3077: Wells Fargo on the Future of Venture Capital

[00:00:03] Are we on the brink of a new era in venture capital? One that's driven by groundbreaking advancements in, yeah, you guessed it, AI.

[00:00:14] Well today I'm going to ask this intriguing question, dig a little bit deeper on it with my esteemed guest from Wells Fargo.

[00:00:22] His name's Rahul Bayek and he's the Head of Venture Capital and Growth Equity Coverage and he's going to offer his unique insights into the current dynamics of technology investments and the emerging trends within the VC landscape.

[00:00:38] And hopefully he'll get to share his perspectives on how AI is reshaping investment strategies, the evolving challenges for startups outside of the AI sphere and also the increasing demands of public investors.

[00:00:51] I'm interested in what he's seeing here. So today I invite you to join me as together we explore whether today's changes in the VC world signify a dawn of a super cycle in technology investing.

[00:01:04] But enough for me, let's get my guest on now. So a massive warm welcome to the show. Can you tell everyone listening a little about who you are and what you do?

[00:01:17] Hello, my name is Rahul Bayek and I'm responsible for venture capital and growth equity coverage at Wells Fargo here in New York.

[00:01:26] I'm a great host of the show.

[00:01:27] And you could ask what that is. And my role is to build relationships with investors to then provide banking services to their portfolio companies.

[00:01:37] And that could mean anything from basic services. And as they grow up, we help them with our investment bank go to the public or private markets.

[00:01:48] So that's what I've been doing for a while. Thoroughly, thoroughly enjoyed my role.

[00:01:53] And it's been a long career that began in London. I came to the US on a two year assignment that lasted 22.

[00:02:01] Wow. Incredible story. Absolutely love that.

[00:02:04] And I'm recently just come back from a tech event in Seattle with Lenovo.

[00:02:09] And there was so many business leaders from around the world, including all the big tech leaders from Microsoft, Zuckerberg there, Lenovo, of course, Intel, AMD.

[00:02:20] And they're all talking about AI. And one of the things I love about doing this podcast every day is for business leaders listening, trying to make sense of what does this mean for them?

[00:02:29] What does it mean for their business? And I know this is an area that you're passionate about.

[00:02:34] And this notion of a super cycle that's driven by AI is incredibly exciting.

[00:02:39] But can you elaborate on what factors you believe are propelling this shift that we're seeing and how it compares to previous tech cycles that we've seen?

[00:02:49] So I thought before we jump into AI, we'd step back a little bit into the world where I spend all my time, which is venture capital or venture capital backed companies.

[00:03:00] Yeah.

[00:03:01] So since 2018, we've had 1.2 trillion invested in 55,000 companies.

[00:03:11] And there was every manner of technology invested in, whether it was fintech, prop tech, software, you name it.

[00:03:21] And AI is sort of the last, the latest theme, as it were, and possibly the most exciting theme for investors.

[00:03:30] So to me, what seems most exciting is the machine is beginning to think like the human brain.

[00:03:40] And that is a sort of fundamental shift from prior rule-based technology.

[00:03:47] And so, for instance, you know, not to go out of school here, but I get scolded for, say, spending $20 more on my rental car because it exceeds the policy.

[00:03:59] My computer in the future is going to help me prepare for sessions like this with you.

[00:04:04] Yeah.

[00:04:05] And get me to answer faster and think or help me do some of my thinking.

[00:04:11] And that's what's so exciting.

[00:04:13] The other thing, of course, is time.

[00:04:17] And I think of time these days and through the lens of my children.

[00:04:21] And I blinked on that 14 and 16.

[00:04:23] So if I can get AI to help me save time because the sheer power of machines, the rapid adoption of AI-based solutions, it can digest data, it creates data.

[00:04:38] And I think it can get me somewhere faster so I can then apply judgment and perspective based on information that was previously available.

[00:04:49] But now in a much more faster and more sort of comprehensive way.

[00:04:55] The applicability is so incredible that I think it's going to replace, at least in its usage, all the prior tech waves since the 50s.

[00:05:07] So the downstream of that is, in addition to AI, there's data centers that will need to be built, incremental power capacity.

[00:05:17] We've read of people, Microsoft in particular, buying a nuclear power plant, semiconductors, humanoid robots.

[00:05:27] And let's say in the last 70 years, $10 trillion was spent for CPU-type infrastructure.

[00:05:33] We've already had $200 billion go into AI infrastructure.

[00:05:37] It's later to go into 2024 and 2025.

[00:05:40] So the sheer magnitude of this, the applicability, the fact that it can go to almost anyone is what's so incredible and exciting investors and practitioners alike.

[00:05:56] And including you, because it seems to be a theme of your podcast.

[00:06:00] Yeah, 100%.

[00:06:02] One of the things that excites me is how it augments our human capabilities and enhances creativity rather than replace it.

[00:06:09] There's a lot of horror stories out there at the moment.

[00:06:11] I'm an optimist by heart.

[00:06:14] And there are so many opportunities there.

[00:06:16] And as you said, save time too, right?

[00:06:20] It's certainly a fact can do that.

[00:06:22] And if I may say, your 3,063 episodes is ripe for AI.

[00:06:28] Imagine the treasure trove of information you have in there.

[00:06:32] Then it's use case for AI to teach and learn and take insights from all your prior speakers.

[00:06:40] You know, so that's something I've thought about a lot recently because I've often thought about getting all those insights out and writing a book about some of the greatest lessons that I learned.

[00:06:50] But let's be honest, the sheer thought of delving into 3,000 plus interviews is enough to make me shiver and rock back and forth.

[00:07:00] But that's something that it would be perfect for.

[00:07:03] And elsewhere, of course, software growth is slowing.

[00:07:07] So I'm curious from what you're seeing, how do you see the AI sector's prominence affecting companies outside of the AI space?

[00:07:15] What strategies might non-AI companies need to adopt to maybe remain competitive in this evolving landscape?

[00:07:22] I'm curious what you're seeing here.

[00:07:24] Well, I think software will be the long-term beneficiaries of AI.

[00:07:29] Everything we have around us is software-driven.

[00:07:33] So rather than them going away, it's a temporary shift as every CIO and every company explores what the power of AI could be.

[00:07:45] So let's just dig in for a second on why the growth has slowed and then what people can do about it.

[00:07:53] So number one, in this period that I described since 2018, the sheer magnitude of investment was so high, a lot of it went into SaaS vendors.

[00:08:05] And that got particularly high during COVID.

[00:08:13] And post-COVID, you saw several layoffs, particularly at companies like Meta and others, where they sort of corrected from a trend that everybody thought would continue for a while.

[00:08:27] So the number of seats using software just got dramatically reduced.

[00:08:32] So for a while, we felt we were in a recession.

[00:08:36] Arguably, we were in a tech session because many of the job cuts were tech-related.

[00:08:42] So just a number of seats using software got reduced in a variety of places.

[00:08:49] And IT budgets and various companies also were under pressure because now, certainly thematically, there's a pressure to do more with less.

[00:08:57] And then AI came along and every CEO said to their CTO, what's our AI strategy?

[00:09:07] So it's sort of crowding out current budgets.

[00:09:10] No one's ever going to sacrifice their security budget.

[00:09:13] So it's eaten into what was previously available for software.

[00:09:19] So in order to get through this, software themselves are going to adopt the power of AI.

[00:09:28] We've already talked about reducing costs.

[00:09:30] But they're extending their runway by not only reducing people, but by being open to this fresh view where they can be beneficiaries of AI and innovate faster using the power of AI.

[00:09:46] So short-term, yes.

[00:09:48] Longer-term, software benefits from the AI excitement we're all experiencing.

[00:09:53] And I think if we go back a few years ago, it seemed that the only startups and companies that were getting funding had blockchain in their title.

[00:10:02] And of course, several years later, now it's all about AI.

[00:10:05] And unicorns outside of AI are now reportedly struggling to raise funds.

[00:10:10] So I'm curious, in your work here, how do you see that trend impacting the overall health of the venture capital market?

[00:10:17] And what does it mean for the long-term sustainability of these companies?

[00:10:21] What are you seeing here?

[00:10:23] So going back to my opening remarks that we have 55,000 venture-backed companies and say 1,400-ish unicorns.

[00:10:34] That's just too many for a finite number of companies to buy from.

[00:10:40] So venture capital has always been founded on the notion of a power law, where a small percentage of companies produce outsized returns.

[00:10:49] And in the last 15 years, we've only experienced this massive technology boom.

[00:10:55] And in many ways, we're overdue for a correction because of this sort of overinvestment.

[00:11:01] But a few of those unicorns, let's say between 10% or 20%, got so much money or so much investment during the 21-22 period,

[00:11:16] that there's enough runway to last for three to five years.

[00:11:20] So while you're right that they're not raising new funds,

[00:11:25] the struggle really is with the bottom 80%.

[00:11:29] And in sort of Darwinian world of venture, I wonder whether those 80% would have received net new funding regardless of AI.

[00:11:43] So that's something to think about.

[00:11:45] And more and more of my calls are, what do we do with the VC-backed companies that are no longer venture-worthy?

[00:11:54] So, you know, if a company was growing at 17 million ARR, 60% growth, now that growth is 30%,

[00:12:03] arguably, VCs are not going to continue to invest in that type of company.

[00:12:09] So, and then I would say VC firms themselves are at risk.

[00:12:14] They were at a peak 8,000 venture capital firms in the U.S.

[00:12:20] That was cut in half last year.

[00:12:22] And I would expect many smaller firms to go away and more and more funding go towards the big traditional players.

[00:12:33] And in fact, the last few weeks have seen some massive raises from the marquee VC firms.

[00:12:40] So, rather than sort of the health of the industry, it's recorrecting back to the way it was,

[00:12:47] where traditional firms tend to dominate not only the fundraising, but the investing dollars.

[00:12:55] So, I don't know if that answers your question fully,

[00:12:57] but the craft of VC will return versus a more sort of private equity-esque,

[00:13:06] very large numbers with very large numbers of companies.

[00:13:11] It really does answer the question.

[00:13:12] And I would say on top of that, we're observing public markets becoming more demanding

[00:13:18] and expectations for growth, profitability, and fairer valuation.

[00:13:23] So, on top of everything we've just discussed there,

[00:13:26] how do you think these higher standards are reshaping the path to IPO for tech startups?

[00:13:32] Anything you can share around this too?

[00:13:34] Well, I think we've all read in the press there's a sort of conference of events that have led to fewer IPOs.

[00:13:41] But what people may be talking about less is we're all competing with machines and indexes.

[00:13:50] And those tend to favor larger companies.

[00:13:55] And the profession, as we were talking about the professional of VC being a craft,

[00:14:01] the profession of investing used to be the same,

[00:14:03] and that in many ways has been replaced by machines that are professionalized managers.

[00:14:11] So, it's been in decline.

[00:14:13] So, the active management of money has been in decline in favor of large machines.

[00:14:22] And so, there are fewer individuals left who buy the story of young emerging companies.

[00:14:28] So, that's one factor.

[00:14:30] The other is we all have read private valuations were very, very high and inflated

[00:14:36] because there was too much money chasing too few opportunities.

[00:14:40] And those valuations are still higher, could be higher than where they're public market comparables.

[00:14:48] And finally, public investors have a lot of choice.

[00:14:51] They could do risk-free rate investing of 5%.

[00:14:54] They could go into the mega stocks or back by AI, as we've talked about.

[00:15:00] There is the FTSE index, the S&P.

[00:15:04] And then it doesn't help that prior class of IPOs, tech IPOs, their performance hasn't been great.

[00:15:11] And that's sort of self-corrected.

[00:15:13] But if you were a traditional investor, you know, in the SAS index or the NASDAQ 100, your returns were arguably higher.

[00:15:24] So, you're sort of competing for space, but also being replaced in part by machines where younger companies' information have less ability to tell their story.

[00:15:38] And before you came on the podcast today, I was doing a little research on you.

[00:15:42] And one of the things that I read is that you mentioned that the survival of the fittest will naturally weed out companies with weaker propositions.

[00:15:50] So, I've got to ask on behalf of every founder and business leader listening,

[00:15:54] what are some of the key characteristics that you think will maybe define the most resilient tech firms in this environment?

[00:16:02] It's a great question.

[00:16:03] And so, we go back again to Darwin.

[00:16:06] Yeah.

[00:16:06] So, in this period of exuberance, and I will say this with the greatest respect to all founders because I have not walked in their shoes,

[00:16:16] there were several businesses born that looked like different shades of each other.

[00:16:21] And the pendulum now is swinging back to those who have real products selling to big, real companies

[00:16:30] and not sort of to each other when in the emerging tech space.

[00:16:36] And because of the time it takes to sell your product, acquire customers, do all the hard things of running a business,

[00:16:45] it's skewing towards bigger companies.

[00:16:48] Arguably, big is winning.

[00:16:50] It's a size, scale, and just the time to survive onboarding into a big company just favors the large ones.

[00:16:59] So, my advice is, you know, those who have real companies, real solutions,

[00:17:08] the future will belong to you, especially when you wrap that in financial discipline.

[00:17:13] And for the last year, you've done exactly that.

[00:17:17] And you're sort of walking the line between financial discipline and growing market share.

[00:17:23] And arguably, there's some tension between the investor and the founder, because this is a great time to consolidate market share and grow your business.

[00:17:31] So, very, very hard to answer the question.

[00:17:35] Very, incredibly hard for a founder business.

[00:17:39] So, you know, all great businesses sort of tend to pivot during wobbly times.

[00:17:45] And arguably, this one is an open question of just too many companies trying to do shades of the same thing.

[00:17:52] And despite being in some of those wobbly times that you mentioned,

[00:17:56] I think one of the positive aspects that we need to highlight today is the fact that equity markets are showing signs of recovery and lower volatility.

[00:18:05] So, that's something we need to shout about.

[00:18:07] But do you foresee a significant shift in investor behavior, particularly regarding their appetite for risk?

[00:18:14] What are you seeing here?

[00:18:15] Are people still playing it safe?

[00:18:17] I think they're still playing it safe, but they're very, very keen to evaluate opportunities.

[00:18:23] And all the major banks have the best companies in front of them.

[00:18:27] But they still remain mindful of the relative valuation to their public peers.

[00:18:34] And that correction is happening, at least privately.

[00:18:38] And we expect a normalized IPO environment in 2025.

[00:18:45] And everyone's excited for 2025.

[00:18:49] Expect that to be primarily led by category leaders in each sector.

[00:18:54] Several have filed.

[00:18:56] They're all big brand names.

[00:18:58] But the hurdle is going to be very high for each of them, going back to my earlier point of having to be large and profitable and high growth and have a fair valuation.

[00:19:15] And I only say large because when you have a company of size, there are more buyers and there's more liquidity and there's more activity.

[00:19:25] And you have an ability to trade the stock.

[00:19:28] So, the new class will be the best of the best.

[00:19:32] And investors are excited to see that.

[00:19:35] Although there are, what, 4,000 miles between us, I think we're both going to be impacted by things like the ongoing geopolitical tensions, rate environments.

[00:19:45] We've had our election earlier this year.

[00:19:47] You've got your upcoming election cycle, which appears to be making things interesting for the outside looking in.

[00:19:53] So, what risks do you see as most likely to disrupt this optimistic outlook for the capital markets that we're seeing right now?

[00:20:01] How do you think this is going to pan out?

[00:20:03] So, I feel that capital markets have sort of priced in both the elections and the current state of geopolitical tensions.

[00:20:11] I think everybody is just under the surface, a little nervous about the possible escalation into a broader conflict on the two wars that we have currently and the skirmishes that happen further east.

[00:20:27] So, you know, if things continue as they are, and regardless of election outcomes, people tend to sort of govern mostly from the center, at least as it relates to capital markets.

[00:20:42] So, geopolitical tensions is probably where I would anchor any sort of major disruption to the optimistic outlook.

[00:20:51] And I always try to give everyone listening something valuable to take away and think about.

[00:20:56] So, for any founders that could be listening anywhere in the world to our conversation right now, maybe they're focusing on sustainable growth, capital efficiency, all areas that you're passionate about.

[00:21:08] Is there any advice that you'd give to entrepreneurs to help them maybe better navigate these more challenging times, especially when it comes to balancing growth with the need for profitability?

[00:21:18] I understand that is an entire episode on its own almost.

[00:21:22] But any advice that you want to offer anybody listening?

[00:21:25] Well, I think firstly, you and I again, once again, we'll sort of tip our hat to founders.

[00:21:30] I tip my hat to you for creating something out of nothing, right?

[00:21:36] Arguably, 98 of the 100 tech innovation rocks have already turned over.

[00:21:41] And the fact that founders dare to dream and create is just extraordinary and, you know, hats off to you.

[00:21:50] So, if this period is a return to the mean, some could call it sort of a downturn from a heady high.

[00:22:00] I feel that the last few years was an anomaly.

[00:22:03] But during these times, extraordinary companies have founded.

[00:22:08] And some iconic names that came out of the prior recessions.

[00:22:13] Uber founded in 2009.

[00:22:16] Stripe, Snap, Airtable, DoorDash.

[00:22:20] And there's an incredible optimism that the class of 24, 25, 26 that are born out of financial discipline and good solutions are going to be sort of returned to the original ethos of venture.

[00:22:41] So, if I were to, you know, give advice, again, it's going to be around real solutions and selling to real companies and using the time to pivot if necessary.

[00:22:54] But a company of the future is going to be the one that does not require billions of dollars in incremental capital for customer acquisition.

[00:23:04] So, strong financial discipline and use case-driven solutions rather than a solution looking for a problem is my probably unsolicited two cents, although you did ask for it.

[00:23:18] And then have faith that the last 50 years of venture has been also extraordinary.

[00:23:24] Companies like Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Nvidia, 1993.

[00:23:31] They were all, in some ways, funded and founded by venture capital.

[00:23:38] And so, if entrepreneurs are the engine of innovation, venture capital is certainly the fuel.

[00:23:45] And because, Neil, I know you love AI, data and AI would be the oxygen.

[00:23:50] So, we're very optimistic for the next six to eight months to 24 months versus the last 18 months.

[00:23:59] And long may the best companies survive and thrive.

[00:24:04] And, you know, best wishes to those founders because you do extraordinary things and we're all beneficiaries from it.

[00:24:11] And I think that is a powerful moment to end on.

[00:24:14] But before I do let you go, I cannot thank you enough for not only sharing your insights with me today,

[00:24:19] but for everyone listening, also getting up incredibly early at 6am to talk with me.

[00:24:24] And as a small thank you, I want to try and do something for you now because some of the biggest names in business,

[00:24:30] VC funding and tech have either been guests or maybe just maybe listened to this podcast.

[00:24:35] So, is there a person that you'd love to have a private breakfast or lunch with?

[00:24:40] Because he or she might just listen to this or might get to hear it through a friend of a friend.

[00:24:45] Let's see what we can manifest together.

[00:24:47] Who would he be and why?

[00:24:50] So, like you, my last few years have been in a state of continuous learning.

[00:24:56] And one of those people who had an incredible career and shares his, not only his point of view,

[00:25:04] but the way he gets to his point of view is Bill Gurley of Benchmark Capital.

[00:25:09] So, he started in industry and went to Wall Street and then to Silicon Valley.

[00:25:16] And across this sort of multi-year career, sort of his analytical and pragmatic approach is what he's most respected for.

[00:25:24] Famously, he was on the board of Uber and contributed in many parts to its success.

[00:25:30] So, if I could learn from him and sit down to breakfast and peek into the way his mind works,

[00:25:36] especially as we continue to educate ourselves and learn and build the most powerful muscle in our bodies, which is the brain.

[00:25:47] So, kudos to Bill for all the things he does privately, publicly that he shares with the world.

[00:25:54] It would be great to meet with him.

[00:25:56] A great answer.

[00:25:58] And if, Bill, if you are listening or if you are a friend of a friend of Bill, six degrees of separation,

[00:26:03] please get in contact with either myself or Raoul today and we'll see what we can manifest and make happen.

[00:26:10] But for anyone listening that wants to find more information about you,

[00:26:14] maybe they want to bend your ear, got a few questions,

[00:26:16] or just want to find out more information about your work at Wells Fargo,

[00:26:20] where would you like to point everyone listening to that?

[00:26:22] So, I'm on LinkedIn.

[00:26:25] Please, please do reach out.

[00:26:26] More than anything, I derive energy from people.

[00:26:29] I have the greatest respect for founders and just thrilled by and energized by your company

[00:26:36] as well as in BCs and investors at large who electively try to make the world a better place.

[00:26:44] Well, once again, absolute pleasure to have you join me on the podcast today.

[00:26:49] I will add links to everything, LinkedIn, Wells Fargo, etc.,

[00:26:53] so people can find you nice and easily.

[00:26:55] And as someone with this special pulse on what's driving and not driving their investments in technology,

[00:27:01] you are the perfect navigator as we all embark on these uncharted digital waters

[00:27:06] and this new super cycle driven by AI.

[00:27:09] So many big takeaways.

[00:27:11] I'd love to stay in touch with you, see how things continue to evolve after the election

[00:27:15] and join forces with you next year again.

[00:27:17] But thanks for sharing your story today.

[00:27:19] And I'll just say that I love coffee and I love walking.

[00:27:22] So, if you happen to find yourself in New York,

[00:27:25] coffee and a walk would be my favorite thing if you want to reach out.

[00:27:30] So, how do you perceive these shifts in the venture capital landscape?

[00:27:34] What implications do you think these changes will have on the broader tech ecosystem?

[00:27:41] Please share your thoughts.

[00:27:42] Email me, techblogwriteroutlook.com,

[00:27:45] Instagram, LinkedIn, just at Neil C. Hughes.

[00:27:48] Love to hear your thoughts.

[00:27:49] Other than that, I will return again tomorrow with another guest and another topic.

[00:27:53] So, thank you to today's guests.

[00:27:55] Thank you for you listening.

[00:27:57] Hopefully, I will join you all again tomorrow.

[00:27:59] Speak with you all then.

[00:28:01] Bye for now.

[00:28:25] I think we covered so much there from the pivotal role that AI is playing in defining a new investment era

[00:28:32] and also some of the strategic shifts that are necessary in a market that values growth, profitability and fair valuations.

[00:28:42] And I think that's more important than ever.

[00:28:44] But listeners, how do you perceive these shifts in the VC landscape?

[00:28:49] What implications do you think these changes will have on the broader tech ecosystem?