Sam Lessin of SlowVC: The End of Factory-Farmed Unicorns
Dec 12, 2023
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Sam Lessin, GP at Slow Ventures and former Facebook product manager, discusses the state of venture capital, the influence of megafunds like Tiger Global and Softbank, the best areas for investment in 2024, investing in AI, 'weird' investment ideas, and the changing global landscape of tech.
The factory farm model in venture capital is falling apart due to the changing demand for tech growth stories and a surplus of startups at the seed to Series D stages, creating opportunities for more innovative approaches.
Venture capital has shifted from an investment business to an asset management business driven by the low-interest rate environment, leading to less focus on scaling dollars through a standardized process and a return to bespoke approaches.
The public markets' decreased appetite for certain tech deals has caused the factory line approach to building startups to break down, with private financing becoming an alternative and resulting in more competition and an adverse selection problem.
Deep dives
Factory farm unicorns and the changing landscape of venture capital
In the last decade, a factory farm model emerged in venture capital where startups followed a round-based system to meet specific metrics and move towards becoming a public company. However, this model is now falling apart. The demand for tech growth stories has shifted, and the public market is no longer as interested in certain types of deals. Additionally, the factory farm system created an oversupply of startups at the seed to Series D stages, leading to challenges for the industry. This change has created opportunities for more bespoke and innovative approaches in venture capital.
The transition of venture capital to an asset management business
In recent years, venture capital has shifted from being an investment business to an asset management business. Venture capitalists realized the benefits of running larger funds and managing more capital. This shift was driven by the low-interest rate environment, as investors were looking for places to invest their money. The factory model in venture capital allowed for increased scale and efficiency, but it also led to a lack of innovation and reliance on consensus deals. Moving forward, venture capital is likely to become more bespoke again, with less focus on scaling dollars through a standardized process.
The changing landscape of public markets and the rise of private financing
The public markets have lost their appetite for certain types of tech deals, causing the factory line approach to building startups to break down. The rise of SPACs and the IPOs of less desirable companies have further impacted the public market's interest in tech companies. Private financing has taken over as an alternative, with big LPs providing capital to companies that would have otherwise gone public. This shift has led to more competition and an adverse selection problem, where the best companies stay private and less desirable ones go public.
The impact of AI and tech companies dominating the market
AI is the next wave of technology, and it is well-suited to the dominant tech companies in the market. Companies like Google, Apple, and Microsoft have the resources, hardware, and access to large datasets necessary for AI innovation. These companies are aligned with the current AI-driven business model and can capture the most value from AI advancements. While there will be exceptions, the overall trend is that the incumbent tech companies will continue to innovate and dominate the AI space.
The importance of following your passion and building meaningful relationships
One piece of conventional wisdom that holds true is the importance of following your passion. Building a successful startup is incredibly challenging, and it requires a deep commitment to the work you're doing. Finding a partner and building a meaningful relationship is also valuable. The model of growing up together and supporting each other's goals can lead to a successful and fulfilling partnership. Overall, it is essential to live and work for yourself, pursuing what you love and believe in, rather than conforming to others' molds or expectations.
Sam Lessin is a GP at Slow Ventures, a former Facebook product manager, and the founder of Drop.io and Fin. He’s also the co-host of an excellent podcast on tech called More or Less.
On this episode of World of DaaS, Sam gives a comprehensive breakdown of the state of venture capital. Auren and Sam discuss the “unicorn factory” for building public companies, the influence of megafunds like Tiger Global and Softbank, and the fundamental changes that VC went through in 2018-2022.
Sam also shares his outlook on the best areas for investment in 2024 and beyond, including which founders are set up to thrive and which businesses are likely to struggle. They also go deep on the dynamics of investing in AI– Sam is confident he knows who the winners will be in artificial intelligence.
To close out, Auren and Sam dive into some of the “weird” investment ideas they’re exploring, like income share agreements and backing creators. They also reflect on the changing global landscape of tech and discuss whether the era of the “open internet” is over.
