VC firm Lux Capital sent a letter on Tuesday to founders of its portfolio startups urging them to prepare for potential business challenges, according to The Information’s Dealmaker newsletter.
The letter noted that “signals suggest something is off,” as 10-year bond yields had fallen even as stock markets hovered near record highs. The firm, known for backing companies such as Anduril, suggested this could sometimes presage an impending recession.
To brace for such risks, the firm recommended that founders extend their cash runway, review venture debt covenants (especially with respect to lenders maintaining cash in hand), and closely analyse costs, particularly for startups that rely on imported goods, which could be affected by tariffs.
Such warnings are common from venture capital (VC) firms when business cycles shift, the newsletter noted. Similar memos were issued in 2022, it said, as stocks fell at the end of the Federal Reserve’s low interest rate cycle, and again at the start of the pandemic.
Lux Capital cofounder and partner Josh Wolfe expressed concern about what he described as “the bubble of AI, which people are afraid to talk about publicly.” He told The Information that while many in the VC industry share these concerns in private, they often remain quiet due to the prevailing culture of optimism.
Wolfe estimated that among AI startups, there are “less than 10 that matter,” though he did not name specific companies, and suggested that startups should be going public while enthusiasm for AI remains high. Notably, two major players — Anthropic PBC and OpenAI — are preparing to list, while xAI, now part of SpaceX, could see an IPO as soon as June.
Despite these warnings, Wolfe remains broadly positive on startup investment, including in AI. He stressed that difficult times can still produce big winners. However, he cautioned that “failure comes from a failure to imagine failure,” and urged founders to consider the worst case possible: “Double-check to make sure that your assumptions are not just a rosy scenario.”
Lux Capital has invested in AI startups such as autonomous agent builder Cognition, app development platform Hugging Face, software firm Applied Intuition, and video generator Runway. In early January, the firm announced it had raised $1.5 billion to invest in cutting-edge science and tech startups.
The letter noted that “signals suggest something is off,” as 10-year bond yields had fallen even as stock markets hovered near record highs. The firm, known for backing companies such as Anduril, suggested this could sometimes presage an impending recession.
To brace for such risks, the firm recommended that founders extend their cash runway, review venture debt covenants (especially with respect to lenders maintaining cash in hand), and closely analyse costs, particularly for startups that rely on imported goods, which could be affected by tariffs.
Such warnings are common from venture capital (VC) firms when business cycles shift, the newsletter noted. Similar memos were issued in 2022, it said, as stocks fell at the end of the Federal Reserve’s low interest rate cycle, and again at the start of the pandemic.
Lux Capital cofounder and partner Josh Wolfe expressed concern about what he described as “the bubble of AI, which people are afraid to talk about publicly.” He told The Information that while many in the VC industry share these concerns in private, they often remain quiet due to the prevailing culture of optimism.
Wolfe estimated that among AI startups, there are “less than 10 that matter,” though he did not name specific companies, and suggested that startups should be going public while enthusiasm for AI remains high. Notably, two major players — Anthropic PBC and OpenAI — are preparing to list, while xAI, now part of SpaceX, could see an IPO as soon as June.
Despite these warnings, Wolfe remains broadly positive on startup investment, including in AI. He stressed that difficult times can still produce big winners. However, he cautioned that “failure comes from a failure to imagine failure,” and urged founders to consider the worst case possible: “Double-check to make sure that your assumptions are not just a rosy scenario.”
Lux Capital has invested in AI startups such as autonomous agent builder Cognition, app development platform Hugging Face, software firm Applied Intuition, and video generator Runway. In early January, the firm announced it had raised $1.5 billion to invest in cutting-edge science and tech startups.
