Tag: Investing

The wide path: Why most current valuation dynamics are not here to stay (and what will)

I recently read Lucas Vaz’s perspective on valuations in the current era of pre-seed and seed investing. I have tremendous respect for Lucas—he’s built an incredible portfolio, and we’ve co-invested together over the years. While I agree with a couple of his points, I think there are a few layers worth exploring about where VC and valuations are headed and why.

The Long-Term Macro Trend: Valuations are driven by supply and demand

Startup valuations have been rising since the 1970s. In 1977, Mike Markkula invested $250k into Apple for approximately 1/3 of the pre-seed company. That would be unheard of now. The reason this happened is simply due to supply and demand. Supply of the round and demand from investors. Back then, there were just not that many investors who invested in startups. Today, there are thousands of VCs and many more angels. So the demand for investing in particular startups, in general, has gone up which increases valuations.

This is also why you see valuations higher in San Francisco than you do abroad. There are just simply more investors willing to invest here. This upward valuation trend will continue as long as more investors continue to invest in startups. This isn’t just a recent phenomenon—it’s been happening for decades.

Short-Term Market Dynamics: The Macro Matters

On shorter timescales, valuations fluctuate based on macro conditions—everything from geopolitics to market trends can affect valuations. We saw this clearly during 2020-2021 era – during the pandemic – when investors suddenly became comfortable with remote investing.

US valuations were getting frothy, so investors looked abroad for better deals, driving up international valuations. But when the market turned in mid-2022, San Francisco valuations took a dive, and US investors preferred investing in local companies again because the frothiness had stopped. US investors pulled back from investing abroad to focus on SF, and international valuations dropped significantly. These international valuations have started recovering somewhat since then, but they are nowhere near previous high valuation levels of 2020 / 2021.

Right now, we’re in a particular bubble around AI investing, and like everything else, the driver is supply and demand. This is why you actually see some AI deals get no investors — e.g. crowded horizontal plays. And some – e.g. AI infrastructure deals – have crazy valuations. It’s the investor demand that drives price up and down.

And many of the high valuations are justified. I’d never previously seen companies scale to millions in revenue run rate within weeks or months. This rapid traction happens frequently in certain AI markets (tools for prosumer or developers). It’s also why, in other industries, you don’t see high valuations. For example, in healthcare and fintech, pre-seed valuations remain much more rational because you simply can’t achieve the same rapid traction. These are regulated industries where—frankly speaking—we wouldn’t want companies to move fast and break things. As a result, many of these industries have fallen out of favor with investors, because it’s much harder to get to $1m rev runrate in weeks. In addition, international startups still have much lower valuations in places where there are not as many investors.

But even in prosumer AI or developer AI, I don’t think this trend will last. Once the low-hanging fruit is picked—perhaps in 1-2 years — when everyone has the AI agents and developer tools they need for sales, marketing, productivity, note-taking and more—it’s going to get much harder to sell similar products. Competition will intensify, customer acquisition will become expensive, and adoption will become slow even these industries where we see massive growth today. Investors will be less excited about investing in these sectors, and valuations will drop in these sectors.

This pattern repeats with every technology wave. We saw it most recently with mobile, though not quite as dramatically because the internet was smaller and news didn’t spread as quickly without social media back then.

tl;dr today’s valuations are not the new normal. Like every cycle, things come and go.

If I’m a founder, then should I be building a developer or prosumer tools?

For founders reading this, the natural question is: if it’s so much easier to raise money at higher valuations in developer AI or prosumer AI, why build anything else right now?

The answer is that you need to choose what kind of battles you want to fight.

The developer and prosumer AI Game: Yes, you can benefit from an easier fundraising path and rapid growth in the current window (probably 1-2 years remaining) if you build AI infrastructure or something along those lines.

But the tradeoff is brutal competition where anyone can enter the market and you can be ripped out tomorrow. Success requires not just being first, but being the fastest to build and iterate so you don’t become obsolete. I’ve seen companies in my portfolio reach $10 million revenue run rate and then crash back down — all because of competition. It’s a field where no one gets to rest. (e.g. look at the notetaker space. how many notetakers have there been in the last 5 years? it’s fiercely competitive.)

Other industries: In other verticals, you have much more of a moat, in that your customers won’t switch overnight, just because a competitor launches a similar product. It’s much harder to rip you out of their workflow. If you’re in international markets, there’s far less competition in general. Your valuations may be lower, but it may be less frenetic and less competitive.

People often think about what they should do to raise money easily or maximize valuation, but we have to remember this is a long-term game. You didn’t start your company to fundraise. And, just because you can raise a lot of money easily does not mean that you will have a successful company. The startup graveyard is littered with so many companies who have raised a lot of money and couldn’t convert those to success. I would almost argue that raising too much money is a major cause for startup decline.

The Inevitable Correction

So, when this AI market eventually crashes—and it will—the long-term macro trend of rising valuations will likely continue as long as investor competition remains healthy. And it will crash because growth slows because of too much competition. Once a number of AI companies can no longer get that crazy growth trajectory, investors will no longer be interested in supporting those high valuations in the entire sector. Often, your ability to succeed in fundraising may have nothing to do with you, but rather the market you’re in.

And we’ll return to lower pricing across all markets. This is just how it goes and is just the economics of supply and demand.

We’ve hit 10,000 Angel Squad applications (+win a guest pass)

Four years ago, we launched our global angel investor community called Angel Squad. It was a bit of an experiment. When we first started, our goal was simple: break down the barriers that have traditionally kept most people out of angel investing – education, check size, dealflow, and networks. Our ambitious goal was to mint 10,000 new angel investors over the course of Angel Squad’s life.

That sounded like a tough goal back then, but today I’m incredibly excited to announce we’ve officially crossed 10,000 Angel Squad applications across 50+ countries!

Beyond Silicon Valley’s Model

Our journey to 10,000 applications reveals there’s an enormous appetite for angel investing globally. We’ve seen Squad applications from engineers in Bangalore, teachers in Buenos Aires, and entrepreneurs in Lagos — proving that great investment potential isn’t confined to Sand Hill Road.

You don’t need to be in a traditional tech hub to be a meaningful startup investor. Our 10,000 applications have come from every point in the globe — small towns in Latin America, the emerging MENA market, and regions historically left out of the startup funding conversation.

One of our members, a professional chef in Turkey, joined the Squad after attending one of our online workshops. Another, a commercial pilot based in Australia, saw our community’s global presence as a way to meet and support local entrepreneurs in the cities he flies to. These stories of global impact aren’t exceptions; they’re becoming the new norm.

Small Checks, Big Impact

When I wrote about our last major milestone of reaching 2,000 Angel Squad members, I highlighted how impactful micro-checks can be for founders. Just a few months later, more and more data points are coming in on how these small investments combined with their networks can be the lifeline for early-stage startups. Recently, a Squad member that works at Nike offered to introduce a portfolio company in the clothing space to one of their execs. One discussion led to the next, and Nike has since become that startup’s biggest client yet. People joke about how VCs try to be “value-add”, but angels who work in specific industries or domains can truly be valuable in opening doors for relevant companies in those spaces. Angel investors catalyze entire startup ecosystems. This is what has made Silicon Valley thrive – its robust angel investing community.

Our Vision Continues

Reaching 10,000 Angel Squad applications is incredible, but it’s just the beginning. Our goal remains to grow to 10,000 Squad members and now we’re moving the target to 100,000 angel investors who can support entrepreneurs globally, regardless of their background or location.

But, for us, each application represents more than just a potential investor. It represents a dream of supporting innovation and of believing that great founders can look like anyone and come from anywhere. We’re not just building an investment community; we’re creating a global network that breaks down economic barriers.

Let’s go!

To everyone who has applied, supported, and believed in our mission — thank you. The future of startup investing is global, accessible, and more exciting than ever before.

To mark this 10,000 application milestone, we’re going to go crazy and give away 30-day Guest Passes over the next 10 days.

To apply for a Guest Pass, simply fill out this Typeform. If selected, you’ll get the full Angel Squad experience to attend our weekly workshops, network with the community, and even invest in startups alongside Hustle Fund.

2000+ angel investors and growing!

I’m super psyched! Our global angel club called Angel Squad, led by Brian Nichols, has reached 2000+ members this past summer across 40 countries! To me, this isn’t just a vanity metric. Angel investors play a crucial role in nurturing startup ecosystems — much more than VCs, so growing and nurturing angel investor communities worldwide is really important to me.

Silicon Valley’s Secret Sauce

Silicon Valley’s long-standing success as a startup hub is often attributed to its weather, schools, and legacy of tech companies. However, I disagree. There are plenty of places in the world with permutations similar to this that don’t have anywhere near the startup density that the San Francisco Bay Area has.

I think, a less obvious, yet critical factor for Silicon Valley’s success is its vibrant Angel investor community. Unlike the common perception that Silicon Valley’s Angels are wealthy individuals writing $25,000 checks at a time, many people invest much smaller amounts here.

For instance, early Uber investors included people who invested as little as $5,000, which became worth $25 million by the time of the IPO! What this illustrates is that angel investors don’t have to invest a lot of money in one go, and finding winners can be life-changing for small angel investors.

This culture of numerous small-scale investments enables a large pool of resources and support for many startups in the Bay Area. Early-stage companies benefit not only from financial backing but also from the introductions and advice that these investors also provide. Such a supportive environment allows startups to thrive and grow.

The Ripple Effect of Angel Investments

A robust Angel investor community can significantly impact a startup’s trajectory. With small checks, startups can secure essential early funding that institutional investors often hesitate to provide. This early support is crucial for the initial phases of a startup, where risk is high, and traditional funding is scarce. In addition, small check investors can often lead to larger checks later by opening doors. One of our portfolio founders at Hustle Fund named Steven Fitzsimmons (Fitz) broke down the anatomy of his seed round a few years ago. His smallest investor (who invested $5k) was the most helpful of all. Small checks lead to both introductions and more checks.

In contrast, many other cities outside of Silicon Valley, despite having either good tech ecosystems or wealthy individuals, lack such a vibrant Angel network. Wealthy individuals in these areas often do not reinvest their money and time back into their local startup ecosystems, which stunts the growth of potential startups in the area. Places like Boston, for example, despite its tech prowess, academic strength, and successful individuals, has lacked for decades a strong Angel community of hundreds of active individuals until more recently with the emergence of active angels from newer successful companies like HubSpot and more. (And I’m sure many of my Boston friends will disagree and say they’ve been actively investing for a long time now, but they are the exception not the rule to the geography :))

Growing Angel Communities Globally

The rise of Angel investor communities in cities like New York and Boulder also illustrate the transformative power of these networks. By fostering a culture where successful individuals reinvest in new startups, these cities have developed robust startup ecosystems. Neither of these cities were previously known for being tech hubs. This model shows that there is no special formula exclusive to Silicon Valley; any city can replicate this success by building a strong, active Angel community.

Angel Squad’s Vision

Hustle Fund’s Angel Squad aims to replicate and expand this model globally. With 2,000 members already on board, the goal is to grow to 10,000 and eventually 100,000 Angel investors. We want to empower entrepreneurs everywhere — not just in the US.

Let’s go!

The journey of Angel Squad is just beginning, but I’m so proud of Brian and team for the progress they’ve made. If we can continue to help great startups globally get access to more capital — to truly have free markets — that would be the dream. Let’s go!

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