VCs are entering 2024 with “healthy paranoia”

Today, Alex got Deepka Rana from Northzone on the mic to chat through a bevy of key topics for the new year: Where venture capital is heading in the new year The prognosis for startups at different stages of maturity Why 2023 was the year of adjustment, and 2024 could be the new venture-startup normal And, the fate of AI in the EU where regulation is afoot. (n.b. When we recorded this, the EU's first-draft of AI regulation had not yet dropped). We think that every person in startups and venture is hoping that 2024 brings a warmer macroeconomic environment, and lots of exits. We'll see. What was clear from our chat with Rana, however, is that the new year is going to be anything but boring. We have two more episodes headed your way before we officially wrap up 2023, so stay close to Equity! Connect with Equity on X and Threads @EquityPods, and keep up with all of TechCrunch's podcasts @TechCrunchPods on TikTok. For episode transcripts and more, head to Equity’s Simplecast website. Equity drops at 7 a.m. PT every Monday, Wednesday and Friday, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts. TechCrunch also has a great show on crypto, a show that interviews founders and more! Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products. Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:11Speaker 00

  Hello and welcome back to Equity, a podcast about the business of startups, where we unpack the numbers and the nuance behind the headlines. My name is Alex and this is our interview show where we sit down with a guest, think about their work and unpack the rest. Today, we are talking with Deepka Rana, a principal on the investment team at Northzone. If you don't know her, she grew up in Germany and the UK, graduated with a degree in physics from the Imperial College of London. She's still based there, joined Northzone back in 2019, focuses on early-stage companies across the consumer internet and B2B SaaS areas. And I have a lot of information on you, Deepka. She wrote about the future of work recently and is generally a bon vivant. Deepka, welcome to the show.

• 0:51Speaker 01

  Hi, Alex. Thanks for having me.

• 0:52Speaker 00

  And then for folks who just want to know a little bit more about your firm, three years after putting together, I think it was roughly a half billion dollar fund, Northzone put together about a billion euro in capital across. It was an early-stage fund and a growth fund, correct?

• 1:06Speaker 01

  That's right.

• 1:07Speaker 00

  And when did all of that kind of wrap up? Just so people know, when you guys closed off that last set of investment vehicles?

• 1:13Speaker 01

  We closed and announced the latest set of funds at the end of last year.

• 1:16Speaker 00

  Fantastic. And I was talking to you before we hit record. I thought that Cota was your most recent deal, but actually it's Katana. And I was hoping you could give us just a really quick note about what they're doing and why you chose them to invest in.

• 1:29Speaker 01

  Yeah, Katana is an Estonian startup. It's building a software ERP platform for manufacturing business in the ERP space. It doesn't just cater to manufacturers, anyone who deals with inventory. And basically what they're doing is serving companies who are making and selling things, but that have graduated away from running their business off spreadsheets, but are not well-served by the likes of NetSuite. The ERP space in general has really suffered from a gap in the SME and mid-market, either dealing with legacy solutions and they're building sort of a modern platform that is integration-first, much leaner, much more affordable and much more effective for the businesses.

• 2:06Speaker 00

  Thank you. And I made you do that on the spot because I wanted everyone listening to know. That not only are you a venture capitalist, but you're also still active in the market. So everything we talk about today about 2023 and looking ahead to next year and what to expect is coming from the mind of someone who has been busy and active in the space, not someone who is just sitting on all of her capital and not putting it to work. So with that in mind, can I just start off by saying that I feel like 2023 wasn't as bad a year for both venture capital and startups as people have made it out to be? That's my core hypothesis, and I'm curious if you agree.

• 2:39Speaker 01

  I think there's some truth to that, Alex. I think it's, looking back at 2023, it's definitely been unusual. All right, it's, some people call it the year of reset or at the very least readjustment. But I think anyone you ask will give you a slightly different answer. We've seen a lot of turbulence, but there's also been a ton of opportunity, which tends to be the occasion that in times of volatility, that's exactly what happens. Obviously, at the start of the year, there's definitely been a slowdown in terms of rounds happening. We saw all across the board from seed to growth. There was also, you know, a bunch of layoffs happening, very high profile ones across big tech at scale ups.

• 3:13Speaker 00

  Sure.

• 3:14Speaker 01

  But ultimately, it's a return to the new normal, quote unquote. The rules that were in fact true in venture and in startups pre pandemic. It's just that in the light of what happened during 2020, 2021, it feels like a very dramatic readjustment. And it's tough to adjust to that after this type of period. But we're going back to the rules of thumbs and the reality that building enduring businesses is really difficult and spotting them and investing in the right ones is really difficult. It just for a few years, it felt like it wasn't.

• 3:44Speaker 00

  Well, for a few years, everyone thought that any software company that had a pulse was going to be worth several billion dollars. And, you know, I mean, in 2021, I was often on the phone with an investor who would not write this down or tell me on the record, but would say things loosely like, I can't believe that deal got done, that was done at 200x ARR. And I would be like, wow, that sounds really risky. We'll see how that works out. Now we have, and the answer is not particularly well. So when I say things are better than people expected, you frame that as we're getting back to normal fundamentals, rules of thumb. And the data I think matches that. I was looking through some global and European. Civic venture capital funding totals across the last couple of years.

• 4:24Speaker 00

  And it seems that we're going to end up roughly this year where we were in 2018, 2019 in terms of quarterly velocity. And those weren't bad years for startups. There seemed to be actually quite a lot of money back then. And so I guess I'm struggling to understand why there's been so much pessimism when there's still capital. And there's still, you know, valuations that are okay.

• 4:45Speaker 01

  Yeah, Alex, I think it comes down to a few things. I guess in 2017, 2018, maybe at the same level, but that was on the way up. And therefore there's a heightened degree of optimism, whereas now, even though we might be at that same level from a valuation perspective or round sizes. But we're on the way down. And now the question is, are we now going to head into 2024 with a sense of more stability? And that we had the bottom, we're now at a place where we know roughly what the criteria is to raise a certain amount of capital at different stages. Or are there still going to be more surprises along the way? My view is that we are going to see more stability in 2024. Not saying we're out of the woods yet. There still might be some turbulence, some tough situations that founders and investors have to deal with.

• 5:26Speaker 01

  But by and large, I'm very much hoping that 2023 will be seen as the more turbulent year. And 2024 is where everyone can have internalized the new normal and can go back to building.

• 5:36Speaker 00

  Yeah, that sits well with me. Just thinking about 2023 as a whole, you know, looking backwards now. Silicon Valley Bank and its crisis implosion and quasi rebirth happened earlier this year. Also, earlier this year, we saw the entire leadership fiasco at OpenAI, just to pick two things. We also saw interest rates reach their highest level since, let's do the math here, I was in college. You know, like there have been a couple of big shocks and some structural issues that were adding friction to things that don't necessarily have to repeat next year. I doubt we'll see another bank collapse the way SVB did. I doubt we'll see another leading AI company go through the same problem. I doubt rates will go up. So maybe you're right. This year is the rough bit, the reset. I like that. And maybe it's just the price we had to pay for some exuberance for the last couple of years.

• 6:21Speaker 00

  The thing I struggle with though, is it seems like there's two groups of startups this year. There's the companies that were active during the last boom and are perhaps struggling with a valuation that doesn't make sense or a cost basis that's too high. And then there are the newer startups that don't have that baggage and they seem to be doing quite well. So is perhaps some of the pessimism that I'm noticing more indicative of how older startups are doing in today's market versus the new companies of today that are born in more difficult times?

• 6:47Speaker 01

  I think definitely those camps exist, you know, that is true for those sets of companies. I think one thing I would say about the later stage companies, you're right, they have more sort of baggage, but also it's just harder to adapt when you are a bigger organization. It's harder to cut your burn overnight or change strategy and adapt. What I will say is I have been surprised, and I, you know, as an investor, I have the privilege of seeing founders up close. In that startup founders, their ability to adapt, to change, to get with the market. There's sheer display of human resilience and ingenuity that is on display and that was on display this year. It is amazing. That doesn't mean that all of those efforts end up being rewarded. Sometimes it doesn't work, sometimes it does, but I think you're right.

• 7:27Speaker 01

  There's the element of companies at the later stages who either realized we have a credible path to profitability and we can pursue that path, we might have to make some difficult decisions when it comes to headcount, but we can get there. Or other companies who have realized that actually the way to access capital markets, who aren't at a point where they can get to profitability without raising further funding, have had to go back to the market, maybe take a valuation that is at best a flat round or slightly lower than their last valuation. And those are difficult decisions because they don't just impact the trajectory of the company, but also the employees, their equity, the risk that they've taken and, you know, and the time they've spent doing that. But I think by and large, I would say the vast majority of founders that we've seen in those situations have been really mature in the decisions that they've taken.

• 8:10Speaker 01

  And really, the very best founders take a long-term perspective. And that just because you had to do a down round this year, but you get to live to fight another day and have a couple more years of runway. It's just the story isn't done in a company until it's done. And as long as you are able to continue, extend your runway, continue building. We've seen it time and time again, that fortunes of companies can change and that the market can change or there's some kind of unlock in this technology that lets companies thrive further on.

• 8:37Speaker 00

  You know, my favorite example of this from the last couple of years has been Klarna. Because Klarna's valuation, I mean, it wasn't just a down round, they got decapitated when they had to raise more capital. And then, you know, what did they do? They went out and built a bunch of stuff, improved their economics, grew in the US, posted some profits. And like just watching them over the last three, four quarters has been, it's not my place to root for. Individual companies, but like honestly, I'm just really happy that they managed to reset the business and then keep showing that they're world-class operators. Like, it's really impressive and they had to do it while everyone knew how much of an valuation cut they took. Like, that was public and that was well-known and mocked by some people. So it's definitely possible. I'm just curious, you know, of all the companies that do have that work ahead of them, do you think half are gonna make it? Two-thirds? A third?

• 9:22Speaker 00

  I don't know, like, what's the ratio of companies from the 21 era that are gonna kind of make it through?

• 9:26Speaker 01

  I think it's really difficult to really pinpoint, especially outside and looking at, without knowing exactly what goes on inside of a company. Obviously, we are talking about private companies. It's not like in the public markets where you can do a full analysis of, you know, financial information. I would say roughly speaking, what I was taught in my early years of venture, prior to the pandemic, is I think when you look at the data over a number of years and normalize it, that by and large, the graduation rates of companies that make it from seed to series A to series B, it's roughly about a third. So, you know, just over 30% of companies typically raise a follow-on round, which we define as sort of graduating to the next stage. I don't know what the number was in the last couple of years, whether it was 50%, 60%. It was definitely inflated and I think now we're gonna go back to that average of, let's say, roughly 30%.

• 10:12Speaker 00

  Okay, no, that helps a lot. Not only did it seem like every company who raised a previous round could raise another one, it also seemed like they were able to do that within like a six-month period. And that's how crazy things got for a bit there. So a third, okay. Now, I want to go back to something you said about path to profitability earlier, because this has been something that I've been tracking quite a lot for the last probably 18 months now, trying to figure out how much profitability versus growth matters. And as we all know, startups raise money, they spend it, they grow quickly, and then they later on pursue cash flow breakeven and then gap profitability, usually post-IPO. Okay, cool. Then suddenly everyone said, hey, you know, startups shouldn't be burning as much money, you should save money, you should reduce your headcount and stop being startup-y. And then

• 10:53Speaker 00

  it seemed like that lasted for about six months and then people began to focus again on growth. But that's just what I saw from where I'm sitting. So I'm curious, from your chair, are we still in as much of a path to profitability is critical even for earlier-stage companies? Or is growth kind of the name of the game yet again for startups?

• 11:12Speaker 01

  I can only speak for myself and how we see things, I think, from a Northrop perspective. I think ultimately at the early stages, and by early stage, let's say anything prior to the series B.

• 11:23Speaker 00

  Sure.

• 11:23Speaker 01

  From my perspective, there's no expectation of companies needing to be profitable at that point, or even being close to profitability at that stage. That is not typically what we are optimizing for when looking at interesting investments in venture capital as an asset class. What does have to line up is the unit economics of a business that either the unit economics stack up today, or that we can with reasonable assumptions as the business grows and the product is developed, that the unit economics will stack up and that, once you get to a certain amount of scale, that will then result in company profitability. And I think that's where there'll be more scrutiny, and there should be more scrutiny on, is this a business model that will ever actually make sense at scale? That is the fundamental question for early stage.

• 12:07Speaker 00

  You know, you invest in SaaS, and SaaS is something that I adore because it's a business model that I like to think I understand reasonably well. But one thing you don't have to worry about in SaaS is the actual unit economics of the product, because software does have such incredibly high gross margins. It's more about the ability to sell it in a repeatable fashion. So when you're talking about unit economics in that context, do you more mean like how efficient someone's go-to-market motion is? Or is there a different way I should consider unit economics when it comes to like early stage startup viability?

• 12:36Speaker 01

  I think for unit economics, definitely across businesses, as you point out, in SaaS inherently, the business model has the advantages of having high margins or more likely to having solid unit economics. So the bonuses there are definitely more on the go-to-market, especially in an environment where if you're a B2B SaaS company, you're selling to other businesses. I think it's been widely documented this year, just the increase in sales cycles and how much longer it's taking to close a customer, to upsell them, to add seats, to, you know, all of the usual things and some of the things frankly that we took for granted in B2B investing. And that is coming home to roost.

• 13:14Speaker 00

  Yeah, I really think the days of everyone having 120% net retention are sadly behind us for a bit. I don't even have any more like my old scorecard in my head of like what's good, what's excellent and what's amazing. Cause I feel like I don't even know. And if you want more about what Deepika is saying about sales cycles and upsells and so forth, just go read any SaaS company that's public's earnings call and you'll see all of that in there with pretty much all of them. Everyone's talking about fewer budgets, people are laying off their own staff, which reduces headcount for SaaS seats, et cetera, et cetera, et cetera. Still out there, but you know, Deepika, looking ahead to 2024, I am starting to see people say it's not getting worse. It's getting better on the public side. So I suppose maybe the right question here is in kind of the North Zone portfolio of active companies today,

• 13:57Speaker 00

  are the signs as we head into 2024, looking positive from how they're seeing the market?

• 14:04Speaker 01

  I think the reality, it really depends. It depends on what sector you're in, in terms of where you're building. But I mean, what we were discussing earlier, I think it does feel that when there's more stability, you're better able to plan, you've got more headspace to execute, you can be more thoughtful in your strategy. Whereas when you're dealing with shocks and twists and turns on a weekly, monthly basis, that obviously becomes much more difficult. So yeah, I would say there is cautious optimism, but ultimately I find some of the founders that I work with, that I've been really impressed with, there's always this sort of this healthy level of paranoia that just doesn't go away.

• 14:37Speaker 00

  Yeah.

• 14:38Speaker 01

  And that is heightened, you know, after what we've been through this year.

• 14:41Speaker 00

  Yeah, absolutely. If you've been through an up and a down, you never expect either to last forever, but you also don't expect it to move as quickly in your favor. And I think that's the thing. All right, enough about this year, let's talk about next year, but first a short break.

• 14:58Speaker 00

  Okay, so 2023, year of reset, some big shocks, some structural issues. Things were okay in venture land, but still trending down. Now let's talk about 2024 because I'm very excited about this. And the thing that everyone won't shut up about, of course, is all things AI. 2022 into 2023 were super exciting from the AI perspective, products, companies, venture rounds, new models, open source versus closed source, so many different themes. What do you think is going to be kind of the leading or a couple of the leading AI narratives as we look towards the new year?

• 15:28Speaker 01

  There's one fundamental truth that I keep coming back to that on one hand, I feel like the VC and tech hype cycles over the last few years are just getting more and more extreme. So if you were to plot time versus attention and capital on a graph, the spikes are getting higher and narrower. And things that were in vogue six months ago, sometimes already feel like people are over them and they're on to the next thing. But when it comes to AI, the technology, there's been a fundamental step change in what's possible and what L L M's allow you to do, how sophisticated it are, how nuanced it is, that to me, it feels like there's going to be some companies that, you know, what you talked about earlier about some of the debates that are pure play AI companies. So like actual foundational models and different types that are already being built, that are getting funded.

• 16:12Speaker 01

  But then the previous tech shifts we've seen, whether it's the move to mobile or cloud, those are just going to be pervasive and become not necessarily a feature, but something that is just embedded and woven into all of the technology that we're seeing, that we're going to be using, that's going to be built.

• 16:28Speaker 00

  Okay. So just like how companies now don't say we're cloud first or we're mobile first. Are you saying that in time AI will become so baked into the kind of digital experience that companies won't have to say they're AI first, it'll be implied?

• 16:41Speaker 01

  I don't see another way around that.

• 16:43Speaker 00

  Got it.

• 16:44Speaker 01

  Yeah.

• 16:44Speaker 00

  That makes a lot of sense to me. I think the reason why I fundamentally agree with that is that step change is the right way to describe what L L M's unlock. And I mentioned this on the show like a month ago, but my mom came out to visit and she had never used any sort of generative AI product. We sat her down on the couch and we're like, name a poet, name a topic, name a type of poem, and we just had to make things for her. And I felt like a wizard, you know, I felt literally like a magician, like someone who could do magical things. And that ability to have creation from nothing does to me set this aside. The question that I have then is how fast? And that's where I don't know, because I don't know about you, Deepika, but today still in my regular workflow, I don't use any generative AI tools,

• 17:29Speaker 00

  even though I think they're awesome and I'm on the waitlist to pay OpenAI for better access to things.

• 17:34Speaker 01

  Do we? I think it's a matter of time. We're still so early, I think, in releasing what's possible. Both in the fundamental technology improving and becoming better, but also the way it's baked into our everyday tools. Today, you would still have to go out of your way to proactively use generative AI. Like for most of us, you know, the vast majority of people. Whereas it's not necessarily like natively baked into the things we use. And I think what I'm really excited about is, is what you were saying earlier, about the power of the automation that is possible that just wasn't before. And how that augments us. I mean, there's this Steve Jobs quote, right? From decades ago, when he described the computer as saying like it's the bicycle for the mind. And so, well, do we now have like the motorbike, right? That lets us do things and abstracts away certain things that lets us as humans,

• 18:19Speaker 01

  spend more of our time on much more fulfilling, valuable and interesting tasks.

• 18:24Speaker 00

  I hope so, because you know, getting humans out of miserable, repetitive tasks is like the thing. I mean, what's the first thing we automated as a species? It was moving water. Like, we were tired of carrying water in buckets. So we invented a water, you know? I mean, like, we've been doing this forever. And so the question is just, how soon does it come out to us? I'm optimistic here. I'm a big old optimist, but I am also very curious and trying to watch this as it come out. But I'm currently talking to you from the East Coast of the United States, and you are talking to me from the excellent small island off of Europe called the UK. That means that we are on two different kinds of camps, if you will, in the venture world. And so when I think about AI, there's a lot of big names in the US market. Of course, OpenAI, my brain immediately goes blank. Coher, CoreWeave, Anthropic, there we go, brain's back on. There are a couple of big names also over in Europe.

• 19:08Speaker 00

  Mistral and Aleph Alpha come to mind, of course. And I ask this with my Danish and German heritage in full flag. Is Europe going to have a leading champion in the AI space, tech world down the road? Or is it going to end up being four big American companies again? And then Europe just regulating them?

• 19:25Speaker 01

  Look, I think if Europe plays its cards right, AI is one of the spaces where it really could be a significant player. And I don't just say that because I sit here, I live here, and I am sort of European, even though I sit in the UK.

• 19:39Speaker 00

  But you're right. I wasn't gonna, look, I wasn't gonna Brexit this. You know, I was trying to think big tent, you know? I'm jealous for everybody.

• 19:44Speaker 01

  I think one of the advantages is just the technical talent that exists in Europe. I think people have recognized that for a long time when it just comes to engineers, software developers and the companies that are being built here. You know, there's a reason many of our esteemed US colleagues have set up base here. But it's the fact that in AI specifically, you know, Europe has some of the world's best research institutions and universities that have been working on this technology, on the underlying technology of machine learning, AI for decades. So it's not a coincidence that we're also, you know, building some of the leading companies in this space. So I'm very excited about that and I think it shines a spotlight on Europe. And also, I think, helps combat the sort of outdated perception

• 20:26Speaker 01

  that European founders and European sort of the ecosystem is not ambitious enough and that we don't build companies that really swing for the fences. I don't know how it's going to play out, frankly. Unfortunately, that is, I'm not in the halls of the EU or in government, but I'm very hopeful.

• 20:39Speaker 00

  Can you imagine? I, I once went to a, a school board meeting in the US back when I was in Boy Scouts. I was getting the government merit badge, if memory serves. And after half an hour of one government meeting, I was like, oh, okay, not for me. Never again was my take on that. I can't imagine that the EU Congress is much better. So, yeah, I get that. Let's put a positive spin on this, if we can. Is 2024 then the year in which Europe pulls level or ahead of the US when it comes to AI technology and building the best startups in the space?

• 21:08Speaker 01

  I think we have the talent. We have the capital available for it, deeper pockets than we've ever had before.

• 21:16Speaker 00

  True.

• 21:16Speaker 01

  So I think it's, there's no reason why we can't build some really significant companies here and, and fly the flag.

• 21:21Speaker 00

  Nice. I'm excited about that. I would love some friendly competition between both sides of the Atlantic because I think it would make everyone better. And I do think that, you know, I'm a capitalist at heart, big believer in competition. I don't think it's great that four or five American companies own so much of the digital world. I don't think it yields the best consumer and customer outcomes. So I really, it sounds weird being so fucking American, but like, please, come try to kick our ass, you know? Microsoft is too big. It just bought Blizzard, for God's sake. That's how bored they are over there. They're like, shit, we need more video games, also AI and Zune. All right. For the founders out there though, I do want to take a couple of minutes and talk about what your expectations are for next year, kind of by stage.

• 22:01Speaker 00

  So when we think about seed investing 2024 in Europe and let's just say North America, are you optimistic that the strong valuations we've seen will persist? Will more deals happen? What's your general seed vibe for the new year?

• 22:14Speaker 01

  It's been interesting. I think the last few months in general, sort of the tail end of 2023, things have really picked up, both just the volume of deals, the really interesting founders coming to market. Seed and pre-seed has relatively been more robust overall, I think, throughout the year. And I think that's going to carry on. I don't see any reason why that wouldn't carry on into 2024. And actually, one of the big drivers of that is folks that are at big tech companies at scallops, saying that, you know what, I've had a good few years here, I've learned a lot. But actually, whether it's because of my equity may not be worth anything anymore, or I'm not going to see a massive return on it, that idea that I've been thinking about for the last six months, I actually now feel ready to take the risk and start my own business.

• 22:54Speaker 01

  So we're just seeing a lot of fresh talent who have seen a few years at their existing roles, go out and start the new things. And I think that's a very healthy thing, especially for the European ecosystem. So seeing a lot of that, and I expect that to continue going into the new year.

• 23:09Speaker 00

  So it sounds like good influx of people wanting to build things who have strong pedigrees and skills and experience, ample capital, and I would say also still very attractive, very early stage valuations. Throw that together in a pot, what do you get? Probably a lot of seed rounds. I love it. Now, let's go a little bit later and talk about everyone's favorite two rounds, the Series A and Series B. Again, EU, North America, expectations and hopes for the new year.

• 23:32Speaker 01

  Yeah, I think the interesting thing that's happened is, I think, as you point out, pre-seed and seed, I think valuations have been very robust and actually pretty aggressive. At Series A and B, I guess not unsurprisingly, but it's really what we've seen is the gap between Series A and seed seems to have really widened, both in terms of the metrics and milestones that founders need to achieve. You know, the rule of thumb used to be a million ARR is what's required to raise a Series A. I think now that seems to be ticking up to 1.5 or 2, or maybe even above that.

• 24:02Speaker 00

  Yeah.

• 24:02Speaker 01

  And of course, I caveat this with everything in venture, there's always outliers. It's always the odd round that you hear of that is astronomical because of the space it's in or the founders. But generally speaking, it seems that a Series A and B has rationalized more so than seed. And so there's a gap that's wider when companies are going from seed to Series A. And that's something founders are experiencing already, both in terms of processes taking longer or having to think about bridge rounds, or having to just say, actually, I need more time to get to a point where I'm confident that I can raise a solid Series A.

• 24:37Speaker 00

  So our Series A investors then, and this is a little bit off topic for our look back, look ahead episode, but I'm just really curious. A million in ARR always seemed like a reasonable rule of thumb to me because it showed you had probably some customers for a multi-year period. So you had some data on how much they're renewing or not, et cetera, et cetera, et cetera. But to get to like two or three million in ARR, I mean, that's an enormous jump. That could be another, you know, 12, 24 months of work past one million ARR. And so I guess maybe VCs should decide if startups shouldn't raise three, like seed rounds before they get to an A or lower the Series A requirements? Because it feels like there's just like seed capital won't get you all the way to these more mature As essentially in one round.

• 25:18Speaker 01

  Yeah, that's exactly right. And the question is, do you raise multiple pre-Use A rounds and, you know, take more of a hit in dilution until you get to that point?

• 25:25Speaker 00

  Right.

• 25:26Speaker 01

  And I think that's kind of the tough situation that a bunch of folks find themselves in. But at the same time, do I think it's rational for a Series A investor to expect three million ARR? Not really. That is not the risk that you're meant to take at that stage. But just, I guess, high level of takeaway being that from a biased and maybe selfish perspective is that it's probably a great time to be a Series A investor.

• 25:45Speaker 00

  Oh, God, yeah, absolutely. Because you can just demand the world than an offer a nickel. Like, it sounds amazing. Or a bob, I think, as they would say in the UK. Or chilling? I never actually use pounds. I feel kind of bad now. Oh, well. Okay, one more question before we do a couple of really quick ones. Same question, late stage, easily the worst category of venture capital fundraising for the last 18 months, lot of pullback. Any signs of light in late stage?

• 26:07Speaker 01

  Actually, again, in the last few months, definitely seeing more activity on the growth stage. The reality is, I think, more so than at seed or at Use A, there's just been a real bifurcation in the market, where either you are deemed to being a category leader, you're still growing reasonably well, maybe not as strongly as you might have in the past, and you're either on the path of profitability or people can chart the course to that and sort of see real exit potential. And those companies are hotly contested. People are climbing over themselves to get into those companies and you're seeing very high valuations. Or you're not. And it becomes much more difficult. It takes much more longer. You have to expand the universe of investors. That you, you know, need to speak to or you have to rethink your plans when it comes to extending

• 26:52Speaker 01

  runway. So it really feels like there's sort of two different worlds going on on the growth stage.

• 26:56Speaker 00

  All right. So the leading tech for next year is going to be probably AI again. Got a good look at the different stages that you're seeing. Any advice for founders before we wrap up today? I'm curious if there's anything burning on your mind that you just want to tell everybody who's listening like, hey, don't do this or definitely do that.

• 27:11Speaker 01

  There's probably two things. I think there's more of a high level theme that a lot of folks have already internalized coming out of this year. It's just there's a potential to do so much more thoughtful deal making, both in terms of investors sort of picking the companies and doing more diligence and being more thorough, but also from founders really thinking about who are you going to let into your business? Who are you going to get into a multi-year partnership with? And it's going to be a leading voice in helping you shape your business. I think the OpenAI drama that you mentioned, you know, at the top of the show, it's interesting because it's a topic. And when it comes to board composition and governance, it's not a sexy topic. It's something I speak to about my founders a lot. And it's something I geek out about. And it was nice to sort of have that in the spotlight for once, because it is so

• 27:55Speaker 01

  important about who is on your board, who is around you, what fund you raised from. So I would just advise all founders to really think about that in detail, because it's not a decision that's easily reversible further down the line. And then just tactically, frankly, for a lot of founders in this market environment, it makes a lot of sense to go out with like a minimum or a very rational fundraising amount when you go out to pitch the market. And then if things go well and things become more competitive, you can ramp that up. You can increase the amount. You can make more space for people if you want to, and it makes sense. What's really difficult is going out with a really ambitious fundraising target and saying, I want to raise, you know, X amount, because that can immediately turn people off. And then going back to market,

• 28:37Speaker 01

  rowing that number down, it's very difficult to reactivate folks because psychologically, they've already sort of turned you down in their mind. So just a word of caution for founders when they go out and start fundraising conversations.

• 28:48Speaker 00

  I really appreciate that. And if you want to understand that bit of advice in venture capital terms, everybody, if I told you that a fund had raised $300 million out of a Target of 250, you're thinking, hot shit. If they'd just gone out for 500 and got 300, you'd say, what a mess, catastrophe. Same dollar amount, different framing. And it matters because we're humans and that's how our brains work. So we care a lot about that. All right, Deep Go, we have to go, but I want to have you back in a quarter or two to talk about what we see in the first chunk of 224, because I think it's going to be a really fun year. I think there's going to be a lot of good news. I think companies are going to do quite well. And I think we're going to be deluged in an eventual wave of IPOs, which will be a lot of fun to talk about. So thank you for your time. We will let you go away now into the London evening and we'll have you back on soon. And if people want to find you online, where should they do that?

• 29:32Speaker 01

  You can find me on Twitter or LinkedIn.

• 29:34Speaker 00

  Okay, easy enough. She also has a webpage on the Northstone website. If you look that up. All right, for everyone else, Equity is back in a couple of days. We come out Monday, Wednesday, Friday, all the time. And it is towards the end of the year. So we wish you a happy holidays to your entire family. Hope you're well and fed and full and just, I don't know, bursting with joy. We're out of here. Bye.

• 29:53Speaker 00

  Equity is hosted by myself, editor in chief of TechCrunch Plus, Alex Wilhelm, and TechCrunch senior reporter, Mary Ann Azaveto. We are produced by Teresa Loconsolo with editing by Kel. Bryce Durbin is our illustrator. And a big thank you to the audience development team and Henry Pickavet, who manages TechCrunch Audio Products. Thank you so much for listening and we'll talk to you next time.