There’s a lot of talk about a downturn in venture capital funding these days, but John Stanton pushes back on that term, at least from his experience. Trilogy Equity Partners, where he serves as managing director, has continued to invest at a steady pace of about one equity deal a quarter through all the turmoil of recent years.
“There’s an ebb and flow in the availability of good ideas, the availability of capital, and the availability of talent,” Stanton said Wednesday in Seattle. “And right now, I think there is a good opportunity to invest in new businesses.”
Artificial intelligence is creating some of those opportunities. However, AI startups also depend heavily on the major technology companies responsible for the development of large language models, in a regulatory environment that Stanton said reduces their chances for a big exit by making it difficult for major tech companies to make acquisitions.
“I think it’s going to be very difficult in the AI space for them to acquire others,” Stanton said of tech companies like Microsoft and Google, citing the aggressive stance taken by U.S. regulators. A Microsoft board member, Stanton saw this challenge first-hand, in another sector, in the Redmond company’s recent acquisition of Activision-Blizzard.
Stanton is in the news a lot these days as the Seattle Mariners chairman and managing partner, but long before he was fielding questions about the city’s Major League Baseball team, he made his mark as a business leader, investor, wireless industry pioneer, and founding partner of Trilogy, the Bellevue, Wash.-based venture capital firm.
He spoke primarily from his experience in those areas in the conversation with Leslie Feinzaig, founder and general partner of Graham & Walker, an early stage venture fund investing in women-founded tech companies, during the event on Wednesday, Nov. 1, at Pioneer Square Labs in Seattle.
It was part of the “Rock On The Road” event series organized by Harvard Business School’s Rock Center for Entrepreneurship. Both Feinzaig (MBA, 2007) and Stanton (MBA, 1979) are Harvard Business School alums. Laurie Bishop, the Rock Center associate director of alumni programs, was in Seattle to lead the event, and dozens of HBS alums were in the audience, including many well-known leaders in Seattle’s tech community.
Continue reading for key takeaways.
Some entrepreneurial talent is shifting from big tech to startups. “There are a number of entrepreneurs that we see, that we want to back, that are looking at [their jobs at] large software businesses. … They’ve been laid off, or they see a reduction in the growth, maybe their equity isn’t going to be as as valuable as they once thought,” Stanton said.
Scarce capital in Seattle is an opportunity for the region’s investors. There’s “definitely no shortage of great people and ideas,” Feinzaig said. But Seattle startup founders are perrenially complaining that there’s not enough capital in the city, and they have to keep going outside the region for funding.
Feinzaig asked, how do we capitalize our city’s entrepreneurs better?
“I think that’s an opportunity for funds that are based here,” Stanton said. “We like to think we see most of the entrepreneurs, at some point in time. We see several hundred a year, and we have an opportunity to pick and choose.”
He added, “Clearly there is still an inflow of capital from California. The Sand Hill Road gang will continue to invest here. But from my point of view, that’s a good thing. That represents a scarcity opportunity, from the point of view of a capital provider. That may give us some better opportunity in terms of returns and the kind of deals that we can do.”
“I’d rather be here than in the Bay Area, where there’s more capital than good ideas,” he said.
“I’d rather be here than in the Bay Area, where there’s more capital than good ideas.”
How AI compares to past tech disruptions, such as the wireless revolution: “The opportunities are substantial,” Stanton said. “But [startups] have to ride on the large language models at this stage, primarily Google and Microsoft through its partnership with OpenAI.
“And that is a different kind of model than either the wireless or cloud model, where you have to put up the capital; or the software model, where you can be in the garage, because you’ve got to have a relationship with or an ability to partner with the companies that own those models if you’re going to really build the business around AI.
“Entrepreneurs have to create something that’s unique, something that’s disruptive, but they also have to have a relationship that allows them to run on these enormous models on enormous platforms.”
Advice for building startups in the age of AI: “In some respects, it’s no different than any other software model,” Stanton said. “You have to have a disruptive idea, a market opportunity that is substantial. You have to have a diverse team of people that have the ability to look at things from different perspectives, and you’ve got to have capital.”
Uncertain exits: From the perspective of the venture community, Stanton said, it’s also important to understand who the acquirers might be. Given the regulatory challenges, he added, the answer isn’t clear right now.
Feinzaig followed up on that point: “You don’t think that the acquirers are Google, Microsoft, Amazon?”
Stanton said the current FTC is “very aggressive in terms of limiting the role that large companies can play,” adding that “it’s going to be very difficult in the AI space for them to acquire others.” At the same time, he said Google and Microsoft can leverage their own resources to develop many of these technologies internally, which gives them less incentive to acquire.
All of these factors together, he said, make it difficult to envision big tech companies becoming major AI startup acquirers in the next five years.
