Alan's Thinking Cap | Capital Markets Update

Pano Anthos:Hey, Alan, nice to be here. Thank you for inviting me.

Alan Wink:So before we start, I asked Pano to give us a quick elevator pitch on his fund XRC ventures, paying close attention to the sector focus, investment stage, check size, value add from he and his team, and the last investment or exit that was completed. Pano, I know you have some slides to go through this, so please put them up.

Pano Anthos:I'll be very quick. Thank you Alan. So we are a New York-based early stage venture fund, specialized in technologies that change and are changed by consumer behavior. That intersection is where we play over 140 investments at this point in time, pre-seed and through series. A typical check size starts around 200 grand, goes up to a million. This is a big market, massive use of GDP consumption. It changes every couple years and it's been largely ignored by the venture community because the return profiles have been challenging to say the least. Our focus is really around six sectors. On the revenue side, we think of corporates really as the target for all these solutions, and we look at digital commerce, payment infrastructure and disruptive brands for the consumer brands industry as well as supply chain workforce, wellness and store operations. These are massive markets with a lot of money being spent slowly in some cases, which is not always what a venture fund wants.

But what we're seeing in the market now is a complete shift away from developer first startup worlds where if you didn't have a developer, you didn't have a business to now being distribution. So building a startup has never been easier, but distributing it has never been harder. Some recent data we pulled is suggesting that by 2030 there will be 1.7 million startups using gen AI natively to build applications, and that's a massive increase from where we are today. But the growth rate of corporates will basically be 7% of the Fortune 500. So almost no growth at the corporate level and massive growth of the startup level, which tells you we got a problem in terms of absorption. So what we do is we focus on the C-suite only, only go after the C-suite, and we have relationships at all these big retailers, brands and others. And our unfair advantage is really distribution. We have the ability to drive incredible distribution through the C-suites of corporate America. And then similarly we've been building using ai, our own consumer brand LLM, that mimics what Stripe did when they got started in their go-to-market. Stripe went around all these startups and said, here, use our link for payment. We are basically providing to our portfolio companies access to over 2 million consumer brands with an incredible amount of detail, including sales revenue, which then becomes a great avenue for early startup success and pilots. With that, I'll turn it back to you, Alan.

Alan Wink:Thanks Pano. Great description. Let's talk a little bit about the market. It's certainly been a challenging market in venture capital the last probably 18 to 24 months. I think finally the market began to show some life in Q3, especially from the exit standpoint. There were a couple of significant IPOs in Q3 and also many acquisitions of VC backed companies. However, IPO activity is still way below expectations. And the interesting thing is that of all the exits, all the sales, 75% of the exits so far this year involved companies that had only raised the series A round at best. So do you think the markets are both public and private, are warming up the VC backed companies? Again, what's going on?

Pano Anthos:Well, there's always a market for a private company going public. It's at what price is that company coming to market? And what we've seen is that the venture late stage private equity venture, almost private equity businesses trying to get to market have had bloated valuations that in 2022 and 23 had to get reset before they could then go back out to market. So you're seeing major haircuts, which by the way no one talks about. And when they don't talk about it, they don't talk about the crush to the cap table and who gets squashed and who comes out ahead. And of course the company comes out at a four or five, 10 billion valuation, but everyone forgets it was at a 40 billion billion dollars valuation two years ago. So that's the biggest change I think is the markets are always available, but they're only available to a certain class of company.

And I think that the area today that's super hot and buzzy obviously is infrastructure. So good luck if you're a consumer product company today. So Chime has done very badly, right? Relatively speaking to the market and every consumer products company, if you saw the Ken View, Kimberly Clark acquisition merger, Kimberly's stock is down 20%. So consumers not in good shape at all in the public markets and everyone's driving toward the AI infrastructure layer, which by the way is going to get played out pretty quickly because it's pretty much a closed circuit of players that will ultimately go public. And then I think the question is the reason why all these early stage startups are getting acquired is because one, investors realize there is no chance of getting to the public markets. Two, they're seeing that they're getting the kind of valuations of five 10 X that they want later stage and taking the money and running because I do think if you've got any sort of history around you, you look at the Facebook platform and if you think of open AI as a platform and they're building all these API capabilities so that you can integrate into them, you're effectively relying on open AI to distribute your solution, which is how the gaming community used Facebook back in 2006, seven and eight.

And for Zynga, it was a huge home run for everyone else. It was absolute, the Tritus, there's not a single company standing that came out of the Facebook platform because Facebook raised their prices, which caused the CAC L TV ratios to fall apart for gaming companies. And it's an analogy just of what platforms can do to you that can help you in the early days, but boy, if you don't sell your company quickly, they'll crush you at the end because they'll take over all your capabilities internally, which is what Facebook effectively did, and then shut the whole gaming business down.

Alan Wink:Do you think because of the slow down, the IPO markets the last couple of years that companies continue to raise more and more private capital and as you said, probably some of those later private capital rounds, when these companies went public, they didn't make any money, they probably took a loss. But I also think because of the slowdown in the IPO market, the companies going public in the end of 25, 26 and 27 are really going to be quality companies that have real customers real earnings. Do you agree with that? I mean, are we going to see a rush of really good quality companies coming to market?

Pano Anthos:Well, I think that's what's required in today's markets. If they make it through, it's because they're high quality. I don't think the market is going to treat money losing businesses outside of an open AI whose money losing is really capital intensivity as opposed to sg a. If you're building massive data centers, it's an investment in long-term growth and so they'll pay for that. But just money, losing money, losing businesses on an operating basis, those are not going anywhere. I do think that even what we're seeing right now in terms of the AI frenzy, two big warning signs are out there. One is the trading of deals between each other. We saw that in the two thousands where I'll scratch you back if you scratch mine kind of deal structures and revenue recognition around basically, I wouldn't say it fake deals, but deals that were less than arm's length, shall we say.

We're seeing some of that again. And there's nervousness around that and for good reason because that's also the house of cards that caused the internet bubble to burst at the same time. The difference here, and again the other parallel I think is that if you recall the cable and wireless worlds, all the internet infrastructure that was being built, all the companies that were going public and worth billions have all but vanished because that infrastructure is now commoditized, right? Who would buy a cable company right now or buy into a cable company? So right now the data center world is like hot tamales and any sort of infrastructure is super hot, but that's going to get commoditized as well. And when it does, everyone's going to be flying away from it. And looking at the application layer, we still think the application layer is the best place to play, but it has a different set of challenges because the enterprise can only absorb, as I mentioned earlier, the enterprise can only absorb so many solutions.

And therefore I think you look at the CRM world and okay, you've got Salesforce in the enterprise or you look at the enterprise resource planning, it's SAP and that's it. And so you end up with these kind of titans who are basically boxed in against each other. And the question really is how disruptive can angen AI solution really be? Now where you're seeing a lot of activity in the acquisitions is industrial old line companies buying agent AI solutions to basically burnish their brand and buy headcount, right? Buy teams that are incredibly valuable that they would never get on their own.

Alan Wink:So from a venture capital venture capitalist perspective, has anything surprised you about the VC landscape so far in 2025? Yeah, we've learned

Pano Anthos:Nothing. We've learned nothing. We'd swear that after 22 and 23 sobriety would kick in and we would be like, okay, we've learned our lesson. We don't go chasing deals super fast, we take our time, we really look on value. No, we're back to ridiculous pre-money valuations of over 20 million on a pre-revenue company today. I just dunno how you make the math work now you make the math work if you happen to have the Hail Mary company that goes from zero to a hundred million in a RR in six months, those are rare, but there's hope brings eternal. And that's the thing is we always, VCs are such optimists when they bank something, they go to the help on optimism until they don't and then they just go negative. But this is, there's no sobriety in this industry. We just go, we're drunken sailors running around throwing money at stuff and even RO BTA who stepped down to Sequoia was complaining about the venture math not working and you can't get, so just simple story here.

You put a million dollars in at a 20 million cap, so you own 5% of the company and hopefully you can maintain that 5%, but you're putting in more and more money. But if you don't, you're diluted and you're probably diluted to somewhere around two to even 1% over the course of history. So now you put in, as we said, $1 million and you got some order of magnitude of equity, you end up with 1%. That thing has to be a 10 billion company to give you a 10 x return. In so many words, and again, my math might be a little bit off, but the idea here is that you need really monstrous valuations and exits at that level. And that's the problem is that we only have so many exits at billion dollar numbers. They're not like if you do the curve, it's not like we've got a thousand over here and then only five in the a hundred million range.

No, it's the a hundred to 200 million range, which is the bulk of the exits and not the billion dollar exits. And so for IRR purposes, you're just trying to sell early, which is why I think all these deals are selling as they do is because they need the IRR, they need the liquidity, they're getting LP pressure. So rather than sit there and ride it to the hill like a Vinod could do because at kla he's an open ai. So of course he can sit around and wait, he's a pre-seed or seed round. I mean he's playing with funny money at this point. He could do no wrong until he doesn't. So anyway, net is, I think we're in a venture math war that a few can win at. We don't believe we can. We don't play that game at all. We're not in Silicon Valley, we're there a lot. But the reality is we're just not part of that early, early network where founders just hop from one venture fund to another just driving the next set of deals.

Alan Wink:So let's change tunes a little bit here. Let's talk about ai. You referred to it earlier, first three quarters of 2025, 160 billion has been invested in AI and machine learning companies already represents a record year to no one's surprise. Where do you see the opportunities ar in AI for XRC and how do you deal with the fear of missing out on a deal?

Pano Anthos:Yeah, so we are, because we're sector specialists, we understand the industry that we're dealing with and the corporations who need these solutions much more closely than the traditional venture market, which basically at the end of the day is pain and spray. You're hoping that something happens, you make a couple introductions, but you're basically pretty much hands off. We're very distribution focused. So what we're seeing is that the application layer, as I mentioned before, is going to be incredibly valuable, but it's specialized application layers. You're not going to build an agen ERP solution very easily and rip out SAP. It's just the sheer cost of doing that. CEOs never want to go through that again. I mean, this is truly pipes in a wall. The last thing you want to do is open up the wall and start ripping out pipes because it's a massive restoration project.

And that's not what CEOs are paid to do. CEOs are paid to run their business. So I think you're going to have a lot of agita around any sort of rip and replace. So then it's going to be value add. So where do you find pockets where there's a lot of complexity and a lot of human intervention that's patterned and repeat. And so a rinse repeat model works. I would say, for example, legal has a lot of rinse and repeat. A term sheet has a standard set of conditions. They always change of course, but a lot of times the contract, the core contract is baseline templated, and then you've got your add-ons and additions and frankly, AI should be able to highlight those additions and challenges which they're doing today. That's just a great simple example. We think supply chain has a lot of opportunity that's just being touched right now because of disruptions.

So we look at the macro trend and we look at the weather patterns and all the sea changes literally going on in the environment and the disruptions, it's having to trading lanes, tariffs, anything that disrupts trade is an area of opportunity for some disruption of technology. We look at healthcare very, very carefully. We think that we know that there's an enormous amount of waste in the healthcare system. A lot of it is invisible. Like in radiology, I was talking to you earlier, Alan, about 10% of radiology costs our paid out and no one knows what the price of anything is. So now an orbits of radiology comes out and reduces the cost by 80% and everyone's piling in because it's free money essentially without changing service levels. So that's an area where it's been underexposed to the light, if you will. Healthcare in particular, it's a black art, get all these people involved, brokers and payers and providers, and there's a separate language and it's kind of like Greek if you're not familiar, no offense, I'm Greek, but if you're not familiar with the markets.

So those are pockets where we like to play because there's a lot of ways of disrupting that and high impact, low effort solutions. The effort now in development as you know is not quite zero, but very soon you'll be building full scale applications really from a set of prompts. And now maintaining that application is a challenge and you're seeing a lot of feedback in that loop on Twitter and elsewhere or X where people are talking about the sheer amount of maintenance involved when you don't code it yourself. And so people are wondering, how am I going to maintain this thing? And a lot of people are like, oh, who cares? I'm onto the next project. I'm just going to install it and move on, which unfortunately happens a lot. So anyway, net is, I'd say specialized sectors, areas, revenue producing areas. So CRM is always going to get enhanced and Salesforce is doomed if they don't reinvent themselves. Truly, I believe because there's so many startups gunning for them, someone's going to really come after them and win much like they did to the installed players back in the day. And I just think, but I think the core SAP implementations are just so monolithic and intransigent that nothing's going to move in that category for a while.

Alan Wink:So much money's going into ai, but not all the money's going there. If you had to bet on one emerging sector outside of AI for the next decade, what would it be?

Pano Anthos:Well, I don't think AI is a sector, so maybe I should step back because I think AI is like water. I actually wrote about this where AI going to be is as will be as ubiquitous as water is and we need it. I don't think you're going to be able to build an application without ai. You're going to be simply like your hand tied behind your back if you don't use AI to build your applications going forward. So it's necessary. It'll be cheapened, it's getting cheaper and cheaper to produce applications. So the whole build process is going to continue to change dramatically. I do think that the value of AI is going to be in these sector specific areas where a domain expert can spin up a solution in a highly pocketed, super specialized area that actually has big implications in a corporation. And that's going to get a lot of intention.

Right now it's all been infrastructure and it literally follows the internet path. Alan, if you remember back in 98, 99, 2000, it was all infrastructure, laying wires and cables, servers. And it was fascinating to watch because we needed it at all. But at the end of the day, none of those players really survived. And the ones that did the Ines or the Akamai, they barely survived that kind of onslaught. They went up and they went down so hard, now they're back. So I think we're going to see the same thing over and over again, which is the infrastructure has gotten all this attention, it's going to die off, it's going to get commoditized, and the application layer is what's going to continue to grow as it has over the last 20 years.

Alan Wink:You mentioned earlier we're finally getting to the point now with some of these exits that we could give limited partners back some of their capital, but it's been a tough couple of years for the VC industry. Have you seen a shift in your limited partner expectations of your fund or do you see any changes in structures the next couple of years?

Pano Anthos:You bet. They sing to me all the time, take the money and run. They're like, they do not want, and these are experienced LPs, some of them are in 300 venture funds, just to give you some crazy perspective, right? Family offices and high net worth individuals as well. And they're like, do not sit around and wait until a bitter end. I mean they say you can do what you want, but if you want our money going forward, we need to recycle what we've got. And so it's a recycling issue. If you think about allocation at a high net worth individual level or even institution, the allocations aren't forever. You just can't keep going back to the trough asking for more and more capital and not returning it at some point. And because of this elongated venture model now of 10, even 15 years before an exit takes place, the IRR is awful.

I mean just even if the MOIC is substantial, the IRR is so awful that LPs are like, I can get better money in my money market account. I mean, I'm joking a little bit here, but not much. I can get more money in the money market account if I just let it sit there. So that is a real issue that we as a pre-seed fund have to fight off. And the way we fight it off is we sell in secondaries or exits much more quickly than ever before. And in part because we can and in part because the LPs want it, and that's really helpful to us having secondary markets really, really helpful.

Alan Wink:Do you see your role as a venture is changing relative to the way you support your portfolio companies, your operational involvement? I went to your website and I saw some quotes from some of your founders of your portfolio companies. What sets XRC apart is their ability to combine strategic thinking with action XRC brought in more than just funding. They became an extension of our team. Do you see that role evolving more? Are you more involved with your companies now than you have been in the past?

Pano Anthos:Absolutely. And specifically in the area of messaging and distribution, I think more than ever if the venture firm is not actively providing more than just a connection, but helping them open up deal flow and create pipeline, they're out. This is such a competitive market now, Alan, because of the sheer number of applications that are being built, it's insane. I mean, I just got another, again, deal flow comes in constantly and I've probably seen this one startup in the kind of, we'll make you see the big LLMs, we'll be able to see your website much better and SEO, and we're going to help you get there. It's like the 20th company I've seen doing this kind of stuff because they're either not self-aware or they really aren't speaking to differentiation. But if you think you're a corporate and now you're just getting all this inbound, you're just shutting it off.

And as I think I shared with you in our pre-call, most corporations now have said to me, unequivocally, they will not open up an email from someone they don't know. Think about that. So it's about the network and the network isn't coming. The founder doesn't have that network. So who's got the network? Maybe the vc. Now the second part is guess what, if you're not talking to the cfo, at the end of the day, nothing's happening in corporate America nowadays in terms of budget without the CFO's blessing, more deals get shot down by the CFO than any other prospect, especially in IT and related characters. And so what we're preaching very strongly is if your solution is not a top three priority within that CFO's world vision and is not returning ridiculous ROI in very short order with no lift, you're out and you're just not going to deal with it. The AI that's going on right now is all these little pilots that are running around doing a lot of cool little stuff and going back to the board and saying, Hey, we're using ai. Nothing really is embedded deeply in the architecture of say, an SAP system or CRM solutions, certainly customer support. These are external facing solutions for the most part, easy to add ai, but that's just a different world, and I think we've got some hills to climb still.

Alan Wink:So as a venture capitalist, what's the one myth about venture capital? You wish the public would stop believing

Pano Anthos:That we're smart, that we know what we're doing? I mean, honestly, if I showed you some of our exits, I mean two of them, massive, 67 x, 167 XIRR percent, completely fortunate set of circumstances, I could almost call it luck. Now you've got this inkling that this should work, but then you have the same inkling of the one that doesn't work. So what's the difference? Both inklings, right? Both got a perspective. It's not like you've figured it out and it's a law of large numbers. You're just basically placing bets power law theory at work, which to some degree works and sometimes it doesn't. And we're just trying to kind of reduce the risk around having corporates buy in early to the platforms that we're investing in before we invest. That's, I think is going to be the big seed change in the industry going forward.

Alan Wink:Probably. It's funny because most people think that VCs have home runs on every deal they invest in. And I guess I've been told it really is a game of thirds. A third of the deals give you the fun return. A third of the deals, you'll get your money back, a third of the deals you're going to write off. But a third of those deals give you the fund return.

Pano Anthos:I don't even think it's a third. I know Alan, I know your math, but I think honestly, I don't think it's a third. In most cases, I'd like it to be right. They contribute to the return, let's put it that way. They contribute to their return. Look, I think founders are amazing. I wish they would be more self-aware of the environment they're around. They all think they're special. I'll give you, there was a study done in 2007, just an analogy. A bunch of teenagers were interviewed about what, what's your likelihood of becoming a star like a Hollywood celebrity? And 30% of the crowd said, we're going to be stars. There's just no self-awareness that's just ridiculously impossible. But everyone has that opinion that I'm going to win or be that special person. And I bless all of you going after it, but boy, you need to understand what you're working against the hill.

You've got to climb the people you got to deal with, the competition you're dealing with. And frankly, the biggest competitor in the market today is do nothing. Time and time again, startup time is not their friend. Time is not their friend. Corporates don't care. Corporates take their sweet time. They're not operating on the same cycle that startups are. And I've seen more startups go out of business, including one of mine when I was a startup founder because of time elapsing, I just didn't have enough time. And VCs have a clock. Their portfolio mandate is even though they extend it, it still, there's a clock running. So it is just one of those things where self-awareness is a really, really helpful perspective.

Alan Wink:I was fortunate enough to take a look at your website and look at some of the portfolio companies you have and you guys have invested in some great businesses in your portfolio. One of my favorite questions to ask is, pano, what's the deal that got away? Which is the one you wish you had a chance to invest in now that you turned down?

Pano Anthos:That I turned down? Yeah. Actually, I can tell you this one, I can't remember the name of the company. It's a children's eyeglass company. Pear and Pear came to us really wanting to work with us, and I looked at children's eyeglasses. I said, really? We're talking about a market of a market. It's not even like, it's like specialized. They've done incredibly well. And I look back and I go, I was stupid. I've been stupid more times than I can shake a stick at. I think that, and also valuation comes into these plays too, which is like you look at the market and you say, is it really worth that much? Is it really worth taking that risk? So I think that that pair was an example of evaluation play. It came to me firsthand. It was highly related and we were close to them and we just couldn't just like really.

And then I give you an example of Billy, which was a razor company that we backed years ago and who needs women's razors? No offense to the women in the audience, that's not the point. But it was like, no, everyone said, this is a stupid business, women's razors, it's a done deal, it's a done business and it sold for a ridiculous amount. So we're just not as smart as we think we are. And per would been, I think Paris is the name. It was the one I would've loved to have been in. It's done very well.

Alan Wink:So I'm getting the note that we are at time, so I just want to thank you so much for spending 30 minutes with us. It was really a great discussion and I hope everyone participated in the webinar. Really enjoyed it. So Pano, thank you so much.

Pano Anthos:Thanks Alan.

Alan Wink:Much appreciated. Bella, I'll turn it back to you.

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