Deal of the Week
Factory, founded by Berkeley PhD dropout Matan Grinberg, just raised a whopping $150M round led by Sequoia. They’re building an AI agent for software development. I haven’t played around with it yet, but I do like that they call their AI agents “Droids.”
This space is both exciting and fiercely competitive, with OpenAI and Anthropic eying the market, while Cursor is creeping into the model layer itself. They are reportedly raising at a $50B valuation. Congrats to the team!
Another day another record growth rate
It feels like an amazing time to be selling software that is AI-charged. The zeitgeist is such that every company seems to have a top-down directive to “go buy that AI thing”. I would argue that in many industries that “AI thing” might just be traditional software automation or some algorithm that increases efficiency. However, it doesn’t really matter — buyers have been enabled to get moving. So everyone is buying, and often buying in bulk.
The question is whether we are in the “over-earning” period of this cycle where people don’t really care about the cost (Uber found this out pretty quickly), they just need to buy solutions. The reality is that AI companies still have to go out and sell and compete, but this could be one of the reasons for the massive growth we are seeing in the best performing AI companies at speed.
The bull case is:
AI will replace labour, so the market is 10x bigger
It is a land grab — once you are in, switching costs mean you can continue to grow
The bear case is:
Switching costs may actually be limited as AI makes switching relatively easy
There could be massive cost compression as the productivity surplus gets shared around and AI companies start competing heavily with each other
The reality will likely be spread out. Some businesses will emerge that truly replace or augment labour and create large new companies. Some will do this but then see heavy price compression, and some will simply see price compression from the start.
Either way, what a wonderful time to be investing.
Confusing Metrics
A topic we have highlighted internally for quite a while got some attention this week: the idea that ARR might be the most misused acronym in the English language.
To start with, I’m not even sure people agree on what ARR actually stands for. Is it Annualized Revenue Run Rate (revenue from one month or a short period annualised) or Annual Recurring Revenue (revenue you expect to recur over time)?
The premise is that with a software business you typically have very high gross margins within this ARR number, which then allows the company to command a lofty revenue multiple. I do blame lazy investors here for trying to create a one-size-fits-all metric across very different companies.
In any case, more people now want to fit their startup numbers into the Annual Recurring Revenue bucket. The problem is a few fold:
Not all revenue is annual recurring (one-off sales, marketplaces, payments). The list is long.
Not all revenue starts on day one, especially in AI where there can be long implementation periods and volume-based pricing.
The upshot is people trying to live the ARR-maxxing life. Getting any kind of revenue and annualising it to create the best possible ARR number. It starts to verge on the fanciful when you see free-trial revenue being annualised. Fun post on this here.
Just remember: not all revenue is created equal, not all business models are created equal, and not all revenue is recurring. Read the contracts.
Quick Takes
Continued K-shaped economy — the total cost of running a car is up 36% since Jan 2020 (Repairs +50%, Auto Insurance +56%, Parts & Equipment +27%). That’s real inflation.
Shout out to my investment Ridepanda, which offers e-bikes as a commuter benefit for enterprises and makes riding to work look increasingly rational.
Got to love how different charts can tell different stories. On the face of it the data centers look like one of the biggest mega projects of all time for the US
But if you take in terms of % of GDP at the time those railroads!
Another push for the SF is back train! It seems it is not just people who want to come back to SF, but it is also where all the Unicorns are being founded. Some research by Elad Gil, with the craziest stat being:
Generative AI is creating a super-cluster in the SF Bay Area. The Bay Area now accounts for ~39% of global unicorn market cap, more than 4x higher than any other city and up from ~29% 1 year ago. Among just generative AI unicorns, the Bay Area accounts for ~91% of global market cap.
Also extremely interesting to see how the SF population is changing
Enjoyed this piece by Elad Gil
Two companies -
Summary by the #️⃣ & 💰:
8 Berkeley-founded companies funded
$340M of capital raised from the 13th April to 19th April
💡 Got any ideas or feedback on how to improve this weekly digest? Just hit reply.
Acquired
🐻 Ankur Nagpal, Founder. BA EECS Article
Closed Rounds
🛠️ Factory $150.0M Series C 🇺🇸 Autonomous software engineering platform. 💰 20VC, Evantic Capital, Sequoia Capital
🐻 Matan Grinberg, Co-Founder & CEO. PhD Theoretical Physics Article
🔌 nEye.ai $80.0M Series C 🇺🇸 Optical AI networking hardware. 💰 CapitalG, M12, Sutter Hill Ventures
🐻 Tae Joon Seok, Co-Founder & CTO. PhD EECS Article
🖥️ Parasail $32.0M Series A 🇺🇸 GPU compute deployment network. 💰 Basis Set, Threshold Ventures, Touring Capital
🐻 Tim Harris, Co-Founder. BA Political Economy Article
🔋 Critical Loop $26.0M Series A 🇺🇸 Off-grid battery power platform. 💰 Better Ventures, Climate Capital, Soma Capital
🐻 Lydia Maher, Founder & CTO. BA Stats & History Article
📊 TextQL $25.0M Series B 🇺🇸 AI data analytics platform. 💰 Blackstone, HOF Ventures,
🐻 Ethan Ding, Co-Founder & CEO. BA EECS Article
📡 HYFIX.AI $15.0M Seed 🇺🇸 Precision GNSS positioning technology. 💰 Catapult Ventures, Craft Ventures, Finality Capital Partners
🐻 Mike Horton, Co-Founder & CEO. MSEE EECS Article
🤖 Balerion AI $6.0M Seed 🇺🇸 Agentic mortgage automation platform. 💰 BoxGroup, , Kleiner Perkins
🐻 Naren Krishna, Founder & CEO. BA EECS Article
🏗️ Primepoint $6.0M Seed 🇺🇸 AI construction management platform. 💰 Aglaé Ventures, NextView Ventures, Penny Jar Capital
🐻 Lubomir Bourdev, Co-Founder & CEO. PhD EECS Article
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