Why Tech VCs Are Leaving Their Firms En Masse

Presented by GOTO Market Institute

Hey, SaaS Sentinel reader, welcome back. This week, we’re looking at why VCs are leaving their firms en masse, a16z’s investment in a new GitHub Copilot rival, and Amazon’s plan to recoup $25B in losses from its Alexa devices.

• Tech investors are actively leaving venture capital as startup funding dwindles

• A GitHub Copilot rival, Anysphere, has raised a $60M Series A at a $400M valuation from a16z

• Amazon turns to generative AI in hopes of recouping billions of dollars in losses from their Alexa devices

Junior VCs are flocking away from the tech scene

Over the past decade, venture capital has become one of the hottest corners of the business world. Young MBAs and college grads flocked to the industry, hoping to uncover the next Uber or Airbnb and get rich in the process. The pandemic supercharged the VC craze even further, as record-low interest rates sent money pouring into the sector.

But lately, the hard reality of venture investing has set in during a market downturn. In a May report, PitchBook forecast that venture firms would raise less than $200 billion in 2024, a 48% drop from the industry's peak in 2021.

And for junior VCs, promised promotions are not materializing. At some firms, there's now only room for advancement if another partner leaves or takes a pay cut. Young investors hustled for years expecting a quick path to partner, but firms are setting "unrealistic timelines and expectations" that are almost impossible to achieve. Even partners who finally made it to the top rungs are not seeing significant payouts as recent funds flop.

At the same time, daily deal competition has become cutthroat. More capital is chasing fewer promising startups, turning co-workers against each other. Sabotage, credit stealing, and deal poaching happen frequently—"This is an individual sport," as one investor put it. Partners have even killed deals from their junior colleagues for arbitrary personal reasons.

The toxic environment and shrinking career prospects have led to a wave of disillusioned investors looking for an exit. Headhunters report getting 4 times more inquiries from senior VCs exploring new roles compared to 2 years ago. But viable landing spots are hard to find since shrinking LPs have hobbled most firms.

For over a decade, working in VC appeared to be a glamorous path to fortune and glory. But that illusion has now shattered for many. The next generation of VCs will need to adapt to a landscape where only the shrewdest and politically savvy investors can still find success.

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A GitHub Copilot rival, Anysphere, has raised a $60M Series A at  $400M valuation from a16z

While morale and career prospects are diminishing across much of the VC landscape, one corner still shining bright is AI code assistants.

Anysphere, a two-year-old startup behind a software tool called Cursor, just raised an eye-popping $60 million at a $400 million valuation. The Series A round drew marquee backers like Andreessen Horowitz, Stripe CEO Patrick Collision, and others.

The red-hot funding follows the blockbuster adoption of GitHub's Copilot, an AI pairing for developers. Copilot already generates over $300 million in subscription revenue annually—more than all of GitHub before its $7.5 billion acquisition.

With millions of coders eager for AI-powered coding sidekicks, Anysphere is looking to take on GitHub in this surging domain. Its own revenue and usage have ballooned swiftly, per insiders.

Anysphere joins a swarm of emerging startups focused on streamlining software development with AI, including Cognition, Poolside, Magic, and others. It's a rare corner of tech still seeing frenzied investor interest amid the market's tatters.

So while most VCs are seeing shrinking opportunities, sabotage from co-workers, and disappointing returns, for those focused on developer tools, the party still seems to be going strong. AI code assistants are demonstrating they can drive real revenue while making engineers more productive.

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Alexa devices have lost Amazon $25B since 2017. Here’s their plan to earn it back.

Amazon's Alexa smart assistant celebrated its 10th birthday last year. But there wasn't much to celebrate financially. Alexa and Echo devices have lost Amazon over $25 billion since 2017 per reports—including a staggering $10 billion down the drain just last year.

The hefty losses led Amazon to lay off hundreds working on Alexa late in 2022. After a decade of hype and massive investments, Alexa has failed to deliver on revenue potential or transform how consumers interact with technology.

Surveys found a majority of people use Alexa for mundane tasks like playing music, setting timers, and controlling lights—not exactly the stuff of sci-fi dreams. "We've built a smart timer" lamented one former Amazon employee.

The waning interest extends across big tech assistants. Excitement has cooled around Siri and Google Assistant as well in recent years. Both Apple and Google have been compelled to reboot their AI offerings.

For Alexa, generative AI from systems like ChatGPT provides what looks like the last best hope. Leveraging breakthroughs in natural language processing could help transform Alexa into a more useful and engaging assistant.

Amazon offered a glimpse of an AI-infused future Alexa last year that sounded distinctly more human. But the clock is now ticking—Amazon likely won't pour billions more into Alexa without signs generative AI can unlock its potential.

Much like VC firms facing a reckoning after riding high, Alexa needs to fulfill its long-running but so far empty promises. Generative AI brings new possibilities, but it could also close the book on Alexa if it fails to create a compelling and financially viable intelligent assistant. 

For Amazon's $10 billion-a-year investment—not to mention the dream of ubiquitous AIs—a lot is riding on Alexa's next act.

Read more.

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!