Is the AI hype bubble bursting? | Equity Podcast

This episode is sponsored by Morgan Stanley atwork visit morganstanley.com Assessment to get your free transaction Readiness assessment [Music] Today hello and welcome back to equity a Podcast about the business of startups Where we unpack the numbers and the Nuance behind the headlines today is January 19 19 2024 and my name is Alex And I'm joined as always by my dear Friend and colleague marann aeto marann I feel like you and I have been Podcasting all week long but we have More stuff to talk about somehow we do I Mean and that's a good thing Lots going On yeah the there's used to be this like You know EB and flow to the news cycle In the tech World throughout the year Like in August everything would shut Down and then like December through January was slow not so much anymore I Mean we started off this year with a Bang it's been busy ever since I got Back on the SE I'm kind of impressed That's true it really like I thought I Would ease back into the year but no it Was like just crazy from the beginning Yeah well you know what the good news is We've had lots of fun and if you didn't Notice we had aen Lee of cowboy Adventures on the podcast yesterday it Should be in your feed so when you have Finished with our round up go ahead and

Listen to that it's a fantastic Interview we grabbed her right after she Wrote a retrospective a 10-year recap on Her original post that coined the term Unicorn over on Tech runch lots of good Stuff in there data interesting tidbits The future Adventure startups Etc a Hearty recommendation but on today's Show we are going to talk about a couple Of deals of the week one from pomelo one From Tandem and then one bonus deal from A company that's pronounced brick but is Not spelled the way you think then in The First theme we're doing an AI Check-in uses risks and what the SE Suite is thinking today and then we'll Wrap with Will startup valuations for Cover in 2024 maybe not so pack show today Maryann we had to start off with a Company that I thought meant grapefruit But it's actually a different kind of Fruit pamelo who Knew I didn't even know that so hey I Learned something new every day thank You Alex I wrote about this company Called pamelo and it's really fun and Interesting for us as reporters to cover Companies as they grow I first read About pamelo in 2021 when they raised a Seed round of 9 9 million I believe it Was at the time they were pre-product And pre-revenue which wasn't uncommon in 2021 not at all but unlike many other

Startups that raised pre-product and Pre-revenue in 2021 pomelo has continued To grow and raise money and this week They announced a $40 million series B And the company yeah which is pretty Impressive actually the company is a Payments infrastructure company based Out of Argentina and kazac Ventures led The round included uh participation from A number of other investors including Index V Monish and Endeavor catalyst so this was An interesting deal payments Infrastructure as we've talked about Many times has remain to be quite a Resilient sector within the fintech Space overall in Latin America we saw The acquisition of Pismo by Visa so Right so here's another example of what Appears to be a success story so far in The region now when I think about pamelo And I think about Pismo are these Companies that are competing directly or Are they actually in different markets So the overlap is more Model than geography yeah that's a good Question and I you know I asked them Exactly that and now I don't remember All the details of their answer um but You know there is some overlap they Don't do the exact same things and they Don't serve the exact same markets but There there is some overlap between the Two yes well if there's some overlap

Today in five years they'll be going too The nail in every single part of the Market because I'm sure that wherever The other one is they'll eventually end Up as well and that's good because more Competition is always good for the end Consumer but Maryann you also had some Notes on how fast pamelo is growing yeah So they told me that last year they saw Revenue increase by 3x or 200% of course They didn't reveal uh actual numbers Unfortunately but yeah so 3x growth in Uh 2023 they have over a 100 corporate Clients which include Banks Multinational companies Tech startups And then they said total payments volume Grew seven times in 2023 and that Reached a processing capacity of 50 5 Million transactions per day that's a Lot of transactions with that kind of Volume your your Revenue really can Stack up pretty quickly and so I was Going to make a joke Maryann about how They went from $1 in Revenue to $3 and Huzzah 3X growth but given that payment Volume number given the number of Customers they have probably larger so I Think although I'm always annoyed by Comparative growth versus hard numbers In this case I think we can know enough Going into those numbers that it's a Material Company like this is a serious Thing it's got half to it and you know More evidence that not only is Latin

America not over as a venture Market but Also fintech Remains Not Over as a Venture market so kind of good news for Two of your favorite things yeah and and I don't think I actually really detailed Specifically what they do Beyond being a Payments infrastructure company they Started out actually they only went live With their first customer in January of 2022 and they only supported prepaid Cards in Argentina since then they've Evolved their model and they offer Prepaid debit and credit cards to Customers in six countries in uh Latin America including Brazil Chile Columbia Peru Mexico and they they say they they Do it with or through a single Integration and that they can do it a Lot faster and a lot cheaper than Traditional methods well it's kind of What we see from a lot of people like The old API model was we'll take all the Complexity we'll take all the issues you Just use this web hook or whatever and Then we'll make the magic happen so this Feels a lot like that and just given how Large Latin American Market is how many Different currencies countes R payment Systems and so forth I think abstracting That for the end consumer must be very Popular so not shocked to hear more from Pamelo Maryann take a guess when will They be back on the show when will the Series C land or when will they announce

Some hard numbers you know I'm I'm not Sure and I'm not going to even venture To Guess that to be to be honest they Wouldn't share valuation with me they Did say it was a positive round not a Down Round um which is good and they did They had raised an Extension last August to their series A Which took place in October of 2021 so I Don't know but they they're growing they Seem to be you know they're putting Emphasis now on their credit card Management platform which is now a SAS Tool to help these companies manage Their entire credit card business so I Wouldn't be surpris if it sooner rather Than later but you know I'm not I'm not Going to guess a specific time frame Yeah also everyone stop being afraid Share hard numbers is what the cool kids Do like data bricks so you can do it too All right now my deal of of the week is Called tandem Tech said that it gives Quote modern couples an app to manage Their finances together and separately Now Maran you and I are both married People we have lots of married friends And so I think we probably had in our Personal lives all the discussions Possible about the ways to handle money As a married couple but what is the way Forward for couples that are not married And may not want to actually have fully Co-mingled finances and the answer maybe

Tandem my first thought was why do we Need this why do we mean why isn't it Obvious why like isn't one of the number One things couples fight about is money Yes so this is the philosophical Distinction between couples so my view Is if you're going to be with somebody Throw it all in a pot and and share and If you don't want to do that with Somebody well that says a lot however I Know I fully understand don't yell at me That I am not in charge of how people Should do things and also lots of people Don't agree with me they think that's Silly and that's why tandem is kind of a Cool way I think for c for customers Couples well couples are customers Customers who are couples if you will uh To have their money integrated in a way That allows them to split expenses and Share costs and save towards things but Without actually comingling their money So it seems to be kind of like a bridge Between the way that I view the world And the way that some folks do who keep Their money separately so that way they Can actually just work together a little Bit better and then it kind of clicked Yeah well I think I think there's a Couple of things here one I think tandem Is not just obviously aimed at married Couples they're very much also targeting Just couples in general who maybe just Live together for example but are not

Actually married so I think that if you Have not yet taken that step of marriage The idea of like opening a joint account Can be even more daunting or unappealing So I think tandem actually gives a Really great way to address this with Its app because like for example one of The co-founders was saying that she was Tired of um using venmo to like share Rent groceries and plenty of other Expenses so and and they didn't really Want to have like a joint debit card or Account you know cuz maybe like you Already you have a card that you've been Using for 10 years and you get reward Points and you don't want to give that Up for example so what tandem does it Gives you connect your credit card and Or debit card tandem pulls in Transactions however each partner only Sees what the other wants them to see And then couples can set up automated Money transfers into a shared expense Pot and then designate that money to Certain expenses for example like rent Or Netflix and so far more than 25,000 Couples are using the app I think this Is to be honest with you I think it's Brilliant but I do but does it exist Already that's one of the things I did I Mean I find it hard to believe this is The first time anyone's done anything Like this no no there there are other Things like plenty honeydew Zeta iela

And Ensemble for divorc couples but like You just outlined to me the most Hellacious thing in the world choose What expenses to share choose what the Split ratio is choose when to move I'd Rather have less money and not deal with That but I think you said Something very important which is for People who want to maintain their points From their card this is not aimed at People like me do you know what credit Card I have I have a Southwest credit Card do you know why because when I Lived in Chicago I flew Southwest I Haven't lived in Chicago for over a Decade but I haven't gotten a new credit Card because I don't want to open my Credit I I froze it like a thousand Years ago did the Equifax thing and so I Just had the same stupid credit card I Got when I was in college but I don't Care because the points are such a small Thing in my life and that's why when I Look at this I respect that it's Important I'm glad the tangent team has Found something that people want to use They've managed over $60 million thus Far in shared expenses for non-married Couples it just sounds like a lot of Work I don't think so I really don't It's a lot of work to have to venmo your Partner and and try to keep up with oh Do I how much do I owe for this or how Much do I owe for that so don't do that

And plus I mean like a lot of people Just you know don't want I don't think It's that they're hiding something from Their Partners but they don't Necessarily want their partner to know Okay I just spent $100 on makeup for Example so that's why they don't get the Joint account so I feel like this can Appeal to a pretty large demographic but Why don't people just communicate more And then not you know I don't it just I Again I know that I'm wrong I fully Understand that I'm in the wrong here I Mean I think I think that there are Plenty of people who feel like you do And plenty of people who feel like I do That's the beauty of this world right Investors obviously find this to be an Attractive model they got $3.7 million In funding recently and you know over 25,000 coues using it doesn't sound bad So far managing about they've already Managed about $60 million in expenses so I will be very curious to see how this Plays out all right uh let's move on and I want to throw a couple of notes in Here about a round you just covered very End about a company called brick but Spelled with a Q what's up right yeah so Like pamelo this is a company that I've Been writing about for years so I guess I can I kind of relate to investors when When this happens and my son put it this Way the other day and I thought it was a

Great way to put it because I was Telling him how you know how hard it can Be like picking who we want to write About and things like that and I said in A way I feel like we're like VCS because We have to judge if a if a company Really does have a differentiator Potential so on he said well yeah you're You are investing in the company you're Investing time you're investing space on Tech Crunch and I thought that's a Really great way to describe it for my 16-year-old but yeah that's that's Sage Level Insight well I know right so Anyway but I I have been writing about Brick and I think since 2020 and they Have developed software to help automate Finances within construction companies And they have been using AI for years Like they claimed before AI even was Really cool to do so they've had Bots For years technology they've built out So they just raised an $8 million Extension at $150 million doll valuation So I thought it was interesting because These days we're seeing so many down Rounds so for them to raise at a flat Valuation is actually newsworthy whereas You know that wouldn't wouldn't have Been so much years ago so a couple of Questions here one $8 million at of $150 Million valuation this is we should Think of this as like this is definitely A bridge transaction right just kind of

Get them to there ex right right they Didn't they wanted to wait out the Market that's what the CEO told me B Some hamd he didn't want to they didn't Want to um they decided to wait out the Market and raise a smaller dollar amount With less delution at a flat valuation Rather than go out and try to raise a Series C at this time okay good that That puts in context for me I fully Understand that cool round flat Valuation love it now on the automating Finances in con construction part I just Spoke to a company yesterday that is uh Construction adjacent I'm going to keep This under wraps until I think next Tuesday cuz I have a post coming but I Learned a lot about the the world of Materials that are used in construction And it turns out that it's like three Ring binders corkboards phone calls Friends to get quotes and bids and stuff Is this that kind of construction Finance or is this more like keeping Track of like your employee payroll Stuff yes a lot of the business Processes so like they autom Financial Workflows like accounts payable payrolls Accounts receivable that kind of thing Got it yeah and that's just one one Aspect of their business so they have These Bots to uh automate those Processes and then they also have so They have another they have two products

One is Brick autopilot which a CEO Likened to Tesla's autopilot for your Accounting Group Tesla's well you know Basically just saying you know these Bots they've trained these Bots to learn How to read documents apply logic to Their contents take actions so on and so Their logic is that that way you can Have less accounting staff too yeah I Know that's great I just wouldn't pick Tesla I know full self-driving isn't so I don't know bro say weo next time wh's Very Impressive yeah they well they have Another product called co-pilot and that Product they said automates the creation And administration of financial Forecasting processes such as job cost Forecasting Revenue recognition Revenue Forecasting all that stuff's pretty cool And honestly it's not the core Competency of a construction company It's just not so if you can Outsource it Good yeah and that's one of the things They were saying um and one of the Investors also said usually when you Think about robots in construction you Think about like machines on a job site And so brick is like one of the few Companies that are really really like Tackling robots in the back office and Interestingly they you know all they They focused on the North American Market right now they're looking to

Expand into the Middle East and Asia They're uninterested in going into non Uh I'm sorry English-speaking markets That you know might seem easy to enter Like Australia for example or the UK They really see potential in the Middle East and Asia and uh non-english Emerging markets in Europe which I Thought was interesting as well and when I asked about competitors they pointed To UI path and automation anywhere oh That's really interesting because I Think about that as more process Mining And process automation versus Financial Process automation but maybe I'm Actually splitting the hairs too finely There yeah maybe so I thought it was an Interesting as well well we can't talk About process Mining and AI without Talking even more about AI in the Enterprise and we're going to hit on That the moment we get back from this Very short Break is your company planning to go Public or conduct a shareholder Liquidity program within the next 18 to 24 months did you know that proactively Planning for your next private company Liquidity event or IPO can help you Maintain greater control over timeline And outcomes Morgan Stanley at work Believes that when you have the right Technology and systems in place working In harmony leading up to a transaction

You can prepare and execute with more Accuracy and ease visit Morganstanley.com Assessment to connect with their issuer Strategy and Excellence team for a free Assessment to find out if your company Is transaction ready again that's Morganstanley.com Assessment to get your free assessment Today now Maryann we've been talking About generative AI now long enough that We're starting to see a little bit of The push back to it if you will kind of The other side of the coin flip of hype When it lands on Tales people start to Tell you things like hey I don't know if It's actually going to work out that Well so I wanted to bring on to the show Today a piece that our own Kyle wiggers Wrote that brought together a whole Bunch of data points about generative AI In the Enterprise and why he felt it Wasn't a home run uh I I call it maybe a Double or a triple in baseball terms but There is some good data here so the Thing that really stuck out to me though Was that a Boston Consulting Group or BCG poll this month says that 66% of the 1400 c-e execs that participated in the Event or in the survey were actually Ambivalent or dissatisfied with their Progress of gen so far so not as Optimistic as I thought not as um you Know leaning into it as I anticipated

How did that data point hit you I was Actually kind of glad to see it because I I don't want to see companies getting Carried away about AI I I do think they Should proceed cautiously so I don't Think that's such a bad thing I I mean Obviously I think oh 89% ranked gen AI As a top three it Initiative for their Companies in 2024 so I think they're all Still like understand the importance and Potential but I I do think they are kind Of proceeding cautiously which isn't so Bad they did site a shortage of talent And skills unclear road maps and an Absence of strategy around deploying gen AI respons responsibly yeah I think the Responsibly is the key thing there and I Also think that one of the impacts that These lawsuits are going to have against Open AI won't just be a clarification of Fair use copyright and so forth I think It actually Pro provides a little bit of A drag on adoption of gen because Suddenly it's not just how can I use it How can I avoid my data getting caught Up in some analysis model but now it's What's this model built on and if I use It will there be any risk so it it is Interesting to see the tension between H We're not that far yet but yes it's also A priority for this year maybe we'll Just have to wait longer to better Understand where things are going to Land think but 65% said that it they

Think it will take at least two years Before J moves beyond the hype so even If it's an top three initiative this Year you know people are still taking a Relatively long time Horizon you know Two years is eight quarters that's eight Earnings calls that's a long time it's a Long time in the in the tech world too Especially so again I do find that Interesting I I I think it's not a bad thing that They're wanting to proceed cautiously And I don't know if if we said this Earlier but about 2,000 Executives Participated so this isn't like a very Small sample either no no no yeah and um Over 50% so they were discouraging gen Adoption over worries it would encourage Bad or illegal decision-making and Compromise their employers data security I found that interesting as well I mean Basically they're afraid probably of Getting sued or you know Have sec security concerns yeah I mean This is why I think it's going to be a Pretty big Market down the road for Companies to self host their own large Language models or alternatively they're Going to have to buy some sort of Software to segregate their data so it Doesn't get hoovered up I think Samsung Had a problem with this companies like Skyflow are trying to like build Solutions for it but what data where and

How is probably the most important Question in AI today and I think we're a Long way from sorting that out but vure Capitalists are not sitting by the Sidelines waiting for this to be sorted Out they're putting money to work now And we have some data from CB insights That says that valuations for earlier Stage AI startups in 23 were 1th or 20% Higher than other companies raising Fresh funding I'm paraphrasing gently From the CB insides data there and I'm a Little bit surprised that uh it wasn't Higher than 20% at series B it was one And a half times higher but uh for Earlier stage only 20% premium I thought It would be like 100 yeah I I'm a little Surprised of that as well lower than I Would have expected I wonder if that's Because early stage companies no matter What don't really have revenue and so It's hard to apply a premium to them but Maybe AI startups that are a little bit More mature series B level have more Revenue velocity and therefore they're Earning a they more traction more Results that's the very generous Interpretation of the data the other Interpretation is that later stage Investors aren't price sensitive and are Just out bidding one another and Therefore overinflating valuations early On that will cause damage down the road Depends if you want to be cynical or

Optimistic I Guess yeah um I would yeah I would say That that's probably a factor as well Yeah now this is all kind of part and Parcel of a conversation we've been Having over on the tech runch plus side Becca scac on my team wrote a piece Entitled will startup valuations start To recover in 2024 and her takeaway from Talking to about three or four dozen Investors was uh they're not very sure And so I think there's kind of two ways To think about the startup world there's The top like one or two% of companies Out there that are raising like it's 2021 the first name that comes to mind Is anthropic you know perplexity AI There's a lot of AI companies that are Raising at very high multiples because Investors are betting they're going to Grow 10 100 x from where they are but it Seems Maran that for other parts of the Venture ecosystem the valuations Forecast is not particularly strong Yeah it's not I mean the the hot sectors Are seem to be right now climate Ai and Defense um that's where investors uh are Are being drawn to to write their checks I don't know I I I know this is there's A lot of mixed feelings about this one VC told Becca that early stage was Likely to decline 5 to 10% before they Normalize and another VC thought that They've already normalized and that also

Series a has already reached that Normalization and might actually climb 2024 which I thought was was interesting Because as we've talked about though We've we definitely saw a surge in early Stage deals in 2023 one of the reasons We felt like that was the case is that Investors wanted to be able to get in And not have to be writing checks or or Pricing deals at really like inflated Valuations because they're you know These companies are just starting out so They have a little more control over That so it will be interesting to see if That in fact happens like at the series A stage my favorite takeaway from this While the series a stuff is very Interesting and I love seeing people Argue about when we've reached normal When we might accelerate when we might Decrease a little bit more Matt Cohen The founding managing partner over at Ripple Adventures says that he expects Late stage companies to go back to being Valued at 5x to 10x ARR which means that according to Cohen's view the upper Bound for late Stage startups could be the lowest Possible double digit number that's Crazy huh and can I tell you little Story please so I forget when this was Maybe like early 22 I wrote a piece that Was like get ready for single digits s Multiples and I was kind of over my skis

And I was like like what if this doesn't End up being true I'm going to get Mocked up and down Twitter and then Turns out I was right on time so you Were and that's the story about how you Can get stuck in one perspective which Was me being stuck in the 2021 Perspective and worrying about being too Pessimistic when I was actually being Still too optimistic I think in that Piece but to see Matt Cohen and the Ripple team think this well it does go To show that you know if you want to be A unicorn at 5x Revenue multiples you Need $200 million worth of recurring Revenue which is a lot more than I think What 98% of unicorns that our private Have right now probably so yeah that's Actually yes a lot more I would think Yeah at 10x by the way it's 100 million So we're literally right back to the old Rule of thumb for what a company needs To go public as the new threshold entry Point for unicorn status put that in a Pipe and smoke it it's going to be a Whole new world once that trickles down Through the unicorns of 21 which Incidentally we talked about with alien Lee what's what it feels just like hours Ago because it was well they don't know That this is coming out on Friday Maran I was trying to throw a little like time Travel joke in there all right friends Listen uh we're going to leave it there

We are back next week in full Force we Have not only our regular Monday Wednesday and Friday shows but we have An excellent interview coming up with Jana tier from crunch base all about Q4 Venture Capital data and what she Expects to see in the year to come but Mary and for now we got to let them go But if they want more of you and I and The whole Equity team well Equity pod Over on X and threads and of course our Two sister shows chain reaction and Found are there and ready for you to Enjoy bye everybody Bye Equity is hosted by myself Editorinchief of tech runch plus Alex Wilhelm and Tech rench senior reporter Mary an aeto we are produced by Teresa Loans solo with editing by Kell Bryce Durban is our illustrator and a big Thank you to the audience development Team and Henry pette who manages Tech Wrench audio products thank you so much For listening and we'll talk to you next Time

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