Sep 6, 2023 · 1h 8m · news
Nikhil Basu Trivedi: Why 99% of AI Investments Will Go Bust | E1057 · 20VC with Harry Stebbings
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In an in-person interview on 20VC, Footwork co-founder Nikhil Basu Trivedi joins host Harry Stebbings to discuss his core venture capital philosophies, highlighting why smaller funds outperform massive ones, how true traction overrides market size, and why the current hype around early-stage AI startups presents major structural risks. He also shares highly personal reflections on fatherhood, overcoming early-career insecurity, and managing VC partnership dynamics.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 26.9% of the talking time here. How this is scored →
Harry as informed peer 4.5 Guest teaching 1.6 Guest disagreement 1.7 Harry pushing back 3.6
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 8:03 Nikhil corrects Harry's net vs. gross fund return math
Nikhil interrupts Harry's fund math calculation to point out that 6x gross does not equal 5x net after accounting for management fees and carry.
Hardest push from Harry ▶ 34:12 Harry rejects dual board attendance as 'a bit BS'Harry directly challenges Nikhil's practice of both partners attending every board meeting together in year one, labeling it non-scalable and 'a bit BS'.
Biggest teaching moment ▶ 8:03 Nikhil reframes LP multiple mathNikhil corrects Harry's mental math on fund return benchmarks, educating the host on how LP fee structures separate gross fund multiples from net returns.
Harry holds his own ▶ 15:16 Harry breaks down uncapped notes in European AI dealsHarry demonstrates deep market domain expertise by reframing media coverage of European AI seeds, revealing how uncapped convertibles mask inflated valuation headlines.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcoming Nikhil Basu Trivedi to the Studio | 2 | 1 | 0 | 0 | Harry opens with warm rapport and asks Nikhil what advice he would give his younger self on his first day in venture. Nikhil shares two foundational lessons from his early career at Shasta Ventures. | |
| Debating the Value of Pitching Junior Associates | 5 | 2 | 2 | 4 | Harry challenges the idea of pitching junior associates, arguing founders shouldn't waste cycles on non-GPs. Nikhil defends evaluating associates case-by-case, citing his own start at Insight and Footwork's investment in Canva. | |
| The Math of Fund Sizes and GP-LP Alignment | 6 | 4 | 3 | 4 | Harry brings explicit math around fund returns to argue small funds outperform large ones. Nikhil sharpens Harry's math by pointing out gross vs. net multiple distinctions when factoring LP fees and carry. | |
| Capital Constraint and the Pitfalls of Over-Funding | 6 | 1 | 2 | 4 | Harry shares data from his own 150 investments showing high-valuation pre-seed rounds for star VPs perform worst. Nikhil agrees, noting fund size constraints force better investment discipline. | |
| Hype Cycles and Skepticism of Foundational AI Seed Rounds | 6 | 2 | 2 | 5 | Nikhil questions foundational AI seed rounds that dump capital into Nvidia H100s. Harry pushes back on media coverage of AI rounds, explaining how European deals actually use uncapped note structures rather than pure equity prices. | |
| The Reality of Startups with Long Runway but No PMF | 4 | 2 | 1 | 3 | Harry asks how to handle startups with massive runway but no product-market fit. Nikhil outlines transparent conversations about returning capital, while Harry questions whether letting them iterate (like Slack) is better. | |
| Ranking Key Investment Variables: Traction, People, Market | 5 | 2 | 2 | 3 | Nikhil ranks traction ahead of people and market. Harry notes this contrasts sharply with prominent investors like Elad Gil and Keith Raboy who prioritize market or founder above early traction. | |
| Footwork's Stage Sweet Spot and Why Markets Are Hard to Predict | 6 | 1 | 1 | 4 | Nikhil explains why market size is hard to predict. Harry leverages insights from his show 'The Memo', citing Snap, Instacart, and Twilio investors who all admitted underestimating market size initially. | |
| Evaluating Founders: Pitching Skills vs. Business Building | 5 | 2 | 3 | 5 | Nikhil warns against slick founders who can fundraise but cannot build a business. Harry counters that a founder who sells well to investors, hires, and customers should theoretically possess the core traits of a great founder. | |
| Vulnerability and Insecurities of an Early-Career GP | 4 | 1 | 2 | 5 | Harry directly confronts Nikhil with feedback from a mutual friend claiming Nikhil has an imposter complex despite his success. Nikhil responds with openness, discussing insecurity and finding his authentic voice. | |
| Footwork's Voting System and Collaborative Board Practices | 5 | 2 | 3 | 7 | Harry strongly challenges Footwork's 1-4 voting system, arguing middle votes dodge real decisions. He then calls Footwork's practice of both partners attending all board meetings together 'a bit BS' and 'weird'. | |
| Dysfunctional Partnerships and the Myth of the First-Year Rule | 5 | 1 | 2 | 4 | Harry cites Jason Lemkin's view debunking the 'don't do a deal in year one' rule for new VCs. Nikhil agrees, reiterating that exceptional opportunities override arbitrary timing rules. | |
| The Fallacy of Endowment Stability | 5 | 2 | 2 | 4 | Harry and Nikhil discuss LP dynamics and endowment stability. Harry offers a tactical fundraising framework based on securing GP friends as early references to anchor institutional LP interest. | |
| Fundraising Tactics and Reference Slides | 3 | 2 | 1 | 2 | Nikhil details unique deck slides showcasing boardroom peers and inbound LP interest. Harry asks Nikhil to pinpoint what VCs see in peer GP drive that LPs routinely miss. | |
| Sourcing vs. Helping: VC Strengths and Weaknesses | 3 | 1 | 1 | 3 | Nikhil self-critiques his weakness in deal sourcing due to bandwidth. Harry challenges how Footwork will maintain a 50% sourcing ratio once board seats accumulate. | |
| Debunking the VC Platform Value-Add Generation | 6 | 1 | 2 | 4 | Harry breaks down why centralized VC talent platforms fail, explaining that recruiting a DevRel lead requires completely different networks and domain knowledge than hiring a CMO. | |
| Nikhil's Biggest Miss: Figma and Pre-Product Faith | 4 | 2 | 1 | 3 | Nikhil shares hitting on The Farmer's Dog and missing Figma. Harry probes why Nikhil passed on Dylan Field, revealing Nikhil's insistence on seeing product traction cost him the deal. | |
| Fatherhood and Relinquishing Meticulous Control | 2 | 1 | 1 | 2 | Nikhil reflects on how fatherhood forced him to relinquish control and adapt his schedule. Harry shares his own personal anxiety about losing work output efficiency when becoming a parent. | |
| Quick-Fire: Hype and Skepticism Around AI-First Startups | 5 | 2 | 3 | 4 | Nikhil expresses skepticism about investing in current AI startups. Harry pushes back, reminding him that tech cycles overestimate short-term adoption but drastically underestimate long-term value creation. | |
| Quick-Fire: AUM as a Vanity Metric | 6 | 2 | 3 | 6 | Nikhil calls AUM a vanity metric. Harry agrees and adds that claiming 'enterprise value created' is equally bogus, citing investors taking credit for multi-billion valuations off tiny Series E checks. | |
| Quick-Fire: Quiet Excellence in USV and IA Ventures | 4 | 1 | 1 | 2 | Nikhil praises USV and IA Ventures for quiet execution. Harry connects with Nikhil over shared relationships with Mickey Malka and Roger Ehrenberg. | |
| Quick-Fire: The Boardroom Brilliance of Vas Nadarajan | 3 | 1 | 0 | 1 | Nikhil highlights Vas Nadarajan's underrated brilliance on boards and shares his dream dinner guests (Alex Ferguson and Michael Moritz). Harry closes the episode warmly. |
Statements from this episode (48)
Basu Trivedi: Junior VC investors should ignore titles and act like partners
“Don't look at your title. Don't think about exactly what the role is. Just think about yourself as a VC. And I think you'll be better off for that.”
Basu Trivedi: Exceptional startups deserve exceptions to standard VC portfolio rules
“Exceptional companies deserve exceptions. And it's a mantra that I've tried to always have in my venture career, which is yes, you have this model of how you want to invest this dream idea of portfolio construction and the profile of company that you're lookin…”
Stebbings: Founders Should Bypass VC Associates and Pitch GPs Directly
“And I'll be honest, I say that too, especially at growth. We don't have time for spinning cycles on associates. Like, just go to the GPs.”
Basu Trivedi: Founders Should Judge VC Associates by Quality, Not Title
“I think that you're better off as a founder judging based on the actual conversation you have, which sometimes may be a lot better with the youngest person on the team versus the managing partner of the firm, and sometimes it won't be.”
Basu Trivedi: Small VC funds outperform larger funds
“And my firm belief in my bones is that small funds outperform bigger funds.”
Basu Trivedi: 5x net returns on $1B+ funds are historically rare
“It is incredibly difficult to have a five X net return on A billion dollar plus fund. I think there's incredibly few of those funds in history, in the history of venture.”
Basu Trivedi: Most large VC firms generate excess management fee revenue
“Most venture firms have plenty of fees to cover the team and more, especially at that fund size scale.”
Stebbings: High-valuation pre-seed rounds by former VPs are my worst investments
“But like, my worst performing, and I've done a 150 investments now, the worst performing ones are always the stellar VP that comes out of the stellar company and raises 10 on 40 as the pre-seed. They are always the ones which slowly meander to either a bad hac…”
Basu Trivedi: Larger VC fund sizes cause laziness in investment decisions
“You know, in a strange way, I really like the constraint of our fund size. I actually think it forces us to make better decisions. And I think there's a laziness and a lack of great decision making that can come from having a bigger fund in the same way that i…”
Basu Trivedi: Massive AI foundation model seed rounds make no sense
“We don't think that the foundational model investments that, for example, they're raising hundreds of millions of dollars in a seed make any sense. They don't make sense for sure for our firm, but we don't think they actually make much sense for the big funds …”
Stebbings: European AI seed rounds are heavily misreported by the media
“I think the funding rounds are very misreported. And what I mean by that is like, there's definitely been some in Europe where like, you know, a hundred dollar, a hundred million dollar rounds are reported on two fifty million dollar valuations. If you actuall…”
Basu Trivedi: Startup runway is meaningless without product-market fit or exit
“The runway doesn't matter unless it leads to a takeoff or a landing. Ideally a takeoff in startup land.”
Basu Trivedi: Early traction matters more than team and market size
“I've always been a sort of traction, early signs of product market fit first investor. Then people, and then market.”
Footwork only leads Seed and Series A rounds with checks up to $9M
“At Footwork we do, we only lead rounds, we only do early stage we lead seeds and A's. So we've made 11 investments so far. We've done five series A's and six seeds. I think our average initial check is about four and a half million, and the range has been two …”
Basu Trivedi: Market size is the hardest startup variable to predict
“I weight market third on the three that you asked me about because I just think it's the hardest one to assess and predict for myself, and I think when you look at the investments you just described and some of the very great ones, that was true for those inve…”
Basu Trivedi: Fundraising ability differs sharply from business building ability
“And so I have been sucked in and seduced by founders that can tell a great story, that are great in a handful of one hour sessions and in person for the first time, who feel like they're magnets for talent, who know their business inside and out, it seems, and…”
Basu Trivedi: Many 2020-2021 funded startups lack basic financial fundamentals
“Like there were so many companies that were able to fundraise in 20, 21 that now don't have P and L's and fundamentals that to show for the vision that they told.”
Basu Trivedi: Asking founders for a board agenda tests their self-awareness
“Oftentimes if I'm really digging in and really excited about something, I'll say something like, hey, let's just pretend that this is our first board meeting right now, that we just invested in the company. What's What's the main challenge topic or discussion …”
Basu Trivedi: Great founders combine confidence with vulnerability about their weaknesses
“Again, that, that ability to be confident in what is actually working but also confident in what's not working yet. Vulnerable about it, and clear-eyed and self-aware about it, is I think a characteristic of many of the great ones.”
Basu Trivedi: Startups requiring no immediate follow-up rarely become massive winners
“And I've gone back to try to study this, like, if I'm thinking about it that evening, if I'm reaching out to people to sort of suss it out better, and you know, I'm just researching on my own about it, you know, hours after the first meeting, there's something…”
Footwork requires one partner's top vote and no partner veto to invest
“One of us has to be a four. One of us has to be strongly supportive to make an investment. And the other cannot be a one strongly unsupportive.”
Footwork does not track deal attribution between its partners
“We actually don't even do attribution at the firm. We've never talked about which are Mike's investments versus my investments.”
Footwork co-founders attend all board meetings together during year one
“Well, look, we actually, for the first year after we invest, both go to all the board meetings together.”
Basu Trivedi: Making VC decisions via internal politics is a terrible practice
“Look, I think there are partnerships where decisions are made based on the ability of individuals to sell internally, and so there's some folks that are just naturally more gifted to sell the deal to their partners, and there's political points back and forth …”
Footwork received $450M in commitments for its $175M debut fund
“We had about four hundred and fifty million of commitments for a hundred and fifty million dollar fund. And we ended up raising one hundred and seventy five million”
Footwork caps single LP concentration at 20% to prevent governance risk
“We don't have a single LP who's more than 20% of our fund and I think in general we thought we don't want one, two, three LPs having the majority of our fund and having therefore outsized control in our thinking or our decision making in some way.”
Footwork has roughly 15 institutional LPs, including six university endowments
“We wanted some diversity, and I think we have about 15 institutional LPs, we have six university endowments you know, I think Three other foundations. So we're a little bit weighted towards endowments and foundations, but we have a bunch of fund of funds, and …”
Basu Trivedi: Relying solely on endowment LPs creates denominator effect risk
“There's still some level of risk of having an entire endowment based LP base, because they may all sort of have the same denominator effect issues at the same time.”
Basu Trivedi: Only 10 to 15 LPs globally anchor first-time venture funds
“Yeah, look, I think that there's, especially in a first fund, there's a handful of LPs around the world, at least that I know of and have met, who are truly independent thinking, who will truly raise their hand and say, we're willing to do a first time fund, a…”
Basu Trivedi: Footwork Fund I was fully committed before finishing pitch deck
“We had two slides in our fund one fundraising deck, which actually, sadly, we barely got to present. We only had it properly designed in February of, and by then we already had the whole fund committed.”
Basu Trivedi: Most LPs fail to rigorously assess GP drive and commitment
“I don't think that they spend enough cycles on it. But I actually think some of the great ones do.”
Footwork LPs performed 30 to 40 references on each partner
“We had LPs who did, I don't know, 30, 40 references that we heard about on, on us each.”
Basu Trivedi: VCs must spend over 50% of time sourcing new investments
“The single metric that we're focused on there is, are we spending more than 50% of our time on meeting new companies and sourcing new investments? I firmly believe you have to spend the majority of your time on those things. To be able to find the next great o…”
Basu Trivedi: Personalized founder support requires limiting investments to a handful yearly
“When you only make a handful of investments every year, when each one really matters to you because you're leading those rounds, you can deliver that type of really personalized support, and that's So much of why we've built this firm.”
Basu Trivedi: VC platform teams scale the firm, not the portfolio companies
“Most of those platform offerings are about scaling the firm themselves versus about Actually scaling companies and really helping companies get to the next level.”
Basu Trivedi: The Farmer's Dog is my biggest investment hit, not Canva
“I actually think my biggest hit right now at least as I can best predict it is not Canva. Dollar gains, Perspective, and on an IRR basis as well, it's a company called The Farmer's Dog, which is in the pet food space, and it's a subscription service for fresh …”
Basu Trivedi passed on early Figma rounds for lacking product-market fit
“This comes back to my bias around wanting to see some early signs of product market fit before investing, and Figma did not have a launched product. Before its first couple of venture rounds.”
Basu Trivedi: Investments require deep personal conviction on spending time
“I have to believe in my bones when we make an investment decision that this is something I really want to spend time on. Perhaps it used to be much more just about the capital and the economics, and now it's about both that and time.”
Basu Trivedi: Venture capitalists cannot work as hard after becoming parents
“No, and I believe the answer is no. I mean, it has not been the case for me.”
Basu Trivedi: LLMs will directly serve use cases, bypassing application layers
“In the large language model world, that the LLMs themselves will serve as a use case versus an application layer on top of those LLMs.”
Basu Trivedi: Several AI startups are seeing ARR declines due to churn
“I've heard there are several companies now that have grown rapidly in ARR and have now started declining in ARR as retention actually starts to affect these businesses because there's churn from folks who just try out products built on top of these LLMs becaus…”
Basu Trivedi: AUM is the stupidest metric for venture firms
“I think AUM is the stupidest thing to talk about as a venture firm, because back to what we were talking about earlier, small funds outperform larger funds, and so you really shouldn't be talking about how much capital you've raised. I'm okay with people talki…”
Stebbings: Portfolio enterprise value is a bullshit metric for VC funds
“I think the enterprise value of, like, portfolio companies is Total bullshit though, too, because it's like, I could invest in, you know, Figma and the Series E. Fair enough. And then it's like, we've created thirty-five billion dollars, and you're like, come …”
Basu Trivedi: Exercising pro-rata in rapid markup rounds was my biggest mistake
“I think it was doing our pro-rata In companies that quickly raised another round at a huge step up from where we first invested. Fundamentally, there was very little de-risked, and we saw this happen where a company had raised a series A from us, and two month…”
Footwork expects to make 20 Fund I investments averaging $4M to $5M
“Our total fund size is about a hundred and seventy five million, right? We think we'll make about 20 investments out of that fund, an average check of four to five million dollars, so let's call it sort of 80 to a hundred million dollars on initial investments…”
Basu Trivedi: USV belongs in the VC pantheon alongside Sequoia and Benchmark
“I think USV doesn't get the credit that it deserves. I think it should be in that pantheon of greatness that sort of Sequoia and Benchmark are typically put in.”
Basu Trivedi: Accel's Vas Nadarajan is an underappreciated top board member
“In my peer group and sort of our generation, although you're younger than me and I'm younger than Vaz, I still think of us as sort of the same generation. I think he's one of the best and probably hasn't gotten the credit he deserves for that.”