Capital Chronicles #22

Hello there! Welcome to Capital Chronicles, saving you hours every week with ~2-3 minute summarised insights from the best venture builders, investors and capital allocators out there.

Note: as a final reminder, I’m testing a slightly more condensed format (answer first, more to the point). Reply directly to this email and let me know what you think!

As subscriber #TBD, read on for the latest…

🛠️ On venture building…

Complaints, cold conversion, competitors and confidence can indicate product-market fit (First Round Review): while quantitative metrics are important, qualitative indicators can be equally valuable in assessing product-market fit, especially in the early stages. These signs include customer criticism (shows they care), converting strangers (unbiased validation), the presence of competitors (market opportunity) and benefiting from dogfooding (affirms value).

Go beyond traditional metrics and look for these 10 qualitative indicators to validate early startup traction.

🧭 On venture investing…

It's official: Vertical AI SaaS is a consensus investment opportunity (BVP, a16z, NFX): three large US institutional VCs released their respective market theses on vertical AI SaaS in the past month, indicating a clear consensus trend. It's tough to make money investing in consensus opportunities. To succeed, consider these strategies: look for unloved niches, provide enough differentiation to command a reasonable price, or have incredibly strong conviction and be prepared to overpay (which, ironically, can be non-consensus).

Understand the key factors driving the opportunity: (1) unbundling legacy software; (2) serving previously untapped markets; (3) addressing more industry-specific workflows; (4) reduced AI-driven development costs.

📖 Learning resource…

Reading evergreen content will improve your decision-making (David Zhou): Evergreen content often focuses on fundamental concepts, decision-making processes, and long-term thinking. Many successful investors prioritize revisiting timeless content alongside staying updated on current events. Balancing both timely and timeless information will increase your likelihood of becoming a top performer in whatever field you choose. In fact, this is the core thesis underlying the Capital Chronicle newsletter series!

Include 2-3 additional sources of evergreen content from David's list that both VCs and LPs frequently consume.

📊 Market insight…

Turbulent macroeconomic conditions continue to impact enterprise software (ICONIQ): ICONIQ's analysis of their 100+ company portfolio show tighter budgets, heightened competition, pricing pressures, and more selective buying are severely impacting growth and efficiency performance. Revenue growth of 20-30% is at its lowest point in the past eight quarters. Net dollar retention fell from ~120-130% pre-2020 to ~110% today. The median magic number dipped below 1.0x for the first time, marking a low point in sales efficiency.

Use ICONIQ's financial and operational benchmarks to reverse-engineer best-in-class performance and inform investment decision-making or reprioritise budget allocation.

Bonus: expedite the process with ICONIQ's Compass, an interactive software metric benchmarking tool containing 38,000+ data points spanning over 12 years of quarterly data.

🎲Lucky dip essential reads…

• Maybe AI has to go through the slow, boring hunt for PMF after all

• 5 strategic finance frameworks you can’t ignore

• 16 rookie errors founders make pitching and passing the "20 Minute" test

Share this edition and get access to…

• Full database: 250+ frameworks, market insights and learning resources powering Two by Two. Filterable and growing daily! (1 referral)

• Investment toolkit: tools, templates, and how-to guides to help you evaluate and analyse venture investments. (3 referrals)

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Have a great week!

Josh