venture capitalist named Mark Leonard in 1995 that started to look at software businesses that didn't really fit that venture curve, right? And stop me if this starts to sound familiar, David, but he felt there was value there. So he started acquiring these businesses, usually for less than $5 million. He would then use the profit of those businesses to acquire new businesses. So that group, Constellation Software, went public in 2006. I think about 250 million. I looked at their market cap last night, 70 billion, right? And so they have proven without a doubt that there is value in unlooked places.

• 19:54Speaker 01

  For us, though, we want to be Constellation Software. We want to be bending spoons, but we want to be doing it in the physical world, right? Where Mark Leonard was able to ride the wave of software from 1995 on. We think we're early to the physical world transforming and we ride that wave. And ultimately, that's the vision.

• 20:13David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.