20VC: $3.5BN - The Price Zuck Paid for Thinking Machines Co-Founder...

Full Title

20VC: $3.5BN - The Price Zuck Paid for Thinking Machines Co-Founder | Goldman Sachs Acquires Industry Ventures for $665M | Softbank Borrows $5BN Against ARM Holding to Invest More Into OpenAI

Summary

The episode discusses major financial and venture capital news, including the acquisition of Industry Ventures by Goldman Sachs and Softbank's financing to invest in OpenAI.

A significant portion is dedicated to the ethical and financial implications of a co-founder leaving a successful startup for a lucrative deal, and the evolving landscape of AI development funding and its impact on venture capital strategies.

Key Points

• Industry Ventures, a fund-of-funds and secondary investor, was acquired by Goldman Sachs for $665 million, with potential for an additional $300 million based on performance, highlighting Goldman Sachs's strategy to expand its private markets offerings and client base.
• The acquisition of Industry Ventures at approximately 10% of its Assets Under Management (AUM) is considered a fair valuation for its secondary business model, contrasting with higher multiples for firms that own more of the economics like KKR or Blackstone.
• Andrew Tulloch, co-founder of Thinking Machines, a company that raised $2 billion, left to join Meta for a reported $3.5 billion, sparking debate about founder loyalty and the shift in incentives with substantial financial rewards.
• The departure of co-founders from high-valuation startups is becoming more common, prompting discussions on the need for extended founder vesting and contractual protections for investors, especially in founder-centric deals where key individuals are the primary asset.
• Softbank secured a $5 billion margin loan against its Arm shares to invest further in OpenAI, a move seen as characteristic of Softbank's founder, Masayoshi Son's, aggressive, high-risk investment style.
• The discussion on AI funding suggests that demand for compute is a major constraint, and while economics might eventually temper investment, the rapid advancements and demand are unlikely to slow down significantly due to efficiency gains; instead, more complex and faster development is expected.
• The rise of unregulated betting platforms like Polymarket and CalSheep, which benefit from regulatory arbitrage compared to traditional regulated sportsbooks, is highlighted as a significant trend driven by economic incentives rather than just kingmaking.
• Venture capital strategies are diverging, with some, like Founders Fund, concentrating bets on a few perceived winners, while others, like Lightspeed and DST, opt for broader diversification, reflecting different philosophies on navigating uncertainty and maximizing returns in the AI era.
• The difficulty in identifying early-stage winners is acknowledged, with an emphasis on the importance of a multi-period game and founder commitment as a key protection for seed investors, as many initially promising companies do not achieve long-term success.

Conclusion

The VC landscape is rapidly evolving, with major acquisitions and new investment strategies emerging in response to AI advancements and market dynamics.

Founder loyalty and commitment are being re-evaluated in light of massive financial incentives, highlighting the need for investors to adapt their due diligence and contractual frameworks.

The immense demand for AI compute suggests continued significant investment, but the ultimate economic returns and sustainability of this growth will be critical factors.

Discussion Topics

• How will the increasing prevalence of founders leaving successful startups for massive payouts impact founder loyalty and VC investment strategies?
• With Softbank leveraging its assets to invest further in AI, what does this signal about the future funding landscape for frontier technologies like OpenAI?
• Given the divergent approaches to AI investment (concentration vs. diversification), which strategy do you believe is better positioned for long-term success, and why?

Key Terms

Assets Under Management (AUM)

The total market value of assets that an investment fund manages on behalf of its clients.

Fund-of-funds

An investment fund that invests in other investment funds, rather than directly in securities.

Secondary investor

An investor who buys existing shares in a private company from current shareholders, rather than directly from the company.

Acquisition

The act of one company buying most or all of another company's shares to gain control.

Margin loan

A loan advanced by a broker or bank to an investor for the purchase of securities.

Vesting

A process where an employee or founder earns ownership of equity over time, often subject to conditions like continued employment.

Cliff vesting

A period during which no equity vests, and then a significant portion vests all at once.

Co-founder

One of the individuals who jointly establish a company.

IPO (Initial Public Offering)

The process by which a private company first sells shares of stock to the public.

LPs (Limited Partners)

Investors in a private equity or venture capital fund who typically have limited liability and no say in day-to-day management.

DPI (Distributions to Paid-In Capital)

A measure of how much cash has been returned to LPs relative to the capital they've contributed.

AUV (Assets Under Management)

The total net asset value of all the assets managed by an investment company.

GP-led business

A business where the General Partner (GP) of a fund takes a lead role in a transaction.

Regulatory arbitrage

The practice of exploiting differences in regulatory systems to gain a financial advantage.

Capital gains

Profit realized from the sale of a capital asset, such as stock.

LTV (Lifetime Value)

The total revenue a business can expect from a single customer account.

Cap (Capitalization)

The total value of a company's shares of stock.

Timeline