The Pragmatic Engineer - The state of VC within software and AI startups – with Peter Walker

Episode Date: August 6, 2025

Brought to You By:•⁠ WorkOS — The modern identity platform for B2B SaaS.•⁠ Statsig ⁠ — ⁠ The unified platform for flags, analytics, experiments, and more.• Sonar —  Code quality and code security for ALL code.—In this episode of The Pragmatic Engineer, I sit down with Peter Walker, Head of Insights at Carta, to break down how venture capital and startups themselves are changing.We go deep on the numbers: why fewer companies are getting funded despite record VC investment levels, how hiring has shifted dramatically since 2021, and why solo founders are on the rise even though most VCs still prefer teams. We also unpack the growing emphasis on ARR per FTE, what actually happens in bridge and down rounds, and why the time between fundraising rounds has stretched far beyond the old 18-month cycle.We cover what all this means for engineers: what to ask before joining a startup, how to interpret valuation trends, and what kind of advisor roles startups are actually looking for.If you work at a startup, are considering joining one, or just want a clearer picture of how venture-backed companies operate today, this episode is for you.—Timestamps(00:00) Intro(01:21) How venture capital works and the goal of VC-backed startups(03:10) Venture vs. non-venture backed businesses (05:59) Why venture-backed companies prioritize growth over profitability(09:46) A look at the current health of venture capital (13:19) The hiring slowdown at startups(16:00) ARR per FTE: The new metric VCs care about(21:50) Priced seed rounds vs. SAFEs (24:48) Why some founders are incentivized to raise at high valuations(29:31) What a bridge round is and why they can signal trouble(33:15) Down rounds and how optics can make or break startups (36:47) Why working at startups offers more ownership and learning(37:47) What the data shows about raising money in the summer(41:45) The length of time it takes to close a VC deal(44:29) How AI is reshaping startup formation, team size, and funding trends(48:11) Why VCs don’t like solo founders(50:06) How employee equity (ESOPs) work(53:50) Why acquisition payouts are often smaller than employees expect(55:06) Deep tech vs. software startups:(57:25) Startup advisors: What they do, how much equity they get(1:02:08) Why time between rounds is increasing and what that means(1:03:57) Why it’s getting harder to get from Seed to Series A (1:06:47) A case for quitting (sometimes) (1:11:40) How to evaluate a startup before joining as an engineer(1:13:22) The skills engineers need to thrive in a startup environment(1:16:04) Rapid fire round—The Pragmatic Engineer deepdives relevant for this episode:—See the transcript and other references from the episode at ⁠⁠https://newsletter.pragmaticengineer.com/podcast⁠⁠—Production and marketing by ⁠⁠⁠⁠⁠⁠⁠⁠https://penname.co/⁠⁠⁠⁠⁠⁠⁠⁠. For inquiries about sponsoring the podcast, email [e-mail]. Get full access to The Pragmatic Engineer at newsletter.pragmaticengineer.com/subscribe

Startups are hiring far fewer people than they used to. In January of 2022, companies on Karta hired 73,000 people. In January 2020, they hired 40,000. In January 2024, they hired 32,000. And in January 2025, I think it's going to be like 20,000 or so. I am not one of those people that says AI is not going to take jobs. I think it kind of already is. How are changes at venture capital impacting startups and scaleups?

And what does this mean for software engineer? Peter Walker is the head of Insights at Carter, and Carter is used by more than 50% of all U.S. startups to record funding and equity-related data. Peter collected over a dozen interesting data points and charts about what is changing with tech startups. Today, we talk about how the number of startups getting funding has been selling dropping, even though the amount of VC invested has remained constant. Data showing the impact of AI and how it might result in smaller teams and more solo founders.

What to look for before joining a VC-funded company, and what can help you thrive at a startup. If you work at a VC-funded company, plan to join one, would want to become an advisor to one, or are interested in venture capital dynamics, this episode is for you. If you enjoy the podcast, please subscribe to it on any podcast platform and on YouTube. So, Peter, welcome to the podcast. Thank you so much for having me. This is awesome. It's really good for you to be here. Let's start with the venture capital ecosystem, how healthy it is, and how can we think of health. As we go, let's just also talk to about some of the, I guess, basic terms that, you know, like we commonly use. We're talking about venture capital in the U.S. that is a venture as a subset of private equity.

It's the standard things that people are familiar with of all these wonderful investors going around finding diamonds in the rough young companies that need capital. Hopefully those companies then shoot up in valuation and they become the public companies that we love today. So, you know, all of, I think all of the MAG 7 at one point or another took venture capital. And the Macs 7 is the seven biggest tech companies, right? Is it Microsoft, Apple, Google, Google, Facebook? Invidia. I think Mango is the new one where you talk that includes Nvidia as it. The acronym always keeps changing.

Yeah, it used to be Fang, even though it's now meta and off Facebook. But yeah. Exactly. Yeah, they're screwing with the names a little bit. So we got to keep changing the acronym. But those big seven tech companies are good examples of what venture capital is trying to do. They're trying to find really, really young companies. give them a slug of capital and then watch their valuations expand dramatically over time.

So VC for a while, it kind of felt like venture capital was the quote unquote default way to build a startup. That's never actually been true. There's always been many, many more companies that don't take VC versus the ones that do. It's just a lot easier to talk about the ones that do take VC because as you raise money, there are sort of checkpoints along the way. So you get seed rounds and series A rounds and series B rounds, whereas if you don't take any VC, nobody really knows where you are as a business. And so it's a lot easier to talk about the venture-backed businesses than it is about the non-venture-backed ones. And as someone who has been embedded in the VC world, what do you think the main differences are, just thinking about as a software engineer or as an employee

thinking about joining a VC-funded company versus a non-VC-funded one? What might be something, I know it's hard to generalize, but still, let's try, right? Like, what might be differences in terms of culture, pace, compensation, those kind of things. I'd say it actually boils down to one key difference, which is venture is in the business of funding growth and not just regular growth, but expansive growth. So any sort of VC-backed business will, by definition, be pushed by their investors and should have the outlook that we are going to grow super fast. So for instance, the recent examples of the AI companies like Cursor and others who are just ballooning up through different ARR metrics faster than basically any companies we've ever seen, those are perfect candidates

for venture capital. If instead you have a business that's growing 20% a year, they're making money, it's a great business, but that isn't a candidate for VC because it doesn't project to have the growth rates necessary to make these bets worthwhile for the investors. And that obviously has downstream impacts to compensation, that has downstream impacts to what the company is focused on, you know, the pace of the actual work. the expectations, both from the board and from the founders. There's a lot of changes that happen when you're beholden to investor expectations

versus you are just building for yourselves and for your customers. Yeah, I think, you know, like having worked at Uber at its craziest growth time, I was there from 2016 to 2020, and I worked at companies that might have had either venture funding or some of them just didn't. Like, I think one of the things that I found is at least at a very high growth startup, like a VCIRF that is actually growing, it felt kind of very exciting slash stressful and also a bit irrational. And by this, like at Uber, like I remember we had an outage in India. Some of our payments went down and we did a post-morto of like what was the damage, right?

Like how much money did we lose? And the engineer said like, actually we saved the business a bunch of money. I'm like, what do you mean? It's like, well, on every ride, we lose an average of $2 in India because we're in growth phase. Therefore, you know, we miss 50,000 rides. We saved like $100,000. And I was like, hold on. Like, well, actually, that's kind of true. And this thing would have never happened at another type of company. And, you know, like, I think you're right.

Like, it all goes back to growth. And also, I feel it's a mindset because sometimes growth does mean irrational things. For example, we like grew the business knowing we're losing a lot of money. Like it felt painfully much. But in the end, I look at where Uber ended up. And yeah, it worked out for them for, for, for the business. that specific category. Yeah, it's a great point that there's this inherent tradeoff oftentimes, although AI is maybe starting to challenge this, between profitability and growth. So if you are

pouring every single dollar into growth, oftentimes you're doing so on a unit economics basis unprofitable ways. Whereas a normal business, if you think of, you know, a normal retailer or a restaurant or whatever, they would never consider, oh, we need to grow so fast. that we are actually losing money on every time someone comes in and orders dinner. That doesn't make any sense. But the VC model is about using capital at the beginning, funding incredibly high growth rates, and then reaping the rewards of those growth weights because the company has gotten so large that they dictate what's going on in the market.

So I think actually Uber is perhaps the ER example of when venture capital works well, because now Uber is a very profitable company, still growing very, very quickly. there are a lot of examples, and this is where people kind of get mad at VCs, where a company will take venture capital, and then it'll turn out that there just wasn't the growth rate there. It wasn't possible to grow as fast as the VCs needed. So the investors go, eh, whatever, we're going to go to our next bet, and the founders and employees are left to say, well, we have to build a company out of this thing that is no longer, you know, the favored child of these investors. And so there's sometimes are those sort of, of misaligned incentives between investor and founder. This episode is brought to you by Work OS. If you're building a SaaS app, at some point your customers will start asking for enterprise features like Sammel authentication, skin provisioning, and fine-grade authorization. That's where WorkOS comes in, making it fast and painless to add enterprise features to your app.

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Happy building. I think we've seen examples. And yeah, it can be sad and also like a bit tragic as an employee. But I guess it's, I think it's just healthy to know, you know, what to expect. Because again, it's, I feel it's like, you know, it's either go to the moon or crash back on underground. So we're going to focus on venture capital going forward with VC-funded companies. You know, this is a sector that's a very interesting, exciting. and I'm looking forward to learning more on what we can learn from data.

So we have some interesting data that you previously share that we're going to get into. The first one is how healthy is venture capital? What do we see here on this interesting chart? So I think when we talk about the health of VC-backed startups, a lot of time by health, we kind of default to how much money is being raised by these startups. And if you just go on that basis, VC looks very wrong. robust and healthy. But those are typically very, very power law outcomes, meaning there's a tiny cohort of companies that actually end up raising a ton of the money. And right now that's,

you know, we all can list them Open AI, XAI, etc. Who are raising billions and billions and billions of dollars. If you instead look at just the number of rounds raised instead of the amount of capital in each of those rounds, the picture looks a little bit less healthy. You know, early stage startups, so seed in Series A startups, we saw an average of 7.4 rounds per day on Carta so far in 2025. That is about half of where we were thinking at in 2021, and it's gone down every single year since 2021. So this means just fewer companies are raising. It might be bigger rounds or whatever, but like, you know, that sounds bad, right? Exactly. Fewer companies are raising. Now, why are fewer companies raising? There's a ton of reasons behind this.

I think two fundamental ones. First, everyone, and by everyone, I mean all the VCs are looking around and going, wow, the world has changed. I used to think that a company growing 100% a year was a great company. Now maybe I'm looking for 200% growth a year or 300% growth per year when I used to look for 100% because they have these examples of cursor and other places where these companies are blowing past the old benchmarks. So that's number one, is like all the speed, the speed just got much, much faster and companies are having to prove more and more.

The second reason, and maybe this is a good thing, is there are a cohort of companies who are looking around and saying, maybe we don't need to raise venture capital. Maybe we are going to build this business and try to get to profitability and then have a lot of options. Maybe we take outside capital, maybe we continue to bootstrap, whatever it is, but we are not going to make VC the default way we build. And that I think has definitely, especially in Silicon Valley, that did not use to be a very common thing. And now it's getting more and more talked about in the ecosystem.

I mean, this last one, I think, is kind of a good thing, right? Because I feel people forget that as long as you keep raising VCU are dependent on the next funding and also investors start to have a lot more say. I think we saw at Uber. Again, an extreme example of when investors step in and they want to fire the CEO or they're arguing about it. And then it happens. You know, like if the more you stay in charge, like from a founder perspective and from an employee perspective, that sounds pretty, pretty nice. If the company is in charge, you know, they can decide what we're going to do and not

not have to listen to external forces. But yeah. Exactly right. Yeah. Most companies, let's be honest, most companies that are founded, even tech companies, probably shouldn't take VC. It's a specific kind of company that can put that capital to good work. And that's why so many people pitch VCs and a lot of them get knows.

What can we talk about hiring? If you're talking about how AI has impacted startups, I think this is the single biggest trend from our data. And the trend is this. Startups are hiring far fewer people than they used to. So if we just look at this showing a chart here with hires and departures, but if you just focus on the black line that is hires, in January of 2022, companies on Karta hired 73,000 people in a single month.

That's a very high number. In January 2023, they hired 40,000. In January 2024, they hired 32,000. And in January 2025, I think it's going to be like 20,000 or so. And just to confirm, how do you track the hires? Do people record, like how many people they have, or is this equity allocations? Yeah, so it's equity allocations. So if a new hire is granted equity, we do now connect into many, many, many HRIS systems as well. We help people actually, you can compensate really effectively using CARTA to say, here's what the average engineer is making at level five in San Francisco and salary and equity. We have fantastic benchmarks on that.

So that's where this data comes from. Nice. So to be clear, they could be, this data does not include part-time or consultants who do not receive equity. Yeah, but it's comparing Apple to Apple. So we know that startups, you know, 10 years ago and five years ago, they gave equity to their key staff. For example, tech startups, actually modern startups give to all full-time employees. Tech startups give to all tech employees.

So it's safe to say, you know, there's a lot of few people being hired as full-time people will get equity. And that's really the key is that, okay, if you look from 22 to 23, that massive decline in hiring, is that AI? Probably not. That's mostly just people having less funding. Less capital means fewer hires. Easy.

23 to 24. Also true that funding is a little bit harder. So that's definitely a capital question, maybe a little bit of AI. But 24 into 25 and 25 into 26, we are just flooded with stories of companies that say, look, we have an engineering team of 10. Instead of moving that to an engineering team of 11, each one of those 10 engineers is just far more productive than they used to be because of AI tools. So we don't need to hire. And so that, sort of expanded across many, many companies over time, I think is starting to be an explanation that makes a lot of sense to me. I am not one of those people that says AI is not going to take jobs. I think it kind of already is. Yeah, well, I think the thing with AI that we don't yet have as much

data, but, you know, Carter will probably actually have a lot of data. The question seems to be not if teams will be smaller and they'll do more. And actually, we're going to get to that in in just a second, but whether we're going to have more startups, more smaller startups that are each doing more. I don't think we have any answer, but I think Carter is uniquely positioned to later, you know, we might get data in a year or two with startup formation and how that's trending. But speaking of teammates and a number of people, what are we seeing here? Yeah, so you're totally right. My hope is that there are more startups, oftentimes smaller teams moving fast. So that would kind of eclipse the down.

turn in hiring. But if you just look at the data as it is today, the pattern is, again, very clear. So if we just focus on this Series A column, in 2022, on the day that you raised your Series A round, companies on Carter were about, had about 20 to 22 full-time employees. Today, it's more like 15 full-time employees. And by the end of the year, I think that's probably going to be more like 13 or 12. So from 22 to 12, employees working at a series A startup on the day they raised that round. So this idea that small teams are all the rage and people are trying to keep headcount low and grow as fast as possible just with the people that are currently in the business, I think it's very true. And a lot of it can be wrapped up in this single metric that everyone

across Silicon Valley is now talking about, which is ARR per FTE. How much revenue do you have for each employee that works at the business as a measure of how capital efficient you are, that is a metric that many, many, many more VCs are asking startups for earlier and earlier in their life cycle. So is this new? When did it start happening? And what used to be the benchmark five or 10 years before? It's not new necessarily in that it's always been a metric that people care about.

What's different is the emphasis. So if we go back to 2021, literally. The point was grow as fast as possible. And if that means hire a bunch of people, hire a bunch of people. We don't actually care that much about the capital. I guess metrics were like a monthly average users, total number of users, that kind of stuff, right? It wasn't, it was about revenue. Or just growth about ARR change.

Yeah, totally. You know, I remember 2020 on GitHub stars was still a thing, which is kind of funny. Exactly. Literally, just like any metric that you could choose that shows explosive growth, that's what we want. And then, obviously, as funding declines, businesses and their investors get a lot more concerned with how much money are you burning? What's your cash burn per month? And so you're trying to remove that. And now we're in this place where, again, I think this goes back to the examples across the industry. If it's possible

to build a company that has $100 million of ARR with 20 people, that's a more profitable, more capital efficient company than the same company with 100 million ARR that has 200 people. So this is data from Silicon Valley Bank. So this isn't from Karta, but they're Silicon Valley Bank. Still an ongoing concern, I promise in Silicon Valley. I know they had a bad weekend.

But they're back. And this is data on how much ARR, so annual recurring revenue, does a startup have at Series A? And in 2021, the median startup had about a million, million and a half dollars in ARR. An ARR annual recurring revenue,

which is, it doesn't mean, that you made that much last year, but you're on track, assuming, you know, you just keep making what you make. Exactly. Exactly right. And in 2024, it's nearly $3 million. So it went from 1.3 or so to three.

And the high end, the upper quartile, you know, the companies that are doing very well, exploded even further. I mean, the companies right now on the 75th percentile for ARR have about $7 million of ARR at Series A. which is like six time as much in two years. It's wildly high. And so that's what investors are looking at. They're going, what are going to be the generational companies of the future? Well, if there are companies that are growing at this pace, you know, again, we get back to that original point. Okay, growth just doesn't cut it anymore. The metrics have gotten a lot higher. I think this is just something really important for people working at BC fund companies to just understand. and also just to categorize their own company accordingly, you know, you probably should have access to how much revenue your company is making, and you'll know how many people there are.

You can divide it and you'll know that, I mean, based on this, you know, if we're seeing the Series A companies oftentimes have 15 people with 7 million ARR, that's about $400,000 per employee revenue generated, which is wild because, you know, like a compensation or just the base salary of people, I mean, you have some other costs, But that might even push some companies into profitable category if they don't have high infrastructure or other costs. Exactly right. I mean, and that profitability question is one that's coming up a lot more frequently now.

It's always a debate about how much this is actually the core question across all a venture. It always is, which is how much money do you need? How much money do you need to grow to be the company at the scale that you want to be? And before AI, I think it was pretty well established that if you raised more more, money, you could use that money to grow faster. Yeah. And now it's the question of, well, if we don't raise that money, can we still grow as fast as if we had raised it?

And there's a lot of startups trying all sorts of different ways to figure out, maybe we can get to profitability at Series A, which is very, very early on. And then if we're profitable, we control our options. And we can fundraise if we want to, but we don't have to because we're a profitable business. How important are valuations? And by the way, what does price seed mean? chart, we have price seat series A, series B, series C. I know what seed round is is the first,

typically the first time when you invest, you might have an idea or you might have a product already. What is the price seed? So in this case, we said priced seed round in, to distinguish it between a seed round that is done on priced equity, which is the normal, you know, you get down, you sit in a room with an investor, you come to an agreement on valuation, which means every one of the shares of your company has a price. You have a price per share. Instead, you could raise a seed round, and this is happening more and more these days, on safes, simple agreements for future equity. And these are this new-ish, probably about 10 years old at this point, instrument that was popularized by Y Combinator. And the safes are actually pretty fantastic. They're this weird

thing that doesn't exist basically anywhere else in finance. And the document is very simple. It goes, I'm the investor. I'm going to give you the founder some money right now. And you're going to give me equity in your business at some point in the future. And that seems odd. Like, why would an investor want that deal? And it basically comes back to the idea that valuing, put in an actual dollar value on the equity of a very, very small, young startup is basically impossible. You don't know where this company is going to go. You don't know how fast it's going to grow. This is an idea. It's a bet. It's not a real company quite yet. So the safe is great because the founder gets money to build today and the investor gets the promise of equity if things go well in the future.

So that's the distinction between a price round and a safe round. And specifically for why, commentators, I understand, they say, we'll give you half a million dollars in, I think, different chunks in the future, next time you raise or the first time you raise, we would like 7% of your company at whatever the valuation that might be, right? Exactly. So they actually have two safes each, yeah, little chunks of capital, but most of the deals boil down to we're going to give you 500K for 7%. And then we're also going to be incentivized on the upside if you do really, really well.

So everyone or a lot of people in the ecosystem look at Y Combinator as the leader in early, early stage startups. They have a fantastic brand. And it's an accelerator program that hopefully takes your business from idea stage, maybe a couple customers to a really significant business in a very short amount of time. So when we look at YC, they definitely play a role in making all of these things more popular. Like if YC does it, other investors are likely to do it. What do we see in the pricing change of valuations?

And how important or unimportant is it how higher low evaluation is? Because I have like two kind of thoughts here. One is I'm just thinking myself as a founder. Let's just, you know, let's say you're a software engineer, you became a founder and, you know, you're hoping to make it big one day. You're raising a seed around. You have an idea. And, you know, let's say you raise up like.

like $20 million valuation. I'm just telling you something. Like, I don't know, you raise half a million dollars. And you have the idea. Then, you know, the idea starts to work out. You get customers. You're going to raise a series A to scale up that idea because now, and then you're going to raise it, let's say, $100 million or something like that.

And then a series B, let's say, 200, a series C, see higher and higher. You know, clearly there's a danger of, like, raising it too high because at any point in time, you should have, like, if you're, if you play your cards right, you might have the option of being acquired if you're still cheap enough. if the business slows down, et cetera. And if you're overpriced, that's not great because your investors might not want that. My question is, just first question is, why is there any incentive to raise it a high valuation? Like, would it not make sense to keep raising it a low valuation?

Because that will give you a lot of exit options. And, you know, if you ever go public, you'll be worth whatever, you know, you're worth, right? Yeah. I mean, you've laid out a very attractive pathway to some founders. However, it does miss a lot of the emotion. that happens with early stage startups, which is it's kind of nice to sit around and say, I am a $50 million company. I am the founder of a $200 million company.

And that whenever people say that, it is referencing the post-money valuation that is given to a startup by investors. So actually, in times of exuberance, a lot of people will see valuations start to skyrocket because there's so much excitement about what this company could be in the future. So let me put a couple numbers on this. At seed stage right now in the U.S., the median valuation on CARTA is about $16 million pre-money. And pre-money means that? Pre-money means the valuation of the startup before the investment.

Post-money is just that number plus however much money you raised. Because obviously the cash is still cash, so you can just use it as dollars. So if you raise a $3 million round on a $16 million pre-money valuation, that means your company is worth post money $19 million. Yeah. That's expensive. I mean, that is a pretty expensive seed stage company.

It's actually more expensive than the seed stage companies even were in 2021. Not accounting for inflation. So there's some differences there. Yeah, because 2021 was the hottest market so far. 2021 was this confluence of things that made it incredibly frothy,

the way that we talk about it. That's zero interest rates for a decade, the pandemic surplus. You remember all those companies like Peloton, etc., the digital pull forward. Like no one was going to ever leave their homes again. So all the digital companies are going to make tons and tons of money. Zoom, great example.

All that stuff was happening in 2021. It was also the best job market ever for software engineers. You could like double your compensation just by going out to interview. It was ridiculous. It's never been as good sense. Exactly. Yes. Don't compare yourselves right now to your friends who got jobs in 2021 because there's probably

fewer offer letters available to you, no doubt. So that was all the frothiness. And then we had 2022 where there was. was a downturn, 23, another downturn. People got, you know, interest rates changed, all this stuff happened. And then in the middle of that downturn, the launch of ChatchipT. And so you had a downturn inventor plus a boom in AI. And so it's kind of, that's what's showing on this chart right now is AI companies in particular have caught this new hype wave and everyone is very excited about their prospects. And the non-AI companies are stuck kind of in the middle of a downturn.

And so it can be really confusing, depending on what company you're talking to, venture is either never been hotter or feels really, really cold. Okay. This is really useful. And it's nice to see it in the data. Like I feel there's feelings. And I think there is this feeling in general that if you're for software engineering, if you are an AI engineer, which means you're a software engineer who has built LLM integrations and you're actually very much in demand. But if you're a full stack engineer who has never touched AI or and even though you're really good at your job, you just see a lot of your job offers, which I think it ties back to a lot of these

things, right? It ties exactly back to that. And I would say for the engineers listening, like that pattern is mirrored across every part of startups. If you're a marketer, if you're a business person, if you're a salesperson, if you are in an AI company or you have AI experience, it just is a very different feeling right now in the job market, etc. rather than if you if you're not. So engineers shouldn't feel like they're, you know, being singled out here.

It's kind of true across the board. We talked about like raising things, raising rounds. Then there's this thing called bridge rounds. And I have heard bridge rounds. So some of my friends and people I knew in 2021, they started, they started a non-AI startup, raised, you know, seat funding of, let's say, $2 to $3 million. And what I started to hear from them about a year ago is we're not doing that great. We're hoping for a bridge round. What is a bridge round? So a bridge round is a bit more capital, typically given to startups by people that are already investors. So you raise the seed round and then the same people that you raise that seed round from, you go back to them and say, look, we couldn't get to Series A the way that we thought we could. We need a little bit more cash today so that hopefully we can then eventually get to Series A. Maybe it'll take longer than we expected, but we still think we're a good bet.

So that's a bridge. Bridges are really interesting. So, you know, in an ideal path, the startup goes from C to A to B, they're crushing it. Everything's great. They don't need any bridge capital. On a bridge round, you kind of know, hey, this company didn't do exactly what I thought they would, but maybe I still love the founder. Maybe I still believe in the business.

So I'm going to give them a little bit more capital. Unfortunately, our data shows pretty clearly that bridge rounds are not usually good bets. You know, they, the percentage of companies that make it from a seed to a series A that had to do a bridge in the middle is much lower than the ones that didn't have to do a bridge. And that's kind of obvious, right? You wouldn't be asking for more capital if everything was going great. But there's also distinctions within bridge rounds. So there are sometimes bridges that are done just as a normal round. You get a new price per share, et cetera.

And then there are some bridge rounds that are just done on safes or convertible notes, which are different funding instruments. which basically just kick the can down the road and nobody has to make hard choices. Early stage startups, I think this is potentially the biggest thing for engineers to keep in mind is you can kind of get lost in the excitement and a couple rounds of funding that look fantastic. The vast majority of early stage startups do not work out. It's still most likely to go to zero. So when you're thinking about the equity, when you're thinking about the job operations, you know, you might look at these gigantic equity packages and get really excited about owning

1% of this company. The likelihood that that 1% ever becomes real cash is very low. So go into it with that expectation. This is not working for Google or meta. That equity isn't necessarily going to be worth even $1 in the future. Yeah. And then I see the data is really interesting here. If we look a little bit closer, if we go back to the bridge round, in 2020,

About 33% of price bridge rounds worked out. So from Seed, this company did get to Series A after they got extended. But then this dropped in 2021 to 16 and then the 2022 to 8%, which means it drops like four times, which kind of suggests to me that in 2021, the market was probably pretty good to raise another round again. But I guess what the data tells me is like it's just probably good to be realistic. If you're at a company that raises a bridge round, again, it might change with if you're an AI startup and so on. But, you know, like as per the latest data, there might be a roughly 8% chance that your company will make it to seed and probably 92% or 91% that it might fold. Again, these are just numbers.

But, you know, if I was an engineer, that will be a cue for me if my company is reading your bridge round. Obviously, you know, see how things could work out. But maybe take my optimistic hat on and just start networking a little bit to think about like what next in case. Because as you say, you know, startups are pretty risky, especially. the early stage. 100%. Look, there's a lot of signals around startups. And this is good and bad, right?

So in addition to a bridge round, there are these things called down rounds, which just mean any time a company raises at a lower valuation than what they raised that before. And instinctively, that shouldn't be that big of a deal, right? Like, Nvidia is worth X today,

and tomorrow it might be worth a little bit less. Like, that's a public company. We know everything possible about Nvidia, and it moves up and down up and down. So of course, private companies with whom we know far less about those actual businesses, they would also probably move up and down. But in culturally, it doesn't really work like that. Like taking a down round is oftentimes this quote unquote admission that things are not working well. And so much of startups is optics and like trying to look like the rocket

ships and trying to manufacture excitement, not in a bad way, but just because there's so little information available. And so like a down round can be really challenging for founders because they got to go back to their employees, their engineers, and say, we are worth less than we thought. And when they do that, a lot of the engineers might think, okay, well, maybe it's time for me to dust off my resume. Yeah. And I guess this kind of answers. We talked about how to price rounds and you were telling me it's really tempting as a founder to say I own a $50 million company or $100 million company. But I guess as a founder, especially, you know, let's say a lot of founders,

X software engineers, you want to keep in mind that you want to price it so you can go on without a down round, even, let's say, if you don't grow that fast. Because I can kind of see it. Like, it kind of sucks as an engineer to say, we work for a year on this. We have a lot more things.

We've learned a lot more. Our product is better. We have more customers. And how we're worth less? Like, how does that make sense? How does that possible, right? And so two points at one, it brings up that classic scene in Silicon Valley,

the HBO show, where, you know, they're at the bar and one of the founders is talking about, wait, no one told me I could take less money or no one told me I could take a lower valuation. Oh, my Silicon Valley is so good. It's a documentary. Like, it's absolutely amazing. And the other thing in that is, yes, founders who are more realistic about their valuation jumps can often, like, keep moving forward in a way that's difficult. But the rest of the market is also moving.

So this is why, you know, you look at the years 2020, 2020, 2021, 2022. you know, some of those companies were probably doing really well in 2020 and then 2021 hit and there were companies that were doing even better than them. So yeah, you're a good company, but if you're not the best company that that Series A investor saw that quarter or that year, then you still might not get funded even though your business is doing well because it's always in comparison to the rest of the pool of startups. Yeah. I think in tech, there were a few years where it was easy to get comfortable to get used to, you know, all the startups started to become a little bit the same.

And I guess, you know, AI switches this up and it just reminds us that like, hey, you know, like it's a competition. It's fun and exciting. I mean, I think that's a good way to look at it because otherwise you're going to be depressed about all the change. 100%. And I'll make a little bit of a plug here. I think working at startups is absolutely like incredible.

I couldn't imagine not working at us. Card is the biggest place I've ever worked by a lot. So after Card, I'm definitely going to go back to some place. smaller, but it's not necessarily, I'm sitting there going, this is a compensation maximizing move. It's a responsibility maximizing move. Like, you'll just have much more agency to build the things that you want at a place that is 200 people versus a place that's 2,000 or 20,000. Yeah, there's this really good quote of which an anonymous VC called startup L Jackson about 10 years ago. And he wrote an article saying how to get rich in like, I think, two.

or three simple, two or three simple steps. And it was like step one, get a, get a job at a, at a big tech, step two, work there for like 10 years. And then he goes on to do the same thing and to say what you just said, which is at a startup, you're not going to maximize your compensation. He said that you're going to, you said responsibility. He said you're going to maximize your learning. And he set up for a lot of things, including a really high paying job in the future future, more responsibility or a spot on the next rocket ship. you know, like Open AI when they were small, I'm assuming they mostly hired people who work at startups.

Yes. Not big companies. And, you know, like that helps. Would have been nice to join, you know, five or six years ago at Open AI. Definitely. Yes. That was a win. So we're in the middle of summer.

And you posted a very interesting thing just recently. Can you raise VC in the summer? You know, people go on holiday at least at companies. What is the day to say? Because this is pretty timely for this summer and also for next summer. Yeah. So this is a funny one. because, you know, there's a lot of, it's very easy to, you know, take shots at VCs because

they're the ones with the capital. And if you're a founder and they're not being, you know, you're not having a good time raising deals. Like, it's an easy target, no problem. And then there's a stereotype, of course, that all VCs are incredibly wealthy. And then they spend July and August on yachts or at Burning Man. That's what they do in July and August. So like, don't even talk to me. Don't, don't hit my email box in those two months. Our data shows that's not exactly true. you definitely can still raise rounds in the summer. And also, by the way, the vast majority of VCs are not these super wealthy people. They are emerging managers who have small funds. And they're effectively building their own businesses, just like founders are building theirs. So respect to those emerging managers. The data shows that you can raise money in June, July, and August. I would definitely say, so this data that we're showing here is by the date that the deal was actually signed. So obviously, you're not necessarily what to do. announced, right? That can be different. Totally. It's not when it's announced, which is an advantage of Cardas data set because we have the actual documents, but it's also not when it was negotiated. So you're probably negotiating that deal for a month or two before it's signed, right? So if I were a founder, I would probably not kick off a fundraise and just announce that we are fundraising in late August. But if you're already in a deal cycle, if you're already talking to VCs as summer hits, it's not like they don't answer email, right? They will do those deals. They will start.

They will keep signing deals. And then you can see it dips. Actually, the worst month for signed deals across the board almost always is January, which kind of makes sense. Like, people want to get all this stuff done before the end of the year. Then they kind of take January to recuperate. This episode is brought to you by Sonar, the creators of Sonar Cube, the industry standard for integrated code quality and code security

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So join millions of developers from organizations like Microsoft, Nvidia, Mercedes-Benz, Johnson & Johnson, and eBay, and supercharge your developers to build better, faster with Sonar. Visit sonar source.com slash pragmatic security to learn more. And it's so interesting to look at this data. I'm just looking at 2023 and 2024 just because they're relevant, but just taking in mind that there's a negotiation leading up to this, you know, deals signed are super low in January,

pretty low in February, and they're also pretty low in September. which suggests to me that in the previous month, you know, negotiations are not really happening, which, you know, if the deals are signed fewer in January, in December there were fewer negotiations. If in September there's a drop, because probably in August there's not as many.

But the other thing that stands out to me is in April and December, wow, those are like popping. And also in July, which kind of suggests that like in March, you know, in the spring, a bunch of deals comes together. In November, there's this mad rush following to like close deals. And curiously, in June, beginning of the summer, there might also be. Really interesting to work backwards from this data.

Yeah. And it's, you know, the big question that comes out of this is how long does it take, right? How long should I expect to be negotiating? Yeah. And that is highly variable. If you are, let's use the wild example, if you are Sam Altman, you can, you know, you can have a billion dollars at your door tomorrow morning, no problem. If you are not Sam Altman, what's happened, especially in the last year or two,

is that due diligence in deals, the actual research that the VC does to make themselves feel comfortable about giving your company money, that does seem to be taking longer and longer. So they're asking more questions, they're interviewing customers, they're going through your financials in a more close quarters way. So the diligence, I think, has increased from VCs as the number of rounds has decreased. So it does take a little bit longer than it used to. Again, just thinking as an employee or as an engineer working at a startup, especially at early stage, I guess it could be smart to ask questions or keep the tabs on how much money your company has and know, you know, when the company might, and figure out what the burn is, basically how much it's spending per month. I guess in smaller

companies, this should be open at least, and then work your way backwards. Like, you know, again, you can get some red flags. A famous example is fast, which went bankrupt, unfortunately, so one-click checkout. A lot of staff was really caught off-guard, by suddenly the company shutting down operations because it ran out of money. But if you would have had access to this information, or I think that company didn't disclose it for some reason, but again, they could have worked a bit backwards

and again, do these probably models of like, hey, you know, this is a bit higher risk. Let me look around. Let me answer some recruited messages from elsewhere. Totally. That's a, I mean, it's an interesting concept, which is how transparent is the founder with these sort of metrics.

I guess you could make a case for or again, you know, extreme transparency, depending on where you sit in the business, etc. But I think overall, one of the indications of a great founder is their willingness to educate and be transparent with their underlying employee base. So if you're at a company where it feels like everything is incredibly secret and there's all these rumors, but no one really knows what's going on, that's a cultural thing. That comes from the top, generally speaking. I think this is also why it can be attempting to go to an early stage startup where founders are more open. You can learn more about the business and you can figure out like, hey, do I want to be a founder one day? Or you can actually,

hopefully you can get it, you can be a bit closer to this. And by the way, some of those startups is an engineer. If you become a lead, you might have a shot becoming head of engineering or CTO where you now sit in the board meetings and you actually understand how it works. And again, I have friends who are on boards again, in CCOs. It's not as scary as it looks. But again, you need to get there first. You do need to get there. And, you know, There is nothing more valuable to a startup than an engineer who deeply understands the business as well. I think that's like a really, really important person. Yeah, we're just trying to see a lot of this.

So an interesting topic we talked about before, the focus is how AI might or might not be changing startups because we know about two years ago or two and a half years ago, Chad GPT, blew everything out of the water and everything we see in VC has this impact. So what does the data say? AI has changed the way that startups are being built hands down. There's no denying that AI is making startups build in different ways with different kinds of teams. And it's a sea change in the way that startups are being built. We don't know yet if all of those startups are going to end up being as valuable as some of the VCs think. But certainly you have examples, Open AI being the biggest

one of startups that are deeply embedded in the AI wave that are going to be generational companies. But at the very earliest part, this is a chart that we put out a while ago, which is this is looking at all startups on CARTA, so not just the ones that took VC capital, but both VC startups and non-VC startups. And one of the clearest findings is that solo founded companies, so literally just one founder, have become more and more common over time. They're taking greater and greater share of startups. And that is for, I'd hope, pretty obvious reasons, right? as the cost of creating a business comes down, as you can do more as a single person, well, maybe you just, you used to have to have a co-founder, but you just get started yourself. And so solo founded companies are more common today than they ever have been in the last 10 years.

And there's been a big jump in 2023 and 2024, like way bigger than, especially in 2024. Yeah. So in 2024, it was over a third of startups that were founded that use Carta, our solo founded startups, which is the highest it's ever been. Now, I do expect that number to come down a little bit because often what happens is by year two or three, that solo founder has decided, oh, I'm going to bring on a co-founder. A co-founder, yeah. So it'll probably modulate a bit, but the pattern is very, very clear. The flip side of that pattern, though, is VCs, and this is the chart we're showing now,

VCs still have trouble funding solo founders. They don't love them. This is very different. Just between the two, we saw solo founders companies going up, but here the funded companies for solo founders have stayed the same pretty much. Yeah, it's about 35% of companies on Karta are solo founded. But if you just look at those who have received VC funding, it's about 17% in 2024. So that's a big gap. Yeah.

And when we talk to VCs, they have a lot of reasons why they don't love solo founders. The older reasons used to be, well, it's very important to have a technical lead and a business lead. That was a very, you know, archetype of a founding team. It also comes to the idea of key person risk. If, you know, I've invested in this founder and she gets hit by a bus, oh, well, there goes my whole investment. Now, how often do they get hit by a bus very rarely? So we can maybe discount that a little bit. And then the, I think the hidden reason oftentimes is because there is this kind of

unspoken idea that if you can't convince a co-founder to join you, you're really not going to be able to convince anyone else. So, like, it's kind of an idea that, you know, one of your key roles as a founder is to attract talent. If you're unable to do that at the co-founding level, it's only going to get harder when you're offering less and less equity to the other employees. So that's an idea. We can debate whether or not that's true, but I think the data is very clear that VCs tend to not love solo founders. I think the fascinating thing for me is just how AI clearly is, or it likely is changing how businesses are now started solo, but the funding has not changed. So people risking their own money or while VC is risking, you know, their, their investors money, this is really

interesting. I think it's worth reflecting on things that might not change even with AI, right? Like, again, you know, like there's some fundamental things, for example, the economy as a whole will have about the same disposable income, and they will still spend it on stuff, right? Like, you're not going to magically have, like, twice as much income and so on. But one of these things is, like, yeah, personal dynamics at a startup might still be really, really important. Totally. Or it could be the case that what we need, what we need more of is these resonant examples.

So if, for instance, Cursor and, you know, bold or lovable and all these places had been started by solo founders and were just skyrocketing, well, maybe VCs would go, oh, now that's the new thing and we got to get down on more solo founders. It really is a bit like we have to have a meme. We have to have something to look at in order to figure out what the next thing is, quote, unquote. Interesting enough, by the way, speaking of Kursar, they, as I recall, they have three co-founders, so an unusually high number. And I personally found that, I observing them, I think they do better because of those three co-founders. They step in. A founder is always there. I remember they had a bit of embarrassing incident where an AI bot responded to people with wrong information, something went viral on Reddit.

And the founder appeared, one of the co-founders saying, I'm the co-founder. They took ownership of that situation and immediately resolved it and people moved on. And meanwhile, the other founders were working on a new thing. So, you know, like we see an example where actually this stereotype is at least with cursor and they are the fastest growing, deaf tool startup and so on. So, so, yeah, interesting. You know, it can be nice to build with the team, no doubt. So let's talk a little bit about equity. So as an employee, when I join a startup, I mean, it's a sex startup, you should be getting equity as a software engineer.

Like, I know there's companies that don't give, but in the U.S., especially or U.S. companies and even European companies, they generally do because it's a great way to have you aligned with the outcome. Plus, these companies cannot pay as much as some of the big tech come. this is seen as some of the, you know, way to compensate. When startups give you equity, they give you to from a so-called equity employee options pool, which is the percentage of the company they reserve for employees. Why is it important on how big this pool is? How is it changing? And can you explain what this graph is?

Sure. So the startup employee option pool or often referred to as ESOP or just the pool. ESOP, yep. is this idea that we're going to say, say you add 100% of this equity pie, so you can give out little slices to as many people as you want. Oftentimes what startups will do is they'll say, we're going to reserve a portion of that pie for employees because we know, one, we're going to hire employees. And two, we want to incentivize those employees with equity. And it's easier for us to do that if we have a bit of that pie that is just kind of cordoned off just for employees.

oftentimes in the last five or ten years, investors would say, well, you need to start that option pool at maybe 15 or even 20%, which is a lot of equity. These days, that's not the case. So option pools will start as low as five or even 10% of the business. And then every time you fundraise, you expand the option pool. And this makes intuitive sense, right? You're going out for your Series A. When you're in conversations with those investors, you'll say, you know, in order to get to series B, we think we need another five or 10 people. Here's the kind of people we're going to go look to hire. And here's how much equity we're going to grant them.

So by that, then the investors can go, good plan. We're going to expand the option pool a little bit so that you have enough. Which means you add more shares because you can always create shares in fundraising. And obviously the investors, I have to agree because their share might, you know, be a bit smaller. Exactly. So that's the concept of dilution, which is as you add more shares, as you literally create shares out of thin air, everybody else's shares are worth a little bit less in terms of the percentage of the pie. And this is, this concept is deceptively simple, but it actually drives so much around startups.

When I talk to people who are not in startups, oftentimes what they think is happening is somebody is given shares and then those shares are taken away from them and given to somebody else. That's not how it works. Your shares are yours. What happens is there's just more shares created so your original 10,000 shares don't represent as big a portion of the pie as they used to because this pie is now just getting bigger and bigger. Yeah, and this is something, again, it's, I guess it's a good problem or a rare problem to have, should I say, but there are some sort of employees who have been early employees at a company, you know, one of the earliest employees, let's say, and then they left a few years later.

And, you know, let's say they leave in five years later that company gets acquired. They raise more rounds of funding. And on paper, this is a great company because, you know, when the employee was there, they raised $5 million, and then they raised another $40 million, and they got sold for, let's say, $60 million. So, you know, lots of money. And then the employee gets their check on how much their thing is worth. And as far as they know, they own, last time they owned half a percent of the company, which would be a big number. And it's a really small number.

And it's because of dilution, because of how, you know, preferences work. But I've actually known someone personally who was, like, deeply disappointed because they really thought as an early employee that they would have that whatever percentage, they just didn't understand that dilution over several rounds can actually make a big difference. Dillusion is really tough. I mean, it is why venture capital is so hard because of that preference stack that you just mentioned. So an easy way for employees to think about this is, if your company was bought today, your

investors who invested in that company get paid out first. And they get paid out, generally speaking, at a 1x liquidation multiple, which means that if I give this founder $10 million and they sell for $20 million, I get the first $10 million back. I get my initial stake back before anybody else gets any money. If you've raised a billion dollars and then the company gets bought for $1.2 billion, the sticker price, everyone is super excited on Twitter because it says $1.2 billion, how exciting. But of course, there's only $200 million of that that is shared amongst the employees and the founders. the investors take their initial stake back first.

So there's a lot of examples of people with amazing big dollar values on the headline, and then it ends up that the employees didn't actually make very much from that acquisition. So in the startup employee option pool chart that we just see here, here we see blue is deep tech and orange is software companies. What does this chart tell us? I was looking into this data the other day, And one of the biggest questions around startups is, of course, startups cover a whole lot of different industries. So you've got software startups, which is oftentimes B2B SaaS.

Cursor is a fantastic example of a software startup. They sell to developers, but all their product is digital code. Whereas deep tech startups are often building things in the physical world. So robotics is deep tech, biotech, actual new drugs is deep tech, energy nuclear reactors. for instance, that would be deep tech. So you're building real physical things. And oftentimes what happens is that there's this idea that building deep tech startups is harder

than building software ones because you actually have to make stuff in the real world. So we were looking at the option pools and you'd think, okay, if a company, if it's harder to build a deep tech startup, then maybe the option pools need to be a little bit bigger because you're attracting much more specialized talent. Yeah, yeah, like robotics engineers, hardware engineers.

100%. There's just fewer of them. and there are general software engineers. And that's kind of true at the very beginning. But actually, the data shows that the option pool for deep tech sort of levels out a little bit more quickly than software. It's not gigantic differences. They're pretty much the same.

What I was interesting about this is there's a lot of stories that people tell themselves about deep tech startups that I think are starting to not be quite as true. So things like it always takes way more money to build a deep tech startup. Well, I mean, look at OpenAI. That's a pretty money-hungry company that's building a not deep tech product, right?

They're building a software product and they can gobble up as much cash as humanly possible. So a lot of times software companies can take more capital than you think, and sometimes deep tech companies can take a little bit less capital than you think. So there's a lot of cool investors around deep tech right now that are saying

the best thing we can do for startups is to fund more companies that are building real. physical things instead of focusing quite as much on SaaS companies in general. Yeah, well, hopefully we'll see more of that. But it's interesting that I guess the option pool size doesn't really meaningfully change. What about advisory? I'm really interested in this because I've had experience software engineers who are either

now leads or engineering managers or, you know, aspiring CTOs or even CTOs. They're asking me, how can I be an advisor at a startup? I'm a advisor at two startups. I get very, very small equity shares and I'm not as much of an active advisor of myself. But what does the data say about being an advisor? And also, can you share some anecdotes on how you've seen people from software engineering background become advisors? Again, I feel stories kind of help here. You know, is it just knowing people?

Is it hanging out with them? Is it, you know, being an expert in helping with them and so on? Absolutely. So let's start with the data and then we'll go to some stories that I think will illustrate what being an advisor is all about. So advising a startup oftentimes comes along with getting a little bit of equity in that startup. Not always. There are advisors that just work for cash and that's totally fair. But oftentimes you will get a little bit of equity if you become a startup advisor. And that's mostly because those startups, if they're very early, don't have a lot of cash. So they got to give you something for your time. Yeah, pretty much. Precede. So let's focus on that. That is, you haven't raised basically any capital from VCs. You're a very young startup.

Maybe it's just even just the founding team. Oftentimes, when I talk to advisors, they say, what we're looking for is about 1% of the business as the equity package for advisors. That is very high. That is on the very high. That's nine out of 10 advisors get something less than 1%. So 1% is a very big number. the median amount that is granted to advisors across,

we had 5,000 advisors in this study in 2024, is 0.25%. So a quarter of 1%. And that, again, if you're an advisor, you might be sitting there going, that doesn't sound like very much. Why would I do the work for that? Well, let's put this in context

with how much employees are given. So the first hire at a tech startup these days, which is, by the way, almost always an engineer, Yeah, they're called founding engineers, right? Exactly. Founding engineers, they typically receive on median 1.5% of the business, sometimes as much as five, sometimes as little as a half, but generally 1.5. Yeah, and they're going to be working there full-time, creating a lot of the fundamental products that will make or break the company.

They're a hugely important person, no doubt. So in that context, an advisor getting 0.25% makes a lot of sense because the advisor is not working here full-time. They are probably contributing a handful of hours a month. the recorder, so this makes more sense. Let's talk about the stories around advisors. There are certain kinds of advisors that are worth tons of money to startups. In my mind, there are two kinds. One is a technical advisor. So I have a friend who used to work at Uber and at Lyft and has deep, deep knowledge of how to run marketplace matching algorithms. If you are a startup in and you have to

build an algorithm that matches markets in a dynamic real-time way, he is a world expert at this thing. So you would have access to someone who has actively built this at scale for major, major companies. And so that might be worth more to you than the average software engineer advisor. The other kind of advisor that is really valuable to startups is someone who can actually introduce you to customers. So without them, you wouldn't be able to talk to these businesses, but with them in-house, you actually get meetings with really big potential customers, and then hopefully you close, come to some of those customers. They are actively bringing in revenue to the business.

Those are the two kinds of advisors, like very technical help or commercial help, that are most common in startups. The advisor that sits down with you once a month or once a quarter and goes over a business plan or talks to you about your marketing website, I would generally say they're just not worth nearly as much as some of them think they are. Jumping to the life cycle of venture capital funded start or VC funded startups. I remember in 2021 when, again, a lot of people who I knew software engineers, they went and they became firsthand founders. They raised their first seat round and they were telling

me like, well, you know, the idea is we spend this money in like 18 to 24 months and in 18 months we will raise a new round. And that, that, that, was the law, like almost like Moore's law, it was kind of a universal law for about 10 years that if you're a startup and you're doing well in 18 months, either you're raise your new round or you're going to die. But this data shows that something else is happening. What is happening? And what does this chart tell us? So this chart shows the median number of days between these rounds. So from C to series A, from series A to series B, et cetera. And as you can see, the lines are just getting higher and higher, going up into.

the right, but not in a good way. So it used to be that you would raise in perfect advice, you know, the 18 to 24 month period was the median for a long time, for many years. And now it might be two and a half years between seed and series A. It might be almost three years between series A and series B. So if you're a founder, the clear takeaway from this chart is you will probably have to make the money you have today last longer than you expected. And I think this goes back to leaner teams or generating more revenue, that kind of stuff. 100%. You're going to change some way about the way your business operates in order to get over the fact that you're probably not going to have as much cash coming into the business from investors

as you expected. The other thing that's happening, though, and this is the sort of good part of this chart, is some of this is reflective of companies that want to raise but can't. raise. And some of this is reflective of companies that are just choosing not to raise because they don't need to. We talked to them at the beginning. That's kind of a good thing, honestly. 100%. So, and this is tricky for VCs as well, because VCs obviously want to put more money into startups, usually. In their best companies. And they're their best companies. And what if the best companies go, thank you so much for that initial capital, but we don't, we don't need anymore. You know, that's, it's kind of a tricky moment for VCs too. So everything is a little bit up in the air in a way that

it hasn't been for a while. And one thing that I keep hearing is how difficult it is to get to Series A. I've covered this in the newsletter before because beforehand in 2021 and 2022, getting to Series 8 almost felt like, like you previously said, like a C-Safe startup had an idea and they kind of built a basic thing. They got some customers. They got a million dollars in revenue, which I know sounds a lot to some people, but actually if you're doing enterprise products, you can get it from a few deals,

who are maybe not even fully committed. And then a lot of companies just raise a series A. And I was hearing people tell me at some point that the series A became what old seed rounds used to be in years before. But now we're seeing the opposite, right? We're seeing it's really hard for companies to go from a seed stage to a series A, which is your first bigger investment. And that shows that you're ready to scale. It has product market fit. Exactly right.

The graduation rate is the thing that we talk about a lot with investment. which is what percent of seed stage startups ever raise a series A. And in the boom times in 2021 or so, it could be as high as half, which is very high, right? These are tricky, risky businesses. The fact that half of them were getting from C to A probably means that there was too much capital available and it was too easy. Yeah, and I remember around that time, this narrative that, oh, you should join, you just join a startup. It's actually not that high risk. And, you know, people are saying that it should be high risk, but it wasn't.

I didn't know many people who got let go because your startup went bankrupted. It almost felt that even if a startup is doing poorly, you'll be acquired by a bigger startup or by a big tech, that sort of thing. It was just a completely less risky environment, for sure. And now that risk is definitely back. So on average, I would say that you should expect about 25, maybe 30% of startups that raise seed rounds to end up raising a Series A round. So that means more than half of them will not make it. And that's more standard. If you had gone back to 2008, 2010, et cetera, that was kind of the framework that most people were working off of.

But again, that ZERP era, the zero interest rates at 2019, 2020, early 2021, they just kind of boosted all of these stats. So if you're an engineer thinking about joining a startup, that startup raised a seed round four years ago. the likelihood that they are ever going to make it past seed is pretty low. Yeah, this is really good to just get a check. And also, I guess, if you're a company that just raises seed round or recently, know that you are in the top quarter of all companies. And a bit of a celebration might be due. I know it's business as usual, but maybe, you know.

Like, don't take it for granted. I think a night of champagne is worthwhile. Right. Yeah, totally. And then back to business. Yeah. And what are we seeing for? startups being stuck in certain stages.

This is maybe a tricky topic that most founders and VCs don't talk about that much. But we should talk about it more. And I think it's actually incumbent on the best investors to have these hard conversations. And here's what I'm talking about. There are a lot of startups that raised a seed round in 2021 earlier that are still live businesses, but are basically just not going anywhere. And the question really becomes, should those people shut the business down or not?

That's a really difficult question. It's an emotional question for a founder, no doubt. But oftentimes what happens, I think we have all of these stories around startups of people who, like Figma is a great example, where it said, oh, it took them four years to build their initial product. Everyone gave up on them.

And now, look, they're going to IPO this year and they're such a success. And I think there was also Slack, which like they almost ran out of money. They try it out. I don't know how many different things. They were a gaming company first. Yeah. They were a gaming company, then gaming chat, and then chat, and then boom.

You know, like look at them. They were 26 billion or so when Salesforce bought them. Exactly. And that's the story that's told around Silicon Valley, which is never quit. Quitting is bad. Always keep pivoting. Always keep trying. And for every single one of Slack or Figma as examples, there are hundreds of companies who

did not make it. And so really what this chart shows to me is there's a founder talent example here where it's like, I want these talented founders if they need to to shut their businesses down and try the next idea. And in Silicon Valley, we do this weird thing where we praise never quitting. But we also are very excited by failure. We say failure is good. Failure is a great way to learn lessons. So both of those things are kind of a little bit in conflict with one another. And I think it shows very clearly in this data where there are founders who raised the seed round five years ago, six years ago, whose businesses probably aren't going to go anywhere who are still chugging along in that business.

When we say they probably won't go anywhere, that that means that either they're making a slight loss or a small profit, but they're not going fast enough to raise the next round, to expand more to, you know, to focus on growth, which is what VC should be about instead of being a very stable business, which, let's say, a bootstrap company will be perfectly happy with. 100%. And that gets back to your ambition as a founder. If what you want is to build a bootstrapped company where you get to dictate how fast you grow and you get to be as profitable as you need to be along the way. Amazing. That is a fantastic way to build a business. But if you take money from VCs, you are committing to their growth rates. And so this is the tricky part. And I really hope that there are founders out there who are sitting and wondering, hey, what should I do with my company who know that if they end up having to shut down and return some capital to investors, those investors are still pretty likely if you did everything above board to want to back

your next thing. Oftentimes, you know, there are founders, my CEO, Henry, is a fantastic example. Carta is not Henry's first business. Carta is Henry's second business, and the first one did not go very well, but he learned a ton of lessons in it and that it kind of built all this equity with investors. so that when he started Carta, he had a much better idea of what he was doing. And I think that that's true for a lot of founders across VC. Yeah.

And I guess as an employee, this is also a good reminder that you do want to, for example, when you're looking for a company, obviously if on a company, look at when they last raised money and know that the longer it's been, the more likely that the founder might say the next day, say, you know what, I'm going to shut the company down because it's not going anywhere. So like if you're joining a company that last raised five years ago and, it doesn't have that amazing growth. It's probably more risky than joining a bootstrap company,

which again has a similar growth. But that one is a bit more likely. Again, these are all statistics, right? But we're talking about data here. Yep. Yeah. No, you're totally right. I mean, ask questions as an engineer coming into a startup company.

Don't be afraid to ask questions that matter, right? The questions that matter might be how much revenues a business have. What are the growth rates for the business? How much capital did we take in and, at what terms and how long has it been since you fundraised? I think those are very fair questions to be asking in an interview. Now, it's not the case that every HR person that you're interviewing with will be able to tell you the answers to those questions.

It depends on the company. But they're totally fair to ask. If I'm a software engineer or a tech lead or an engineering leader, how would you evaluate a VC-funded company to figure out, is this a good company to join at? Is it likely to be high growth? could I have a great career here where the team grows and I get more and more responsibilities and, you know, we'll take a more of bigger, bigger challenges? 100%. So this is a multi-variable question. But I think the framework and the mental

model that you should be using as an engineer joining this company is the same as though you were an investor. So put yourself in the mind of a VC and say, what do I think of this company, an in-contrad distinction to all the other companies in their space. How fast are they growing? Obviously important. What is their unique technological edge if there is one? So this is something that VCs talk about a lot, which is what is your moat? What is your defensibility?

Why, in a world where AI can spin up product features in a weekend, why are you the company that's going to win in this space? So if they have a unique edge, and sometimes that unique edge is very obvious. It's a technical one. Sometimes it's this is the most relentless founder I've ever seen. Both are valid edges, by the way. Like speed of execution is a valid edge. edge. But you want to have some sense of what is the edge of this company? And then when you get

in to the more like the deeper interview rounds, et cetera, you got to start back channeling with people at the company, with people who've worked with that founder before, et cetera. If you're joining a CED or Series A firm, in many cases, what you're doing is you're betting on that founder. So the first thing that you need to be doing is being comfortable with the founder themselves and saying this is the kind of person that I want to follow. And I believe in strongly will have the next great idea to keep us ahead of the pack. So if it's an early, early stage place, you're betting on the founders, first and foremost. As a software engineer or engine leader, what do you think, what have you seen skills being important to thrive at a BC funded startup?

Obviously, technical acumen matters no matter where you are. So there's no limit to how great an engineer you can be on the technical skills. I think the difference at a startup is there are different personal skills that come into play at startups versus big tech companies. For instance, at a startup, you are very likely to have a small or even non-existent team. So player coach comes into the idea. If you're joining as an engineering leader at a fang company, you might have 13 direct reports. At a startup, you might have one. So you're going to get in the weeds and actually build that code base a lot more at a startup. So being willing to do that and excited about it is very important. And the other thing about startups is, it gets back to that idea that

there's a Swiss Army knife aspect to it. You're going to be asked to get involved in stuff that is not just pure code, right? You're going to be asked to talk to a bunch of customers. You're going to be asked to evaluate market maps to say, oh, we're building this product, but should we also try to build this adjacent product? Or should we think about buying a company that has an adjacent product? How do these worlds mix? So it's not just a product. So it's not just a product. But should we also, just a pure technical exercise, you're going to have to start up-leveling your ideas about the business. And that, I think, is the hidden magic of startups where you would leave a startup after two years and look back and go, yeah, my coding skills got better. But wow, I up-leveled so much of my

knowledge on this space and the way that businesses grow and shrink and compete. That's the stuff that really is exciting. And this is what I see, a lot of engineers these days who become founders. they say, oh, I'm launching my new startup. I resisted this much funding. Oftentimes, they're engineer number two, number two, or number three at this other startups four years ago, which grew really fast. And actually, they're very open saying, I've learned so many of these skills. So now I'm confident on doing my own thing, which is just amazing.

It's awesome. And it also makes it very clear that doubling down on your network is like something that is so important. If you're at a fast growing, like you at Uber probably know 100 people who tried to start businesses after Uber because they were just. in such a deep talent pool while they were there. And that stuff really matters. Yeah, and I think that's one of the reasons people underrate. Like, it is oftentimes worth joining the most hyped company around, even if they might not make it, because there'll be such

great people and they'll go everywhere. If it works out, people stay there like at Facebook and they'll be amazing. If not, they go elsewhere and they, a bunch of them will do amazing things. And the other ones will keep trying until they do something amazing. There's a reason why there's this concept of Silicon Valley Mafias, right? The PayPal Mafia, the Airbnb Mafia, etc, where people who work together at one point, their paths end up crossing at totally different companies down the road. Like, that is super, super common. Let's close with some rapid questions.

Does that sound good? Let's do it. So what are new sources that you use to stay up the date with the VC industry? Podcasts are fantastic in this case. So some of the ones I'm listening to lately, Sorcery from Molly O'Shea is wonderful, uncapped by Jack Altman, Sam Altman's brother, also founder of Ladis, wonderful podcast.

used to listen to All In, don't listen to it as much anymore. Sometimes you get tech news, sometimes you get a ton of politics. It depends on what you want. So that's one great news source. And of course, Carta Data Minute, our podcast at Carta. The other, I think that tech press is sometimes a little bit behind the times, whereas tech newsletters are oftentimes ahead of the curve. So, I mean, obviously everyone's probably already reading Pragmatic Engineer.

but if they're not, they should. And then the other one, that is tech, but startups, but everything. I mean, if you don't read Ben Thompson, like, you're just out of the loop. Strategory is like a must have, I would say. I think for anyone wanting to build up their business muscle, it's amazing. I have to like plus one that one. Absolutely. What is a tool that you use and you love and why?

And it can be a digital or a physical tool as well. I love Tableau. I know a lot of people don't like it. I know. It's an older, older tool for everyone. It's a vintage tool. But like, as someone who thinks in terms of charts and graphs, I have lived in Tablo for quite a while. And I just think it's the most wonderful way to get visual diversity in your charts.

So I'm trialing all sorts of different chart makers, AI ones, et cetera, all the time. And I just keep coming back to Tablo. So I can't quit it yet, even though some people might disagree. What is a book that you, you'd, recommend and why. I am reading a book right now, which I think is fascinating. Apple in China, very recently published. Candidly, if you're an Apple fan, it kind of makes you feel not so good. You get this huge history of how Apple came to be so deeply embedded in China for the manufacturing of all their products and what that means for the world, for global trade, for the competition

between these two countries. I think it's a wonderful book that is company-focused, but it gives you this lens on how to look at the way that the world has changed over the last, call it 10 or 15 years. So really, really have loved it. I think Ben Thompson called it the best book on Apple and the best book on China recently.

Which is pretty hard to do. Those are two big areas. Yeah. Well, Peter, this was really interesting, really refreshing, and I think much needed and as software engineers, you think a little bit more about how VC operates, what it means, and just the reality of working at VCTOP

and how it keeps changing and how the bar just keeps going higher. Yeah, thank you so much for having me. And this is fantastic. And I'm excited to watch what engineers are listening to this show built as they become founders over the next couple of years. I hope enjoyed this very data-driven episode where we went through a large number of data points in charge

to get a sense of how VC funding and VC-funded startups are doing. To get more reports from Peter on this topic, follow him on social media. His links are in the show notes below. For more in-depth reading about startups and scale-ups and health thrive in these environments, check out the Pragmatic Engine Deep Dives also link below. If you enjoy this podcast, please do subscribe on your favorite podcast platform and on YouTube. This helps more people discover the podcast and a special thank you if you leave a rating.

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