Bing dodges $100B bullet & IVP's Tom Loverro on the looming startup collapse | E1678

Episode Summary

Executive Summary: This episode of This Week in Startups covers two main topics: the alarming sale of mental health data from telehealth apps, which is legal due to HIPAA loopholes, and the inaccuracies in AI chatbots from Google and Microsoft. The main interview features IVP partner Tom Levero discussing a predicted 'mass extinction event' for startups in late 2023/2024, advising founders to raise capital early, focus on survival over valuation, and prioritize unit economics.

Main Topics: Mental Health Data Privacy Concerns (Priority: 5/5): Discussion of a Washington Post report revealing that mental health data from apps like telehealth platforms is being sold legally due to HIPAA not covering app makers. This includes identifiable information like names, addresses, and conditions such as depression and anxiety. AI Chatbot Inaccuracies (Priority: 4/5): Analysis of recent failures in AI chatbots from Google (Bard) and Microsoft (Bing), including fabricated financial data and incorrect claims, highlighting that the technology is not yet reliable for prime-time use. Startup Mass Extinction Event Prediction (Priority: 5/5): Tom Levero's prediction that many early and mid-stage startups will face a funding crisis in late 2023 and 2024 due to reduced venture capital availability, down rounds, and increased scrutiny on unit economics. Fundraising Strategy for Startups (Priority: 4/5): Advice for founders to raise capital early, avoid anchoring to previous valuations, and focus on survival rather than valuation. Emphasis on starting the fundraising process 9 months before needing funds. Venture Capital Behavior and Biases (Priority: 3/5): Discussion of cognitive biases in VC investing, such as anchoring and recency bias, and the importance of choosing investors with conviction and chemistry. Criticism of 'venture tourists' who invest without long-term commitment. Operational Efficiency and Unit Economics (Priority: 4/5): The shift from growth-at-all-costs to focusing on unit economics and efficiency. Advice to bring in experienced operators and trade growth for better economics to survive the downturn.

Key Arguments: Mental health data from apps is being sold legally because HIPAA only covers hospitals and doctor's offices, not app makers. AI chatbots like Google Bard and Microsoft Bing are prone to fabricating data, as seen in demos where they invented financial figures. A mass extinction event for startups is coming due to a hangover from 2021-2022 capital deployment, with many companies running out of runway in late 2023. Founders should raise capital at least 6 months before they need it, ideally starting the process 9 months out, to avoid losing leverage. Down rounds and structured deals (e.g., 2x liquidation preferences) are becoming more common, and founders should accept them to survive. Venture tourists who invested during the boom are now unresponsive, leaving founders without support. Focusing on unit economics and efficiency is critical; growth at all costs is no longer viable. The current environment is a good time to hire top talent as competition for employees has decreased.

Data Points: Market cap loss due to Bard error: $100 billion - Google's stock tumbled after Bard provided false information about the James Webb Space Telescope. Startups with less than 12 months runway: 80% - January Ventures survey of 450 early-stage founders found 4 in 5 had less than 12 months of runway. Bing AI fabricated operating margin: 5.9% - Bing AI claimed Gap's operating margin was 5.9%, but actual figures were 4.6% (with impairment) and 3.9% (without). Bing AI fabricated diluted EPS: 42 cents - Bing AI claimed Gap's adjusted diluted EPS was 42 cents, but actual was 71 cents (adjusted) and 77 cents (unadjusted). Bing AI fabricated Lululemon gross margin: 58.7% - Bing AI claimed Lululemon's gross margin was 58.7%, but actual was 55.9%. Twitter thread views: 2.7 million - Tom Levero's thread about startup extinction event received 2.7 million views in a week.

Pivotal Quotes: "This is not an asteroid hitting Earth, though. This is climate change. It'll creep up on you very slowly and quietly." — Tom Levero: Describing the nature of the startup extinction event, emphasizing it will be gradual rather than sudden. "The most dangerous mistake is to make it a high wire act and just really be out there without much room for error." — Tom Levero: Advising founders to raise capital early to avoid being in a precarious financial position. "It's easier to get out of a marriage than a board or an investor relationship." — Tom Levero: Emphasizing the importance of choosing investors carefully, as the relationship is long-term and hard to exit.

Implications: Founders must prioritize fundraising early, focus on unit economics, and choose investors carefully. The AI hype may be overblown, and data privacy regulations are urgently needed. The startup downturn will weed out weaker companies but create opportunities for efficient, mission-driven teams.