Marc Andreessen is worried about the future of American startups

Presented by GOTO Market Institute

Hey SaaS Sentinel reader. Early-stage VCs are exercising their pro rata rights, Marc Andreessen and Ben Horowitz are expressing their concerns about overregulation, and CIOs are getting nervous about the impact of generative AI. Here’s what else is happening in SaaS this week.

• Early-stage VCs are increasingly turning to specialized "pro rata funds" to maintain their stakes in successful startups during later funding rounds

• Venture capitalists Marc Andreessen and Ben Horowitz argue in their "Little Tech Agenda" that government overregulation is stifling American startups

• CIOs are adopting a pragmatic approach to generative AI, focusing on enabling safe and ethical usage rather than outright bans

Fighting for their share: How VCs are using new funds to exercise pro rata rights

Seed and early-stage VCs have long relied on pro rata rights to maintain ownership in their top portfolio companies during later funding rounds. But competing against bigger players to exercise those rights has become increasingly difficult. Now, VCs are turning to specialized "pro rata funds" to ensure they can back their winners.

These new funds provide dedicated capital that early investors can tap into when they want to double down on a hot startup. As Lee Edwards of Root VC puts it: "pro rata rights are earned." But actually exercising those rights takes major money these days.

When a new lead investor comes into a Series B or C round, they usually claim a large preferred allocation off the bat. Remaining investors face pressure to pony up ever-higher valuations to maintain their stake. New investors may even ask founders to squeeze out earlier backers altogether to give them more room.

Unable to afford writing 8-figure checks, seed funds often have to let go of their stars. But declining pro rata also means missing out on greater ownership of the next unicorn. This explains the rise of "opportunity funds" from firms like Alpha Partners, SignalRank, and SaaS Ventures.

SaaS Ventures recently closed a $24 million vehicle to back Series A and seed funds in late-stage deals. As partner Jesse Bloom explains: "I give them money to invest in their pro rata, and I get 10% of the carried interest." The anchor LP joins a growing list focused on the pro rata advantage held by top-tier VC brands like A16Z and Insight.

Competition for pro rata deals is heating up thanks to a shakeout in the private markets. With later-stage venture activity down almost 90% since last year, deal access has become more cutthroat. As Steve Brotman of Alpha Partners notes, funds are unable to exercise rights over 95% of the time.

The takeaway? The lifeblood of venture returns means following winners. Pro rata funds now offer a way for early investors to double down in the late innings. Expect to see more founded as LPs and VCs aggressively pursue outsized outcomes. Until then, the game of pro rata musical chairs continues.

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America must love Little Tech too if it wants to stay on top, say Marc Andreessen and Ben Horowitz

Tech titans Marc Andreessen and Ben Horowitz want Washington to step aside. In their "Little Tech Agenda" published last week, the famed VC duo argue that overregulation is killing American startups—and jeopardizing the country's superpower status along the way.

Their diagnosis: While the U.S. dominated the 20th century thanks to Big Tech predecessors, today's political climate is outright hostile to entrepreneurship. From investigations to tax proposals targeting founders, they believe policymakers fail to grasp startups' importance for national security and global primacy.

As leaders of venture capital firm A16z, Andreessen and Horowitz have an existential interest in backing this "Little Tech." They recently closed a $7.2 billion fund to double down on startups in areas like biotech, space infrastructure, and supply chain tech. But in their view, the heavy hand of government intervention puts all this dynamism at risk.

Fundamentally, they argue that startups hold the keys for American preeminence in the 21st century, just as pioneers like Ford, Lockheed Martin, and Oracle defined its strength last century. Yet regulators seem unable (or unwilling) to foster the next generation of revolutionary companies that could buttress the country's leadership.

The question is: whose agenda is this Little Tech vision ultimately serving? VCs thrive when capital flows freely and startups chart exponential growth trajectories. But policymakers must balance competing priorities of public welfare, system stability, and much more. In truth, America's future likely depends on striking the right balance. Whether the hands-off approach favored in Silicon Valley offers the right path ahead remains less clear.

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CIOs’ concerns over generative AI echo those of the early days of cloud computing

When MIT CIOs gathered recently to discuss generative AI, the conversation sounded familiar. Behind the buzzy new technology, the concerns they raised mirrored those from a decade ago when cloud computing was still nascent.

Governance, security, responsible use—these worries over AI mirror the uncertainty many IT executives grappled with when assessing the cloud in 2010. But there's one big difference: this time, CIOs recognize they can't just lock the doors.

"We cannot and don't want to be ‘the agents of no,'" said Akira Bell, CIO at Mathematica. Today's consumerized world means that even if IT bans new AI tools, employees will likely find them anyway. Rather than shutting down access, the focus now is enabling safe, ethical usage.

Other CIOs echoed this pragmatic stance. GE Vernova's Angelica Tritzo is piloting generative AI through a deliberate process to build understanding. ServiceNow's Chris Bedi argued that before long, workers will demand AI augmentation to perform their jobs. "It’ll be unthinkable to ask your company employees to do their jobs without GenAI," he said.

The takeaway is that while concerns around AI haven't changed much, CIO attitudes have evolved markedly. Sticking heads in the sand no longer works: instead, tech leaders recognize that guidance and governance will help their employees realize the benefits of genAI while managing the risks. It's a nuanced, collaborative approach reflecting key lessons learned through the cloud revolution and beyond. And for enterprises on the road to AI, it paves a more productive path ahead.

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Parting Thoughts

Well, that’s the tech news for this week. Hit reply and let us know — did you learn something from today’s newsletter?

Until next time!