The Ongoing Startup Downturn & More PR People Than Reporters to Answer Their Emails

[00:00:00] Hi, I'm Eric Newcomer. And I am Madeline Rennbarger. And this is the Newcomer Podcast. Each week, Eric and I discuss the VC deals and the drama that went down. Let's do it. Here we go. Let's dive in. Jumping into funding rounds this week, we have two deals to discuss with you, Poolside and Impulse Space. Eric, what's exciting to you about Poolside?

[00:00:28] I broke May 2023 Poolside's seed round, $26 million. Now it's raising its Series B round and it's $500 million at I think a reported $3 billion valuation. You know, the CEO here is Jason Warner, the former CTO at GitHub, super smart guy and obviously extremely hot space, you know, an AI powered developer platform.

[00:00:55] Everybody is convinced that coders are going to use AI more than anybody. It may be...

[00:01:01] This is the use case that has really jumped off.

[00:01:04] Exactly. You've got, I like the factory CEO, there's Augment, there's what's the one? A cursor is super buzzy. We obviously last week talked about Gary Tan's like forked open source thing.

[00:01:16] Pair AI with all of YC's open source coding editor bets. It really is kind of, I think, I mean, it's the space where people see AI adoption really hitting its stride and actually creating value for its users and rather than the sort of experimental corporates that are testing out AI tools but aren't sure which ones they're going to take.

[00:01:37] Coding is pretty much clear. This is a valuable use case. We're integrating in it right now. So I can see why the sector's hot.

[00:01:44] Well, I'm excited for Jason. I will say that poolside $500 million round, I think came at a time of fatigue with AI companies raising unlimited sums and just sort of some skepticism that throwing money at companies that don't produce much, if any money is a good idea.

[00:02:05] And so he can prove everybody wrong. But it's certainly a big swing and amazing that, you know, I don't know, later in this episode, we're going to talk about how it's been a tough time in venture.

[00:02:16] And yet, clearly, there are the haves and have nots. And this poolside is a half.

[00:02:21] Madeline, you want to talk about your deal of the week?

[00:02:23] Yeah, for sure. You know, I'm interested in all things defense and space world.

[00:02:27] And on the space side of things, Impulse Space, which was founded by Tom Mueller, who was the first employee at SpaceX, raised $150 million in a round led by Founders Fund, who have become known to be pretty associated with this space defense world.

[00:02:42] I thought they were like, we don't follow trends. And we did Anderil. We don't follow the herd. Isn't this on trend to do space now?

[00:02:51] Well, you I mean, they would certainly push back on that characterization since it's all about the founder. Right.

[00:02:57] So it fits their brand, too. You know, with Tom being from the first employee of SpaceX being, you know, top of.

[00:03:03] No, it makes a lot of sense. They're always like, we think different. Like, OK, yeah, space is popular right now.

[00:03:11] Space is popular right now. Defense is popular. This is not a defense company, to be clear.

[00:03:15] They're doing orbital device delivery. So it's kind of like the last mile delivery for space when, you know, the SpaceX rockets take all of this equipment up, parts of industrial tech up into space for different projects.

[00:03:27] They, you know, sometimes need to get into outer Earth orbit and connect to different satellites.

[00:03:31] And so this is the company that's promising to make that last mile delivery much more seamless and a lot less, you know, cumbersome for space engineers.

[00:03:40] Kind of crazy that this space company has 150 million, but the software sort of coding company has 500.

[00:03:48] You know, I don't know, just intuitively, obviously building models and getting GPUs is costly, but pretty amazing just to compare the two funding amounts.

[00:03:57] Right. Yeah. Like you think about what actually goes into building rockets and really intense engineering there.

[00:04:04] And it's like, hmm, wonder, wonder about those totals.

[00:04:08] I think this is a really promising company. It's one that is fulfilling a need if if space is hot and it's the next big thing, this will be necessary for industrial space.

[00:04:18] And there's been kind of, you know, a range of these companies that are building around space manufacturing or like Varda, you know, is doing drugs in space, basically.

[00:04:27] So preparing for our future where we are much more in space than we are now, it could be, you know, another case of maybe being too early.

[00:04:35] But I think there's real traction here is also could be, you know, something where this is their pitched mission.

[00:04:41] But the team there is super talented.

[00:04:43] They have and they have a really big culture of innovation to where, you know, something that starts out as a side project should actually, you know, take over and become this really big technological development.

[00:04:50] There's a, I think, accurate view in Silicon Valley that SpaceX is sort of a Starlink company and that the satellites are amazing.

[00:04:59] So building a company that serves Starlink makes a lot of sense and obviously takes some time to build this kind of business.

[00:05:06] And I think, you know, given that SpaceX is still a private company and it's not a consumer product, seeped into the culture less than Tesla, but certainly super important.

[00:05:17] Should we talk about the big news of the week? It's more of a trend than news.

[00:05:21] Yeah, it's more what the data is showing, right?

[00:05:23] There's so many data providers. We're looking through like Pinchbook, Carta, Crunchbase.

[00:05:27] But Crunchbase put it the most clearly saying we are now nine or ten quarters into the current startup funding decline.

[00:05:35] Been in this decline for a while.

[00:05:37] Madeline, you want to give us some of the numbers that stood out to you in this report?

[00:05:41] Yeah, absolutely. I mean, the main thing that surprised me with this report was just how beyond the open AIs of the world and the haves that are, you know, raising in this quarter the largest venture funding round of all time.

[00:05:55] Still with that funding round, it's a decline of 10 percent from last quarter and 22 percent from the same time a year ago.

[00:06:03] And Q3 is always slower, you know, VCs need to take their vacations.

[00:06:07] But it really was surprising to see even with so much AI activity that it's still a down quarter and it continues this trend.

[00:06:15] And any, you know, mid-year lift didn't really happen.

[00:06:18] What stood out to me is just AI, and I've said this in the newsletter before, but AI has allowed us to sort of paper over the downturn narratively.

[00:06:27] It's sort of like, oh, we have something new to get excited about and there's a lot of AI activity.

[00:06:30] But I think if we didn't have this new shiny thing to glom onto, there would be much more of a sense that like, oh, there's been a painful period for startups.

[00:06:40] We obviously had a bunch of layoffs. There's less investment.

[00:06:44] Right. Venture firms, which typically don't, you know, have layoffs, have had layoffs.

[00:06:49] And even Y Combinator, which we talk about a lot, is really, you know, revitalizing the San Francisco tech scene and really getting a lot of investment,

[00:06:56] a lot of praise around Gary's revitalization of the program.

[00:06:59] They laid off a ton of their staff within like the last year and people keep leaving.

[00:07:05] So beyond the success stories, it does really feel like a time of contraction around funding and the size of venture funds.

[00:07:12] Notably, the New York Times had a story last week about CRV, a very established early stage investor,

[00:07:23] returning $275 million from its $500 million select fund to investors with a just sort of, I don't know, not great late stage prices.

[00:07:33] We don't want to deploy all this money.

[00:07:34] I texted Sar, one of the top guys over there, Sar Gurr.

[00:07:39] And he said, as you know, it is easy for firms to expand and raise bigger funds and take more fees.

[00:07:45] At our core, we want to be in the returns business, not the fee business.

[00:07:49] Given our view of the growth market, we have concerns on the return profile for that last part of the market and are focused on our core business early.

[00:07:57] So, yeah, I mean, Founders Fund, it's sort of a little bit ago, shifted the money to a later fund.

[00:08:05] Now we're having a firm give it back.

[00:08:08] And certainly there have been like no-name firms that have stopped investing.

[00:08:12] Any observations?

[00:08:14] Well, even within the bigger funds, I mean, Peak, which was spun out of Sequoia,

[00:08:18] was their vehicle for investing in India, and now is its own private fund, has pulled back its fundraising goal by, I think, $465 million.

[00:08:28] And they're also kind of citing growth stage valuations being too high to really see measurable returns,

[00:08:33] that it just doesn't make sense to have as much money if these private investments get larger and larger,

[00:08:40] and these valuations get so big with nowhere to go.

[00:08:42] It's kind of like, you know, where do you go from here?

[00:08:45] And then the other one is what Gary Tan's firm, or former firm.

[00:08:51] He's still affiliated, I believe, but Initialized Capital.

[00:08:54] Initialized, yes.

[00:08:55] They had a sort of shuffle.

[00:08:57] It's not clear if this fits into the downturn story, but they're getting back to basics,

[00:09:02] and some partners are out and cutting down the team.

[00:09:06] Well, some pretty senior partners are out too, which was a bit of surprising.

[00:09:09] But like you said, it could just, you know, be a restructure, but people are being let go,

[00:09:14] and it does seem like that's another major fund that's been seeing some shakeups recently in staffing,

[00:09:21] even while, you know, other deals or other sectors appear to be really hot.

[00:09:26] It's still, there's some trouble under the hood, if you will, in some of these, it seems like.

[00:09:31] Anecdotally, it's just like, seed is super hot and crowded, and everybody's like, oh, it hasn't corrected.

[00:09:37] I mean, especially you hear about these YC startups raising out of YC at 200 million valuations that we wrote about.

[00:09:44] Like, obviously, it's still going on.

[00:09:46] Series A is where everybody sort of, who's institutionalized, wants to play.

[00:09:51] And then later stages, they're like, it's too expensive.

[00:09:54] I don't know.

[00:09:55] It feels like, how do you square the circle on that?

[00:09:57] I think one challenge is that there are non-economic actors at the early and super late stage, right?

[00:10:04] At the early sort of fund to invest in your friend's company.

[00:10:07] There are a lot of rich people in Silicon Valley that want to be in the mix.

[00:10:11] Seed investing is waiting to be in the mix.

[00:10:12] And some of the late stage rounds, you have the hyperscalers who might buy the company or want a partner or want an option call.

[00:10:20] So they can invest irrationally.

[00:10:22] And so then if you're a traditional venture fund, just trying to make a return, you have to then compete against these sort of non-economic actors.

[00:10:31] And that certainly makes life a little more difficult.

[00:10:34] Yeah.

[00:10:35] I mean, it's kind of the messy middle, right?

[00:10:36] Like, no one really wants to play at the point where a company is going from growth to, you know, like they're scaling to the next step, right?

[00:10:47] They're really getting into becoming one of these later stage unicorns.

[00:10:50] That's not really what people want to touch right now.

[00:10:52] There's that great Silicon Valley scene where it's like, you want no revenue.

[00:10:56] Some revenue can disappoint, but like no revenue, your unlimited growth potential.

[00:11:03] Moving on, I do want to call back, Eric, you had some pretty popular tweets last week about the PRification of the media world.

[00:11:10] I don't know if you want to elaborate a little more on how many PRs per journos you're seeing these days, especially in tech press.

[00:11:18] I think I was just like, it was Friday and I'm like, I'm still drowning in email for the week.

[00:11:23] And I said, judging from my inbox, the gap between the amount of money spent on tech PR versus the capacity of the tech press to write stories is mind boggling.

[00:11:31] Market failure somewhere.

[00:11:33] Certainly no hate to PR people.

[00:11:35] I mean, I think there are some generic pitches that I would prefer not to receive that.

[00:11:40] If you read my coverage, it's like, would I ever write this?

[00:11:43] But for the most part, it's more on the media side that I'm observing really, because it makes sense to me that there are there's so many companies that raise $100 million.

[00:11:52] They all should probably hire a PR person and get some attention.

[00:11:55] But there's just not the media apparatus to meet them on the other side or to be interested in what they're doing.

[00:12:03] What's kind of the solution?

[00:12:04] Because the imbalance has been the case for a while.

[00:12:06] It just feels like, especially right now, every other day I get a pitch about a tech company launching a new feature or, you know, raising a $5 million seed.

[00:12:15] And there simply is not the capacity to write about that if you want press.

[00:12:19] Yes, my point here is like the demand is from companies to be covered, whereas so much of the industry, the media industry thinks of it correctly as the demand of readers and sponsors to pay or consume content that they can then monetize.

[00:12:35] But we have this weird problem where there's clearly another market, which is to be covered.

[00:12:40] And the PR industry is monetizing that very well.

[00:12:43] But then they don't get all the way there because they need media as a vehicle to get that content out for the most part.

[00:12:52] And so what's the answer?

[00:12:53] Like, I don't know.

[00:12:54] I mean, some of it has been these sort of industry built sort of publications like Future.

[00:13:01] Andreessen's like blogs, I think, are successful.

[00:13:03] But yeah, they didn't start to build independence and be also working for clients.

[00:13:09] You do have what like Paki McCormick has called like the techno optimistic media with his not boring.

[00:13:16] You know, you have Turpentine, somewhat us where it's like, OK.

[00:13:19] I was going to say we're pretty techno optimistic.

[00:13:21] Yeah, we're pro tech.

[00:13:23] We don't have the bandwidth or priorities to like cover a bunch of funding rounds.

[00:13:28] Yeah.

[00:13:28] So we're not we're not big enough to solve the problem.

[00:13:30] I am like, man, what's the right way to structure like, oh, pool together like two hundred thousand dollars from the industry and we'll cover defense tech.

[00:13:39] Or it's like I feel like I wouldn't I could.

[00:13:41] The challenge is like SpaceX funds you.

[00:13:43] It's like they want positive coverage of SpaceX.

[00:13:45] Like no media outlet wants to promise that.

[00:13:48] But I do think I'd be willing to say, oh, there's money to cover space tech broadly.

[00:13:54] And we can like be positive and negative about who we want.

[00:13:57] You sort of have a sense for our overall disposition.

[00:14:00] But then there's this sort of collective action problem that no like one space company is going to be like, oh, I'm going to fund overall space coverage.

[00:14:07] And I feel like that that's sort of the problem.

[00:14:10] I'm not kind of like where where could you have a sponsored beat per se and where would people want to fund maybe?

[00:14:17] I mean, I feel like this is more common on the nonprofit end of media, but where, you know, certain groups say, hey, we really need like a community real estate reporter.

[00:14:24] We're going to put together this grant.

[00:14:26] So this nonprofit newsroom can hire the reporter to cover our industry, you know, because in part they want the stories to come out.

[00:14:32] And I think there could be a model for that.

[00:14:35] It's just, you know, of course, going to always have to balance that sort of like, you know, church and state of, you know, coverage and who's funding you.

[00:14:42] I mean, the way that the support ends up happening is through sponsorships.

[00:14:48] You know, like, like, I mean, even at Bloomberg, I think, you know, the website would sometimes be organized around like cloud or like security.

[00:14:56] And I'm like, those aren't like our main beats.

[00:14:58] But I do think sometimes it was so it's like, oh, you have security advertisers, you have a security landing page.

[00:15:04] So there's certain cases where it's almost you build, you know, the things that people want, the sponsors want, and then you get that stuff sponsored.

[00:15:12] It's like, oh, you're writing about cloud.

[00:15:14] Which there is some I mean, there's a case to that to be, you know, in the news business, too.

[00:15:18] Like, you should have you should be writing for an audience that wants to read your stories.

[00:15:23] And if there's a vested interest, you know, in a certain industry, then, you know, you do sometimes shift your coverage to make make that, you know, fulfill that need.

[00:15:32] I feel like most sponsors are assessing like reader engagement and they're really thinking about the audience.

[00:15:39] I never hear a sponsor.

[00:15:41] I mean, I think there are sponsors.

[00:15:43] People have sponsored.

[00:15:44] We are not big on sponsorships, to be clear.

[00:15:46] We're like an advanced business and then a subscription business and sponsorships.

[00:15:50] We need to spend more time on them.

[00:15:52] But most of the time sponsors are thinking, who am I reaching with this and not like, let's help out newcomer.

[00:16:00] And it's not really as sustainable.

[00:16:02] Like, I never wanted to ask, like, my friends to subscribe to newcomer, like when they didn't need to.

[00:16:09] And similarly, you can't really build a big business by saying, like, support us.

[00:16:14] Yes, we should exist, you know.

[00:16:16] And so then you really your value.

[00:16:18] You want it to be economically rational for people to do it anyway.

[00:16:23] But my point was that I do think it's there's got to be a world where people want more like upbeat coverage of the space industry.

[00:16:31] Like, how do they get it?

[00:16:31] I think it's sort of an unanswered question.

[00:16:33] Yeah.

[00:16:34] Remains to be seen.

[00:16:35] Madeline, what are you thinking about this week?

[00:16:37] Well, we're you know, as you know, Cerebral Valley is coming up.

[00:16:41] November 20th.

[00:16:42] November 20th.

[00:16:43] Coming up soon.

[00:16:44] A little more than a month away.

[00:16:45] And I'm actually putting together a panel on biotech and AI for this year's Cerebral Valley, a new topic for us.

[00:16:52] I'm looking, you know, to meet with founders in the space that could be a good fit.

[00:16:57] So if anyone wants to reach my inbox, it's Madeline at newcomer.co.

[00:17:02] Send me your pitches.

[00:17:02] I'd love to talk to some more promising founders in biotech using AI to create new drugs or therapies and, you know, cure aging, all that kind of stuff.

[00:17:11] So please, please reach out.

[00:17:13] Well, I'm thinking a lot about the bull and bear case for open AI.

[00:17:17] So we'll see if I I'm feeling optimistic about that piece.

[00:17:20] So trying to put that together.

[00:17:23] The four year anniversary of newcomer is October 24th.

[00:17:27] So I'm starting to try and like part of why I'm tweeting about media and everything.

[00:17:31] You know, I'm just sort of, oh, what are my reflections?

[00:17:33] Um, so trying to, to get organized with some reflections there.

[00:17:39] Cool.

[00:17:39] Well, that's this week's episode.

[00:17:41] Thanks for listening to the newcomer podcast.

[00:17:43] See you next week.