E11: Tomasz Tunguz and David Clark on how to invest in AI and Q1 2024 startup valuations

Key Points

• The winter class of Y Combinator showcased a significantly smaller batch size with a less than 1% acceptance rate, featuring AI companies that have generated excitement in the VC community, such as Leah, an AI assistant for lawyers that raised a Series A from Benchmark.
• Startup valuations for Q1 2024 have increased significantly at both the seed and late-stage levels, but concerns are growing around the sustainability of high entry prices if exit valuations remain depressed due to a closed IPO market and regulatory issues around large M&A.
• Successful venture capital firms are increasingly managing reserve strategies effectively, with the best firms able to adjust their exposure to increase investment in high-performing companies and decrease in loss-making ones, potentially moving a fund from top quartile to top decile performance.