The Last Great Movie Star

This will be the last generation of global movie superstars. 

In the not-too-distant future, everyone will have the tools they need to create a completely AI-generated film that is indistinguishable in quality from a traditional Hollywood movie. This includes the whole shebang: from the main characters and actors to costume and set design. Our only limitations will be the constraints of our imagination. But even that will be augmented with technology. It is easy to draw a line between where we are today with the capabilities of AI tools to where we will be by the end of the decade. And while these statements may seem hyperbolic, the rate of progress across generative AI is accelerating. Things happen gradually, then suddenly. We are approaching the inflection point. 

This type of sea change, while unsettling for those who have mastered the status quo, holds immense potential for the broader population. The proliferation of new technologies and tools not only empowers a class of emergent creators but also lowers the barrier to participation and expands the market for industries. This is a positive shift - broadening access to the arts, expression, and creativity to everyone across the globe with a computer and an internet connection - but it disrupts the current norms. 

Why would a movie studio build a franchise around a human actor when it can use an AI-generated actor it has created and owns as IP and can uniquely customize across geographies and demographics? Is that dystopian and inhumane, or is it the obvious future? Denis Villeneuve’s recent Dune series is a masterpiece, but the second installment cost $190m to produce. How many orders of magnitude will that production cost come down as people in remote corners of Earth will have access to tools that enable them to create something of equal quality on their phones? Is that an absurd question, an implausible reality, or an inevitable one? 

This premise doesn’t just extend to film - it applies to all media. We are already seeing it happen with art, images, text, and music. Video is just an extension of these, and new formats that didn’t exist before will follow. The implications are hard to fathom, but here is a spectrum of scenarios for the future of media and entertainment, all of which will coexist: 

We are moving towards a world where content is auto-generated specifically for the sole purpose of entertaining individuals. It will be uniquely customized to suit their needs, tastes, and preferences without the need for explicit definition. Today, companies like TikTok use other people’s content to entertain a mass audience. They, like other scaled (sometimes social) media platforms, understand what we want to watch more than we know what we want to watch, and they capture our attention by surfacing addictive content. In this future, why would a media platform want to be dependent on a group of human creators when it can auto-generate all media itself with AI? We are rapidly approaching this world. Content - from music to video to memes and beyond - can be spun up instantly and uniquely customized to every individual and then immediately discarded. The endless scroll will be truly infinite. Scroller beware of the implications. 

Humans will embrace AI tools to augment their creativity and explore new artistic frontiers. We’ve come a long way since the days of cavemen painting pictures with twigs and pigment blocks. We are now armed with tools that expand our capabilities and creativity to new dimensions. In 1997, world chess champion Gary Kasparov was the first knowledge worker/athlete/artist (pick your own descriptor) to lose his job to AI when he was defeated by Deep Blue. Since then, it has been believed that between human chess players and AI chess engines, the most skillful player is actually a combination of human and AI, or a chess cyborg. Media is experiencing its chess moment, and creators now have AI partners to help them push into new frontiers. Over the past two decades, some of the largest and most powerful networks in the world emerged around media. These networks built around “social media” grew on the backs of user-generated content - photographs from point-and-shoot cameras, 140-character quips, memes, videos taken with smartphones, entries on message boards, and more. The combination of humans and AI is going to produce new atomic units of media and expression, and around these novel (and weird) formats will emerge tomorrow’s global networks. 

There will always be an important market for authentically human creations, and as AI-generated media floods the digital realm, the value of “deep reals” will grow. Live experiences that showcase human talent will counterbalance the manipulation of bits, and its scarcity will drive demand. The same goes for unassisted, human-created media. While these formats may be more niche and never achieve the reach or ubiquity that their AI-generated or AI-assisted counterparts will - a human-directed, produced, and acted film may never have the same “popularity” (ie views, impressions, etc.) as a perfectly optimized-for-engagement AI-generated movie - they will still be critical foundations of culture. 

Media exists on a spectrum, and the introduction of AI tools is stretching and adding new dimensions to it. Innovative tooling is critical, but I am most interested in the networks that emerge around these novel “Human + AI” formats, as well as the experiences and infrastructure that help deep reals thrive. While this may feel like a particularly daunting moment for those who have thrived in the status quo, I'm optimistic about new opportunities for exploration and the ever-expanding canvas of expression and creativity that can fit in the hands of everyone across the globe. 


A Little Bit

My 7-year-old son recently started to love playing basketball. He wasn’t all that into it before this year, he has never watched much of it, but he loves to play. It’s the first thing he has really taken to and he asks me to play all the time with him. We practice dribbling, rebounding, and defense in our backyard, and he can’t get enough. We also got a basketball hoop at our place upstate and he can play Horse all day long. I love doing it with him.

He asked to join a team two months ago, so we signed him up for a league. He practices once a week and plays a game every weekend. When he started he didn’t really know which side of the court was his teams or the opposing ones. He spent most of the first game with his hands behind his back, double dribbling, or almost falling when he was running from one side of the court to the other. Watching it was an experience.

But he loved it and that's all that mattered. He also wanted to get better. So the first thing we did was work on passing the ball to each other and moving around without the ball. We did this every night for 10 minutes. I never asked him to do it, he'd drag me outside after dinner and demand it. The next game there was a noticeable difference in his passing and catching abilities. But he would run away from the hoop when it came time to grab a rebound. So we practiced rebounding and made it fun. He’d have to jump up for the ball and when he grabbed it and landed on the ground he’d have to yell. The next game he got several rebounds and wasn’t afraid of the ball. Then we did dribbling. Then defense. Then shooting.

Every week he made progress. And in the last game he played, it went to triple overtime. That’s a big deal for a 1st through 3rd grade league. In the third overtime, the ref declared “next point wins.” The score was 20-20 (which is a high scoring game for a bunch of 7 and 8 year olds). My son was passed the ball and scored the game winning basket. I’ve never seen him smile like that before. He came sprinting across the court and jumped into my arms. The whole gym was lit up and as far as I was concerned he had just won an NBA Championship. It was an all-time moment. 

The chances of him being a pro are slim to none. He may grow bored of it next year and not want to play anymore. That’s fine. What has been incredible to see is how his consistent bursts of effort compound slowly, then quickly. As an adult (or whatever I am), it’s easy to forget how practice and getting reps in is the only way to get better. We want immediate progress, but it always comes gradually. We practice a thing and get better, but just a little bit. But when we do it over and over, the little bit turns into a lot. Parenting teaches me a lot of different lessons, but I was so happy to be reminded of this one, and to witness it again firsthand. A little bit over and over again goes a long, long way. 

Storytelling

Previously I wrote: “One of the most important skills founders must hone is their ability to tell a compelling story. Part of that story, if they plan or want to use venture capital as a tool to grow, is articulating how much money they want to raise and what they plan to do with that money.”

Moving from entrepreneur to investor, I assumed that founders universally knew about the importance of storytelling. I took this for granted and was very wrong. Most of the time an introductory meeting is 30 minutes. That’s a huge chunk of time to leave a lasting impression, and it belongs to you. Seize it by telling the best story possible, and augment it with the best presentation you've ever made. I’m constantly shocked by how many people just want to shoot the shit, or act cute and coy and don't use the time productively to either share what they’re building and why they're building it or begin to develop a lasting relationship in a productive way. 

There are many pieces of a story that are important to communicate, and every story is different, but there are some obvious and important component parts that you should always get across either with or without a deck:

  • Who are you? I like to know your personal background and story. It humanizes you as an entrepreneur. 

  • What are you building? Too many entrepreneurs struggle to crisply articulate what is it they’re building. When this happens I immediately shut down. Whether right or wrong, it’s my dealbreaker and I can’t compromise on it. Workshop this, get feedback, refine it, do whatever you need to do to nail this. Another great way to communicate this is to show and not tell. A quick one liner accompanied by a very simple product demo (ie don’t show me every feature, just enough to grasp what it is) is always helpful. Do not mess this part up. This may sound painfully obvious, but too many people do it wrong.

  • Why are you building this? The why is the fire that fuels you for the decade to come. Express this with passion. 

  • How’s it going? What have you learned? What’s the data look like? How are the market and customers reacting to what you’re putting out there? This is a good time to demonstrate that you’re capable of synthesizing market feedback and doing something intelligent with it. What have you learned from the capital and time you've invested invested so far? I’ve always liked Frank Rotman's framing of quality learnings per dollar spent. 

  • What’s the plan moving forward? What does the roadmap look like? How much capital do  you want to raise and what will you do and accomplish with it? 

And don’t forget to paint a picture of why this is so exciting and how this becomes big and important along the way. 

Some entrepreneurs are gifted storytellers. Others are not. But storytelling is a skill that can be learned and honed over time. Practice it repeatedly. Do it in front of a mirror. Nail the delivery of the most important lines. Record it and review the tapes like a professional sports team would to get better. Pace around the room by yourself endlessly rehearsing it out loud. Practice it with your cofounder for days on end. Laugh about it. Cry about it. Give each other high fives. Give each other a hug. Scream at each other. Get weird. Enjoy the process. Refine it. Get it to the place where you can enter a meeting, start presenting, completely black out, come to at the end of the presentation and know it was flawlessly delivered. It needs to be superb and capable of being delivered on autopilot. 

If you do not take this part of company building seriously then you are shooting yourself in the foot. Some companies strike gold and are in the right place at the right time and have captured lightning in a bottle and could keep their mouths shut and term sheets and job applications would be delivered to their doorstep. This is the exception and not the rule. I’ve never built one of these companies, and chances are you won’t either. Not because you’re not amazing, but because the odds are statistically near zero. So in lieu of getting absurdly lucky, you have your story. It’s your ammo for attracting capital and talent. Make sure you invest in it because it pays dividends. 

Powerful Pockets of Internet

I’ve been spending time thinking about how web3 will influence the future of social networks and consumer applications. There are three core areas that are most exciting to me: public social networks, private social networks (eg the real-life communities that exist in messaging applications), and marketplaces. An emergent onchain internet architecture, characterized by protocols, open graphs, and composability, is giving builders another crack at reinventing these categories. I plan to write a series of posts highlighting how these different areas may evolve over time, beginning with public social networks. 

Last year Steve Martocci and I were talking about the future of social networks. We are both obsessed with self-directed healthcare, and we observed that so much of the bottoms-up dialogue that happens in the space occurs in subreddits, and it has reached a tipping point where it deserves its own place on the internet to call home. 

This is a theme that will come to define the future of social networks over the next decade. Over the past 10 years, social networks have become less social and more broadcast. I’ve written about it in WTF is Social Media? The playgrounds we used to call our homes have turned into large horizontal media distribution channels and have lost their sense of intimacy. As a result, relationships - both based on real-life connections and around interests - have been pushed to the edge. They have found their home in group chats within messaging applications and in subreddits. 

The time has come for these networks to inhabit new spaces that can deliver richer functionality, better UX, and a variety of different business models that benefit both application developers and network participants. I have been particularly interested in how subreddits can be siphoned off the mothership and turn into thriving networks of their own. There is no reason why a message board should be the universal form factor for social networks. We have seen instances of this happening from communities on Discord to sites like Patients Like Me

Last week I attended Farcon, a sufficiently decentralized conference organized by people, mainly Ted (not lasso), who are active participants in the Farcaster community. It was small (roughly 500 attendees), but filled to the brim with energy that was reminiscent of SXSW from 2009-2011. Everyone there was eager to experiment with new products, learn from the people using their products, and support the ecosystem. It felt like a very special moment in time and in ten years I think we will look back on that event as a tipping point for web3 social. 

Dan and Varun (Farcaster founders) kicked off the conference and they discussed their strategy for growing the Farcaster protocol to 1m+ DAU. One of the pillars of the strategy that they call "cozy corners" rhymes with the idea of giving flourishing subreddits a place to call their own on the internet. Dan alluded to the notion that subreddits with millions of active users can and should actually be their own freestanding networks and businesses on the internet. 

This deeply resonated with me. "Creating cozy corners" is an endearing turn of phrase, but there are powerful pockets of the internet that pack a punch and will emerge as independent social networks of their own. Channels on farcaster may very well be the thing that enables the rapid acceleration of this trend, which we can think of as the unbundling of Reddit.

Channels are the perfect conduit for this because as they become decentralized and protocolized, channel creators can spin them off into their own client. They can build their own UX around them. They can monetize them through a variety of different mechanisms. Maybe participants will need to pay a one-time fee to be able to post to the network. This could improve the quality of content and dialogue. Perhaps those that can't afford to pay will have different paths to post, like volunteering to be a moderator. Each network can have its own programmatic reputation system. Maybe it's interoperable with other channels/networks. Perhaps everyone needs to subscribe to the channel using STP. Each network may have its own native economy and token used for tipping and payments. Maybe network creators can economically participate in minting fees from the channel as a native monetization mechanism. Maybe every channel participant is also an owner and can accumulate more ownership over time based on a transparent set of rules and dividends are distributed regularly. Maybe users can collectively determine that their posts and various contributions to the network can be sold as data to train an open source AI model and they're each individually and proportionally compensated.

The canvas is wide open. Composability, openness, tokens, reputation, and native web3 monetization models - both existing ones and ones to be invented - along with a whole host of other onchain primitives will come to define emergent social networks. Web3 is opening the aperture to an entirely new UX and business model paradigm and we are going to enter a new age of many smaller but thriving social networks, each special and unique in different ways yet built atop shared infrastructure and information.

I believe this decade will be very special and I feel lucky to be here for it. 


What's Different?

I remember buying my first BTC on Coinbase in 2013. It was during one of the first crypto bubbles, and the world was freaking out that BTC had surpassed $300. I happily participated in that hype cycle without really understanding what crypto was. 

When I was building Fundera I was pretty heads down for the better part of a decade. I continued to buy BTC over time - I can probably time my purchases to increased mainstream media coverage. I was easily influenced and I never really took the time to do a deep dive and teach myself about blockchains or read the BTC and ETH whitepapers. It wasn’t until I read Digital Gold in 2018 that things really started to click. 

After Fundera was acquired in 2020 I finally did the work. I voraciously consumed every piece of literature I could get my hands on. I also tried to play with every product I could. As I was doing this, I would attempt to identify areas of opportunity and investment. What protocols would power the future internet? What was the underpinning of a new financial system? Which NFTs would maintain their value through a market downturn? Of course, this was in the midst of the last bull market. Needless to say, I got rekt. 

This was an important learning experience for me. I was fine with losing money as an angel investor, especially because a lot of the investments I made had sound reasoning behind them, they were just poorly timed. They also provided a good opportunity to tax-loss harvest. What I wasn’t fine with was getting caught up in the hype and doing things because of FOMO. It was disappointing to succumb to it, and it taught me that doing things because they are in vogue is not the right reason to do them. I should do them when I have a deep understanding and conviction. I imagine this is a lesson I’ll continuously learn, but I can at least now recognize what it feels like in the moment. 

Fast forward to today and something is very different for me in the world of crypto. I am fully red-pilled, as Nick likes to point out. When I first started to really dig in in 2020, a lot of the products I used felt like they were enabling me to participate in the global casino. They were speculative in nature. It was fun, and there were definitely foundational developments that emerged, but a lot of the UX for me was oriented around trading and swapping and buying and collecting and hodling. Today so much of the UX is wrapping my hands around products I can regularly use and immediately get utility and joy from. They’re social in nature and familiar, yet novel and experimental.

There has been much talk and writing about the theoretical power of onchain applications in the context of rebuilding consumer networks and services, but now we are seeing those theories become reality. Every day my eyes light up when I see the power of composability and headless application architecture and open graphs manifest in the form of a new product and experience. Entrepreneurs are connecting the dots in real-time, and they are enabling consumers to experience a better way of doing things on the internet.

Programmable Anythings and Headless Applications

One of my favorite places to hang out in Warpcast is the chess channel. There are a lot of people talking about current events in chess and posting tactics for others to solve. People will respond to the tactics by writing out their answers move by move in a new cast. Usually, the first person who responds correctly will be awarded $degen for their efforts. It's a lot of fun.

I thought it would be even more fun if you could interact with tactics in a Farcaster feed. Frames are the perfect way to experiment with making this happen. I think of Frames as interactive applications that can be embedded into a Farcaster feed and usable in any FC client. The first Frames have been relatively simple, but it doesn't require a stretch of the imagination to see how these can evolve into full-blown games and social interactive experiences over time. They are very reminiscent of Zynga's Farmville infiltrating Facebook years ago.

I wanted to create a Frame where you could solve tactics within it instead of having to post a picture in a cast, reply with answers, and wait to hear if you were correct. These types of web applications exist (chess.com has a great tactic application), but why not make it an experience inside the chess channel feed? I created a bounty on bountycaster and a caster responded to it with a quick and dirty version of a Frame. We worked together over a couple of days to refine the experience, and ultimately got to a good place.

While it's not perfect, my goal was to make something that was fun for people who like chess on FC to use, and to hopefully inspire people to push the envelope of what Frames can do. Can we build real interactive games inside them? Can they be social or multi-player experiences? When can I play chess against another FC user in a separate client but an audience could follow along in real time in a Frame? Are these ideas even possible?

This was a fun experience for me because it helped push my thinking around two areas. The first is the idea of Frames as interactive applications, or "programmable anythings" as I call them in my head. We are really at the very beginning of what is possible here. I haven't seen many instantiations of Frames that have actual inputs other than pressing a button. The Frame we created through this bounty has a text prompt, but there will inevitably be other modes of interaction within them over time. The skeuomorphic expression of this is Farmville in the FC feed, but something weird and native to the onchain experience will emerge and be very special, and it will happen after a lot more collective experimentation.

The second area is around the future of headless applications. When I created a bounty on bountycaster, I did not use a bountycaster client. Everything was done entirely within the Warpcast feed. I simply crafted an initial post, someone responded, and a job spec was fulfilled.

This experience reminded me of a post I wrote about agent native applications. The premise is that in the near future, agents will act on our behalf and existing marketplaces or services that require your eyeballs to visit their website or specific client will not be compatible with them for a whole host of reasons, but headless ones will and they'll emerge to fill this need. These headless applications are already emerging onchain. Sometimes they are referred to as headless marketplaces. Using them is pretty magical and the implications are profound when we think about the future architecture of internet services and marketplaces.

Bountycaster is an example of a headless application that has emerged in the FC ecosystem. You can think of it like Fiverr or Upwork, but instead of having to do everything through a specific website, I can initiate or fulfill a job request from anywhere within Farcaster. This means that as a job-doer my reputation is not tied to Fiverr or Upwork. It's portable across any onchain application and I can bring it with me. And when I want some work to be done, in this example the creation of my chess tactics Frame, I can post it anywhere onchain and it can be distributed and responded-to through any client built on FC. Being headless enables a job post to proliferate and be accessed everywhere onchain, and any job-doer now has a portable and self-owned profile, work history, and reputation. This is an architecture that is also compatible with an AI agent-centric future. I invested in an iteration of this Bounty concept years ago with a project called Ahoy, but bountycaster pushes this several steps further into the future.

There are some obvious holes I encountered in the bountycaster experience, but those will all be patched (eg escrowing payment at the outset of a job and having a network of arbiters that can subjectively determine when a bounty has been fulfilled to spec). The whole process felt familiar but entirely novel. It was a taste of things to come in the future and yet another reason to be excited about the pace of rapid experimentation onchain that's creating fun and useful consumer experiences in entirely new ways.

Social Media Onchain

Social media platforms have evolved in a variety of different ways. Some are about sharing things with friends, and many of them have become a way for creators to put content into the world to entertain an audience. It very much feels like the dominant platforms today have become sterile. We use them, but they’re not fulfilling, nor do they have the pioneering sense of adventure and wonder they did as they emerged many years ago. 

Recently I wrote about how something magical is happening onchain in consumer social. The Warpcast community feels like the early days of Twitter, and the openness of Farcaster has made the feed an experimental playground similar to early Facebook when third-party apps like Zynga could build companies on top of the FB social graph.

There’s an emergent playbook for building consumer social apps in web3. It begins with a skeuomorphic version of the web2 counterpart that the crypto community embraces. People onchain have a real willingness to experiment with new things, so acquiring early users is much easier in web3 right now than it is or was in web2. During this first phase, it’s important for application developers to hone in on what makes their product uniquely differentiated from their offchain comp. What are some of the defining characteristics that are only possible onchain, and how will that create preference amongst users so it can cross the chasm to a non-crypto audience? Here are some early and obvious ideas:

  • Applications that enable creators to monetize have the ability to offer meaningfully lower costs. This is the “your margin is my opportunity” play. Why pay Patreon a high rake when you can use Hypersub? Why Substack when you can use Paragraph which is 50% cheaper? Less extractive fees will create economic preference amongst creators, and these savings can be reinvested in their art and livelihood. 

  • Financialization is a major feature of crypto. With onchain social media, creators can do things like allow their audience to benefit and participate in a creator’s growth and upside economically. That’s something that has never existed before and a real incentive for fans to help creators expand their audience and flourish. 

  • We talk a lot about the ability to own your audience and bring it with you wherever you go. This is one of the pillar features of web3. Farcaster cannot shut down your account the way Elon Musk can. Your audience belongs to you which means that you can distribute an infinite variety of content to them through a multitude of different applications and interfaces. 

  • Open data and composability enable a lot of experimental things to happen in crypto. Usually when someone shares media to a platform, it stays within the confines of that platform. It’s hard for it to proliferate across the internet and make its way into a variety of different applications. The only place this really happens in web2 is when a publisher embeds a tweet, instagram, or video. In web3, an atomic piece of media or data can be reshared across any onchain platform, and a creator can and will consistently be compensated for its distribution regardless of where it was originally posted. Because media is tied to your identity instead of a specific platform, it can live in many different places simultaneously, wherever you choose to go. That is immensely powerful. 

There are still plenty of hurdles to deliver a UX that will draw in an offchain user base. Current onchain social applications are too insidery. Connecting crypto wallets is not something the average internet user understands. Paying with tokens is not a widespread behavior. These things will need to ultimately be abstracted away from UX in order to onboard billions of people. Fortunately, many tools that help solve these issues are being developed and adopted.

Ultimately, users go where their friends and content creators are, and creators go to pockets of the internet where they can get distribution. Right now, given the lack of a scaled onchain social network, robust distribution is a missing link for offchain creators looking to make the migration. Perhaps the rapid experimentation and composable nature of onchain consumer applications will help to solve this problem. We may very well find that sooner rather than later web3 offers a much richer distribution opportunity across a variety of different networks and platforms, and there’s an argument that it’s easier to be early to a network and build an audience as opposed to arriving late to the party. It seems that the right approach is not to try to convince web2’s biggest creators to drink the kool-aid, but to make sure that the onchain gravity is so strong that tomorrow’s biggest creators emerge on web3.


Web3 Social: Skeuomorphic, Then Not

For a long time, the web3 ecosystem had to organize and communicate on web2 platforms. From the memes of crypto twitter to the project-specific communities that congregated in Discord and Telegram, there were no dominant web3 platforms. That is changing quickly and there is something special happening in web3 social right now. 

Over the past several years, we have seen a series of new projects emerge that finally give the web3 community a place of their own. They are unique, constantly evolving, and growing quickly. These projects have real tailwinds because people who like crypto have an explicit preference to use crypto-native products instead of web2 ones (even if they are less convenient to use), they are willing to experiment with and try new things, and nascent communities are always more fun than big ones with a lot of noise. 

The trend for a lot of these projects is that they begin as a skeuomorphic representation of their web2 counterparts to attract an initial audience, and then they rapidly experiment to introduce weird and crypto-native features. This is just the beginning of what we are seeing:

Twitter Warpcast

Reddit Warpcast Channels

Tumblr/Instagram Zora

Substack/WP Paragraph

Discord Towns

Patreon Fabric

TikTok Drakula

I’m sure there are plenty of other examples I am missing here. In all of these instances, the web3 version initially mirrors the web2 counterpart, but then they quickly diverge. A lot of times this divergence is marked by some crypto-native feature: financialization and minting as a web3 version of “liking,” things that can only happen because of web3 composability like Frames, the emergence of memetic tokens that transcend applications like DEGEN, etc. All of these things are new, they are weird, and they are uniquely web3. The other characteristic they share is they are simply more fun and entertaining than anything that exists in web2.

We are now beyond the hand-wavey language and posturing and pounding the table on “everything needs to be open and portable and LOUD NOISES” We are seeing applications emerge that are fun, have real DAU and utility, are birthing products and memes that transcend beyond those communities, and represent the beginning of a new wave of emergent social networks that are fundamentally different. And while it’s still early (when will it not be“early?”), things feel more promising, useful, and engaging than they ever have. 

At the very least, it’s a joy to see so many people rapidly experimenting together, building new products and features that could have never existed before, trying new things, and having a good time. It’s very reminiscent of early Twitter where an early community of curious people took a platform and morphed it to their liking. Now it gets to happen all over again, just with a new set of tools, functionality, and a permissionless and open system to ensure its future belongs to everyone. 




Use of Proceeds

One of the most important skills founders must hone is their ability to tell a compelling story. Part of that story, if they plan or want to use venture capital as a tool to grow, is articulating how much money they want to raise and what they plan to do with that money. 

When raising capital, it amazes me how many founders will say something along the lines of, “Well, right now the market for Series A companies is $X, so that’s what we want to raise.” I find that type of finger-in-the-wind talk extremely lame and weak. It means that you haven’t taken the time to truly think about what your goals are - e.g., growth objectives, what you need to learn, build, and prove, and what resources you need to accomplish those things - and the capital requirements to get them done. 

One of the things my investors taught me is that entrepreneurs need to be good stewards of capital, and part of that is having a very keen sense of what to do with it. When raising money at groupme and fundera, we always had a crystal clear idea of how much money we wanted to raise and why. Sometimes it was to be able to pay for some rapidly accelerating variable costs attributed to our fast growth; other times, we needed to invest in hiring people with different types of skills to build things like new mobile clients, or we wanted to scale a sales team after we had a basic sense of our payback periods and how we’d operationalize onboarding and ramp cycles. This wasn’t rocket science or even calculus, it was just a simple model we’d build in a spreadsheet. It demonstrated that we had some modicum of an idea as to what we’d spend money on, when we’d spend it, and why. And it’d be reflected in a basic pro forma and financial model that would grow in sophistication as we learned more about our business over time. 

Some frameworks for this can be a simple comparison of what your company looks like today versus what it will look like in a future state due to this fundraise across a series of different attributes: team size and composition, customer or user growth, revenue growth, product features, releases and milestones or markets you’re live in, etc.  Demonstrate and convey what will be different about your business when you raise the money. “We want to raise $10m to accomplish these things and have some buffer to invest in new initiatives opportunistically” is an infinitely better answer than “$10m feels right for us.” One shows you might be a thoughtful steward of capital, and the other is a total turn-off. 

The process of doing this work isn’t super time consuming, and it’s remarkably important to help you think through just what it is you want to accomplish with money. If you’re asking for capital, at least have the wherewithal to answer these basic questions for yourself let alone investors. You’re selling a piece of your company. Be thoughtful about why you want to do that and why it will be worth it. 

In Defense of Thin Wrappers

GroupMe first launched as an SMS-only application. All groups were assigned a unique phone number that you could add to your contacts as Family, College Friends, or Music Crew. You’d add members to the group with a series of SMS commands. When you sent a message to your group’s phone number, a text would be relayed to everyone else in the group. All of this was built using Twilio, which at that time had found a way to abstract away all the complexity of integrating with telecommunications infrastructure so application developers could focus on building great user experiences. We would have never existed without Twilio, but it also led to a real problem with our business: we paid for every single message we sent. The average size group was six people, so we paid when someone sent a message to the group phone number, and then we paid to relay that message five times to everyone else in the group. One message meant paying for it six times on average. We also paid every month to lease the group phone numbers. 

This became an extremely expensive endeavor for a free service with no means of monetization. The product grew virally. For every group that was created, one user would go off and create their own, adding five new people to the network. Every group and message sent was a variable cost, and we were beholden to Twilio’s prices. We tried negotiating but could never get prices to a place that wouldn’t put us out of business. My co-founder Steve even proposed doing an equity swap with Twilio to align our respective fates, which was a wonderful idea but sadly rejected. Our only chance of survival was to raise enough money for VCs to subsidize our text messaging product while we found ways to drive down SMS costs and migrate our user base to an over-the-top mobile messaging application similar to WhatsApp. 

To get off Twilio, we first had to understand how to get closer to telecommunications infrastructure, or “the metal,” as industry veterans called it. We hired consultants who ramped us up and helped us to identify two companies, Bandwidth and Level3, that Twilio was using to build their service on top of while they hammered out deals directly with telcos. These companies were not developer-friendly friendly, and we had to task Brandon Keene with the mission-critical responsibility of migrating GroupMe off Twilio and figuring out how to rebuild all of our SMS infrastructure while maintaining acceptable service levels for our users. We also had to play Bandwidth and Level3 off each other to negotiate bulk pricing that wouldn’t put us out of business and enable us to scale for the years ahead. We were in our early 20s and had no clue what we were doing. 

We miraculously managed to cut a deal with Bandwidth, migrated off of Twilio, and bought ourselves enough time to wait for most of our users to switch to the native mobile app where we didn’t have to pay exorbitant SMS costs as the service scaled. 

Lately, I have seen many companies that remind me of this GroupMe experience. They are building consumer-facing applications that sit on top of LLMs, primarily Open AI, and when they get some form of traction and grow, variable costs start skyrocketing. Similar to GroupMe, very quickly monthly costs ramp up to hundreds of thousands a month, but now it’s inference instead of SMS. Over time, these costs will come down for application developers. Market competition, open source, and locally hosted models will all make inference more affordable, but it’s unclear if we are operating on a timeframe of one year or five. 

For most application developers, it’s not really an option to not use these models. Consumers are growing to expect the type of functionality and features they deliver. Once things start working, there will inevitably be some form of scaling and expensive inference costs that are meaningfully higher than what pre-LLM companies have experienced. Having to deal with these issues when you are growing is really hard. You effectively have to rebuild the engine of your machine mid-flight. It’s hard enough to improve your user experience continuously, hire people, do performance management, and run your company. Adding the capital sink of inference costs creates a whole new series of challenges. 

This means it is incumbent upon founders to get ahead of this issue. Several things feel like best practices now:

  • Plan for using more than one model when you start, and begin to diversify at signs of inflecting. Being beholden to a singular LLM is likely a recipe for disaster. You have no leverage and are subject to pricing whims. Plan to be multi-model. This doesn’t mean starting with three integrations out the gate, it just means knowing who you’ll expand with and having an idea as to when you’ll do it and what the process will look like.  

  • Learn how to route prompts to the right models. Not all models are created equal, and some are better at certain things than others. One of our portfolio companies has a wizard-like mastery of this. There are now many companies that act as an intermediary between applications and underlying LLMs, but I think if AI is a core part of your value proposition you need to master this yourself and can’t outsource it. 

  • Find your Brandon. Someone inside your company needs to shoulder responsibility for owning your LLM strategy and executing the plan. Like all mission-critical things, accountability is everything.   

  • Find a group of advisors who know how this all works. While LLMs feel reasonably new to a lot of people starting companies, there are experts out there who are excellent at helping assess which models best fit your needs, and understand how to think about competitive pricing and prompt routing. It’s probably a good idea to have a circle of 2-3 advisors who have some skin in the game that you can turn to with specific questions, both strategic and tactical. 

  • Hone your business development chops. You’re going to be in a constant conversation with model providers asking for things: pricing, integrations, access to private betas, etc. These relationships matter. Invest in them. 

  • Raise a little more money than you think you need as a buffer so you’re not always caught on your heels reacting to these costs. When things really work it means your costs will escalate faster than expected. Extra capital on your balance sheet may provide you with some peace of mind. 

I’m sure there’s a lot more to add to this list, but it’s a start. This is likely the status quo for the next several years so it’s good for entrepreneurs to be aware of the current state of affairs and have a plan for it. Exciting times come with exciting challenges.