A venture firm just said the quiet part out loud: Things aren’t as copacetic in startup land as those sky-high AI valuations would suggest. Lux Capital on Tuesday published a letter it had sent to founders it has funded, urging them to prepare for a slew of business risks. The venture capital firm, which has backed Anduril and Ramp, noted that “signals suggest something is off,” observing that 10-year bond yields had fallen even while stocks were near record highs. That, the letter added, is “sometimes a recession indicator.”
Please join The Information at the New York Stock Exchange on Monday, April 27, to hear from top executives and investors on how the rapid buildout of AI is reshaping tech, finance, and capital markets. Learn more here.
Welcome back!
A venture firm just said the quiet part out loud: Things aren’t as copacetic in startup land as those sky-high AI valuations would suggest.
Lux Capital on Tuesday published a letter it had sent to founders it has funded, urging them to prepare for a slew of business risks. The venture capital firm, which has backed Anduril and Ramp, noted that “signals suggest something is off,” observing that 10-year bond yields had fallen even while stocks were near record highs. That, the letter added, is “sometimes a recession indicator.”
The firm’s suggestions? Founders should extend their cash runway, review their venture debt covenants—lenders’ requirements for maintaining revenue or cash on hand—and scrutinize their analysis of costs, especially if a startup imports goods that tariffs might make pricier.
These are the kinds of memos venture firms blast to founders when a business cycle sours. Venture capitalists issued similar warnings in 2022 as stocks plummeted at the end of the Federal Reserve’s low interest rate cycle, and before that, at the outset of the pandemic.
I’ve been wondering when such warnings would make it into Silicon Valley’s public discourse. As my colleagues and I have reported, there seems to be no limit to rising AI valuations—a trajectory at odds with the crashing prices of tech stocks.
Lux Capital co-founder and partner Josh Wolfe told me he is concerned about “the bubble of AI, which people are all afraid to talk about publicly.” He said many people in the VC industry “privately harbor these very vocal doubts” but keep them quiet because of the upbeat culture.
Wolfe estimated that of AI startups, there are “less than 10 that matter,” without specifying which. He said many should be “rushing to get public as fast as possible” while the markets still have this level of AI enthusiasm. Naturally, two of the biggest—Anthropic and OpenAI—are taking steps to go public, while the third, xAI, is now part of SpaceX, which could raise its initial public offering as soon as June.
Lux Capital has been an active investor in AI startups, including Cognition, maker of a coding assistant; Hugging Face, developer of app-building tools; Applied Intuition, which makes autonomous vehicle simulation software; and Runway, an AI video generator. In early January, Lux announced it had raised an additional $1.5 billion to invest in cutting-edge science and tech startups.
Wolfe is still broadly bullish on investing in startups, including AI ones, and said that despite difficult times there will still be big winners.
Yet he cautioned that “failure comes from a failure to imagine failure,” and he urged founders to protect themselves against doomsday outcomes: “Double-check to make sure that all of your assumptions are not just a rosy scenario.”
AI Agendaby Stephanie Palazzolo separates hype from reality and explains how AI is transforming industries. The 4x/week newsletter details the innovation and disruption happening in AI, from the AI startup funding frenzy to the major technological breakthroughs that will set the agenda for decades to come.Sign up today.
Join The Information at the New York Stock Exchange on Monday, April 27, to hear from top executives and investors on how the rapid buildout of AI is reshaping tech, finance, and capital markets
