Private Markets
Key Takeaways
- AI’s current cycle appears larger than prior tech waves because the digital user base and economic reach are far broader than in earlier eras
- Accel sees real commercial substance in AI, with breakout company growth illustrating that demand is extending well beyond hype
- Some of the most compelling opportunities may be in AI infrastructure and in founder ecosystems developing across Europe and other global hubs
In this episode of the Adams Street podcast, Accel General Partner Rich Wong talks with Adams Street Partner & Global Head of Fund Investments Brijesh Jeevarathnam about distinguishing hype from real traction in AI, which may be the biggest innovation wave yet, and where Accel sees opportunity in the venture ecosystem.
Transcript
Brijesh Jeevarathnam: Hello and welcome to the Adams Street podcast. I’m Brijesh Jeevarathnam.
At a recent investors’ conference in Chicago, I sat down with Rich Wong, General Partner at Accel, to discuss the rapid evolution of the venture landscape in the age of AI.
Accel is one of venture’s leading global franchises, with a history spanning more than four decades and investments in companies including Facebook, Slack, Atlassian, UiPath and Anthropic. Rich has been with Accel for 20 years and is helping to shape the firm’s direction for the years ahead.
Rich explained to our guests in Chicago why he believes this AI cycle stands apart from earlier technology waves. With far more of the world now digitally connected, each new wave of innovation can reach more users and therefore create more value and reshape more industries than ever before. We also discussed where he sees the most compelling investment opportunities, and why some of the most exciting innovation is now emerging well beyond Silicon Valley.
I hope you enjoy these edited excerpts from our conversation.
Brijesh Jeevarathnam: Over the last 20-plus years, there have been a number of innovation trends: internet, mobile, social, cloud. We’re in the AI phase now. How does this compare to what you’ve seen over the last two decades in terms of scale and scope?
Rich Wong: Until 2018, there was never a trillion-dollar market cap company. That was Apple, which, by the way, was creating $70 billion of positive cash flow when it created a trillion-dollar market cap. In this next possibly hundred days, there will be three trillion-dollar companies that will go public that are, by the way, not creating positive cash flow in those three companies. And so it’s remarkable that we’ve been able to go from an environment where today we’ve got 14 trillion-dollar companies—almost all of them are tech companies—that have created that level of wealth.
All of these different waves have created preconditions for the next waves to be much, much larger. When we first met about 20 years ago, there were about a billion people of the 8 billion people on the planet that were connected to the internet. But because of the rise of the smartphone, now about 70 to 80% of the people on the planet are now digitally connected, and because about seven out of the 8 billion people on the planet are connected, they are now all either digital consumers, they can transact, they can bank from a digital form, and so as a result, all these people are now potential consumers of all the innovations that come after, including AI. And so the impact of all the other innovation waves, including what we’re about to go through at the moment, has a much greater economic impact than ever before. We can debate the market cap and the valuation of whether it’s all justified. That’s why the waves are getting bigger and bigger.
Brijesh Jeevarathnam: There’s a lot of steak, there’s a lot of sizzle as well here as well, right? How much hype is there in the AI conversation?
Rich Wong: There’s a lot of substance as well. There’s a lot of direct impact that you’re seeing in terms of the commercial value of these businesses. We happen to be investors in Anthropic. Finishing December of last calendar year, Anthropic had about $9 billion of revenue, which is a remarkable number considering when that company was founded. As of today, they’re at a $45 billion revenue mark.
It’s easy for those numbers to sort of roll off the tongue. That is a remarkable number. To grow $36 billion dollars in revenue in a four-month time frame has never been achieved before. A company that I’ve worked with for about a decade, Atlassian software, for it to grow to about a $6 billion to $7 billion revenue run rate over a decade—to achieve that as a software company is in the top 10 or top 15 of software companies over the history of software. To have that be achieved is incredibly humbling. To have that be achieved in one quarter just sort of hits you in the gut, is the honest truth.
When you look back at Accel, we’re proud of CrowdStrike, Slack, Atlassian. These are companies we’re proud of over our 40-year history, and Anthropic did that multiples of those companies in one quarter. I think that is an example of the substance.
Cursor, another company in our portfolio, is another example. The founders of this company are four 25 year olds today. They founded this company out of MIT when they were 21 years old. They had essentially no revenue two years ago. They’ve just crossed about $3 billion of revenue today, and they are expected to be acquired by SpaceX for about $60 billion once SpaceX finishes pricing its IPO. That is, again, just an absolutely stunning thing to occur in that period of time.
So how much is sizzle? How much is substance? These numbers are real. They’re genuine. This is real impact in terms of the world of coding and software. And so I think there is some level of froth, there is some level of hype, but these numbers are genuine and real.
Brijesh Jeevarathnam: How do you underwrite these companies? There’s a cohort of companies that are a year, maybe 18 months old, and they look like rocket ships. How do you separate the false positives from what could become one of these kinds of companies?
Rich Wong: It’s difficult. Oftentimes there’s no metrics to go on. You’re fundamentally evaluating the reputation of the founder. You’re evaluating how large the space can be, and you’re having to price the valuation of the company purely based on the sense of the space. That’s what early-stage venture capital fundamentally is in the vast majority of times. So you’re essentially having to make a probabilistic bet on the potential.
Once you get into mid- or late-stage venture capital, of course, in those instances you’re able to use some level of metrics. But most of the time you’re having to pick a point on the horizon and make an estimate of what it is a year or two years ahead. Once you make some estimate of the future point, you can use some level of metrics or estimate, but at the end of the day you’re having to pick a point on the horizon to make some calculation in the future. At the end of the day, you have to project, oftentimes two, three years out, to get some rationality in what your pricing point is.
Brijesh Jeevarathnam: How are these founders in AI different than, or similar to, the prior cohort from the other innovation waves?
Rich Wong: The Cursor founders, for example, are quite a bit younger than in previous generations. In the dot-com era, you had a lot of truly young internet founders that had truly never done anything before—Mark Zuckerberg as an example. They’re not quite of that era, but many of them are younger than, say, in the networking era, where people had worked in Cisco or had worked in Google in a previous time frame.
Many of the folks that are coming from the AI era essentially come from very deep math backgrounds, and so many of them have come from PhDs in the math field. So you’re essentially evaluating their research heritage, and that oftentimes is the background they bring when you evaluate their ability to advance their research.
Brijesh Jeevarathnam: Could you pick an example or two of the impact that these companies have for the customer?
Rich Wong: A company like Legora, you’re seeing the ability to reduce the expenses inside legal firms by like 60 to 70%, or, said another way, to improve the throughput per lawyer of 5x to 6x in terms of the amount of throughput they can have. So, said another way, an application like Legora can dramatically improve the profitability per lawyer. The firms that are either going to develop the software themselves or have to adopt it are not going to be able to compete with the firms that are actually using these types of software.
Brijesh Jeevarathnam: As you look at these categories, are there particular ones you’re more excited about, and maybe ones you might be moderating your new investments into?
Rich Wong: Even though the enterprise applications are the most understandable, I think one of the largest areas of investment opportunity are going to be in the picks-and-shovels areas that are harder to understand but are going to be one of the most valuable areas of investment. So specifically, data centers and the neo-clouds are going to be one of the most valuable areas of investing.
So a company that is a public company is called Nebius, that happens to be one of our investments. This is a fascinating story. Nebius is actually a spinout of a company called Yandex. Yandex is originally the Russian Google, so it’s almost as if Google was forced to sell the search engine, and what was left was Google Cloud. So Nebius essentially is now a company that is listed on the NASDAQ, trading, and essentially is all the GPU cloud, or the things that run AI. And so if you are putting in a search in ChatGPT or you’re running a piece of AI, that has to run through a GPU chip that is running on Nebius. The demand continues to rise substantially because of all the demand for AI tokens. This need for data centers and all this AI infrastructure continues to grow dramatically year over year, and we think the growth for all of this picks-and-shovels, all this AI infrastructure, will continue to grow dramatically over the next three to five years.
Brijesh Jeevarathnam: Accel has done something that’s very hard to do. It’s a craft business, and it’s obviously a brand and reputation business. You’ve sustained the iconic nature of the franchise over multiple generations. Could you talk about some of the cultural elements that have made Accel successful for so long?
Rich Wong: We’ve always had more of an inductive, wonky style to the business as opposed to, I’d say, a financial style to the business. And what I mean by that is that we’ve always been technology-first, I would say, as opposed to financial-first. The way oftentimes we build a reputation internally is by studying a technical area that we call a prepared mind and presenting that technical thesis to our peers. And the way you build a reputation is by developing that signature.
So when I first arrived at Accel, it was before the iPhone shipped, before Android devices, and so I developed a reputation around mobile technology. And then I went on to do things like Angry Birds, Supercell, and other forms of mobile investments, and that’s how you sort of rise in the firm, is by building that reputation around a particular area of technology.
And so as other young people come into the firm, kind of like a PhD thesis, you’re expected to develop an area of expertise. That’s how you become known, and you build expertise within the firm and in the industry. The other thing that we do quite well is we often recruit our former founders and CEOs to become partners in the firm. In fact, in our early-stage team today, five out of the seven partners are actually former founder-CEOs of our own portfolio. So they come with their own natural signature or their own reputation, and so a combination of those things I think is what helps build the firm over time.
I think firms ultimately die in the venture world if they don’t regenerate themselves. So it’s really, really critical that firms stay young. These great companies are started by young people, and if you don’t stay within 15 or maybe max 20 years on median of these 30-year-old founders, ultimately I think the firms founder over time if you just don’t keep the firm thinking and staying young. And so we really invest the time to keep the median age of our lead young partners within that 15 to 20 years, and I think that’s how a firm sustains itself over time.
Brijesh Jeevarathnam: You’ve also, over time, expanded presence globally—North America, of course, with Silicon Valley roots, and then in Europe and now in India. Could you talk about how you see the opportunity set in these three geographies?
Rich Wong: It really used to be that almost all the innovation came from Route 128 in Boston and in Silicon Valley, and all that opportunity came from these very limited geographies. Increasingly, with the rise of being able to distribute using social media or being able to distribute using Google AdWords, you could start a company from anywhere and distribute using digital means, and you could deploy using the cloud.
More and more, we saw these great companies coming from Australia and New Zealand and Tel Aviv and Bangalore, and we just see multibillion-, and now decabillion-, and now hundreds-of-billions-of-dollars companies coming from all over the world. You also, truth be told, have a labor cost advantage where, given the cost of engineering and frankly the cost of housing in certain parts of the world like the Bay Area, you are able to hire and scale engineering in parts of the world that you really cannot in parts like Austin, Texas, and you cannot in the Bay Area.
So we, I think, have this unique advantage of being close to communities outside of the traditional areas of innovation, and we intend to be first to access those innovation hubs far from Silicon Valley. We often say that Silicon Valley has become a state of mind, a state of disrupting the incumbents, and no longer just a physical place. And we’re excited to see that innovation occur all over the world.
Brijesh Jeevarathnam: Do you think AI has maybe propelled one or two of these areas more than others?
Rich Wong: We’re seeing in Western Europe and Israel the most. Which was fascinating is that, as I mentioned previously, AI really advantages collections of entrepreneurs that are very advanced math thinkers. There just are clusters of thinkers specifically in France, Germany, and the UK that have taken advantage of a new set of innovations to accelerate a number of companies that did not exist in those geographies before. And so for whatever reason, we’re seeing these new clusters of very fast-growing companies in those three geographies specifically, and I would just add a fourth, Poland for whatever reason. Those three, plus Poland, regions have all of a sudden seen an acceleration in startups that we had not seen even two or three years before.
Brijesh Jeevarathnam: One of the key questions we think about is, I guess, two questions. One is: how does AI impact the new investment thesis in venture? That’s pretty obvious—there’s a lot of AI investments in our portfolio. The second important question is: how do the existing portfolio of pre-AI, maybe SaaS, maybe anything else really, companies get impacted or disrupted by AI?
Rich Wong: There is a SaaSpocalypse effect of AI on some of these companies, and it is quite impactful. But there is a little bit of overselling, I think, to some effect.
But just to comment and specifically answer your question, here’s my quantitative summary of it: I think about 60% of the NAV of the portfolio actually is making the transition quite well in terms of the move toward AI. Fundamentally what’s happening is that our software companies were historically built around managing the workflow. They’re increasingly transitioning to doing the work as opposed to just managing the workflow. And so they’re actually turning AI into a tailwind as opposed to the headwind that it was before, and so you’re starting to see their stock prices sort of reinflect as a result.
So as I said, I think the majority of them—about 50 to 60%—are starting to see a benefit because of AI. I think about 20% of them are not able to actually make that pivot, but we’re able to land the plane because they’re strategically valuable to a number of acquirers as a result. And I think about 20% of them are not able to make the pivot successfully, and we have to park them less elegantly as a result. But in the nature of the way the power law works in venture capital, the 60% of the NAV that’s successful tends to overwhelm positively the 20% that is not doing as well.
Brijesh Jeevarathnam: Can the market absorb the upcoming liquidity potential, and what does it do to venture?
Rich Wong: I think the market has been starved for investing in growth for a long time. There’s been such a scarcity of IPOs, and it’s only the private market that’s been able to participate in this disruption, that I think absolutely I think there’s going to be the desire to buy growth. It just hasn’t been viable by the market for a very long time.
Not everything is going to be priced at the Taylor Swift ticket price, meaning we have a number of other companies that are not as sparkling as Anthropic. They’re not as sparkling as OpenAI. We would love to get those companies public. There are 25% growers with 25% EBITDA. They’re still great companies. They probably should not be priced at the eye-popping prices of an Anthropic, but they’re still very viable businesses that I imagine many of the people in this room would like to own at a reasonable price.
Those are companies that should go public in 2027. They just should not be priced at 30 times revenues. They should be priced at some reasonable multiple. So yes, I do think that the market will, and should, very much absorb companies like that going public, and I think on the reverse, that should very much provide liquidity to the private portfolios that you all hold through Adams Street as private positions.
In answer to the question of how that affects venture capital positions, I think it depends what you call venture capital. I think the reality is that the industry that is venture capital has changed a lot in the 20 years that I’ve been at Accel. We were an early-stage venture capital-only firm when I joined. Now we are a multiproduct firm that does everything from early-stage to late-stage investing.
So for our part, we have largely not radically changed our early-stage funds, but we have done other products that are more mid- and late-stage. So I think firms like Andreessen Horowitz, Lightspeed, Menlo, ourselves—will there be other private technology investment products, and so will the industry expand? Yes, I think that will be the case, but I don’t know that early stage will expand.
What is your opinion, Brijesh?
Brijesh Jeevarathnam: Didn’t expect that. I do think venture returns can be had not just at the early stage but, if done right, in the mid and the late stage as well, which is why I think we are seeing and will see the scope of venture capital expand. Just to think about this briefly, going back to 30 years ago, mid-90s, there were 8,000 public companies in the US, today it’s about 4,000. Mid-90s the market cap of those companies was about $7 trillion, today It’s 10 times that much. it’s $75 trillion. The most valuable company mid-90s was an oil company worth about $100 billion. Today there are multiple companies and IPOs in the trillions, right? Totally different public markets. That has implications kind of upstream, if you will, in venture and where they can access the growth, access the alpha, and compound capital. So that’s a long way of saying, I think, the aperture for venture returns has grown in the last certainly decade plus.
Rich Wong: I come home on Friday in the evenings and I find myself exhausted by how much there is still to learn, and It is generally my day job to be reading this stuff, and I’ve young partners and associates that are trying to feed me the synthesis. So if people feel overwhelmed or that there’s a lot to learn, there is, and I would not let how much there is to learn stop you from learning the early basics, because those of us whose day job it is to try to absorb this stuff, we also feel overwhelmed. A lot of the capabilities that are in the press today have only existed in some cases for 60 days, and even the most advanced, you know, these capabilities have only been in existence in cases for six months, since essentially the Holidays, since the new year, and so people in Silicon Valley like to throw it around like everything’s been around for years. It has not. It’s really only been very, very recent. And so I just wanted to share that from a time scale context, because it’s all happening very rapidly, but it’s not late in any sense. It’s all very first inning in terms of what’s happening.
Brijesh Jeevarathnam: I Just want to say Rich, thank you for your partnership.
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