This video provides a data-driven analysis of how changes in venture capital (VC) are affecting startups and software engineers, featuring Peter Walker (Head of Insights at Carta). While VC investment remains active, the number of companies receiving funding is shrinking. The episode takes a deep dive into the current state and future of the startup ecosystem, including the contraction of startup hiring markets and the growing importance of small teams driven by advances in AI technology. It also provides practical advice for engineers considering joining VC-backed companies.
1. The Current State of the Venture Capital Ecosystem
Peter Walker explains venture capital as a type of private equity fund, stating that it "provides capital to young companies, with the goal of these companies growing significantly in valuation and eventually going public." For example, today's "MAG 7" (Microsoft, Apple, Google, NVIDIA, and other large tech companies) were all once VC-backed companies.
In the past, VC investment was seen as the "default way" to build a startup, but in reality, far more companies never take VC money. VC-backed companies tend to be discussed more because their growth stages can be clearly tracked through seed, Series A, Series B, and other rounds.
Differences Between VC-Funded and Non-VC-Funded Companies
Peter identifies the biggest difference between VC-funded and non-VC-funded companies as growth prioritization. VC-backed businesses are expected to "grow at a really fast rate." In other words, a profitable business growing at 20% per year is not a VC investment target, because VC investment is a "bet" that delivers high returns to investors through explosive growth. This growth pressure significantly influences company culture, pace of work, board and founder expectations, and compensation structures.
For example, when Uber experienced a service outage in India that caused losses, the ironic analysis emerged that they actually "saved $100,000 because they absorbed losses while expanding the service during the growth phase." This illustrates how VC-backed companies sometimes prioritize growth to a seemingly irrational degree.
"Profitability and growth can be at odds." Peter explains that the VC model pours initial capital into massive growth, then reaps the rewards once the company becomes large enough to dominate the market. Uber is cited as a case where VC investment worked well, but not all companies follow that path. When growth rates fail to meet VC expectations, investors move on to the next "bet," and the founders and employees left behind face difficulties.
2. The Current Health of the Venture Capital Market
Peter emphasizes that the health of the VC market should not be judged solely by "investment dollars." A handful of giant AI companies (OpenAI, xAI, etc.) are raising billions of dollars, keeping total investment figures high.
But looking at the "number of investment rounds" tells a different story. According to Carta data, the daily average number of early-stage startup rounds (seed and Series A) was 7.4 in 2025, down to half the level of 2021. This means the number of companies receiving funding has been steadily declining.
The decline in funded companies has two main causes:
- Rising VC expectations: VCs now think "even companies growing 100% annually aren't what they used to be," and with the emergence of hyper-growth companies like Cursor, they now expect 200% or 300% annual growth.
- Strategic shifts by startups: Some startups are thinking "Do we even need to take venture capital?" and are prioritizing profitability and bootstrapping (operating on their own funds) to maintain autonomy. Peter adds that "most tech companies may not even need VC investment."
3. Startup Hiring Market Slowdown and New Metrics
Peter identifies the hiring market slowdown as one of the biggest changes AI has brought to startups. According to Carta data, startups hired 73,000 people in January 2022, but that dropped sharply to 40,000 in January 2023, 32,000 in January 2024, and is expected to fall to about 20,000 by January 2025. This data is tracked based on equity allocations to employees.
The hiring decline from 2022 to 2023 was mainly due to lack of funding, but Peter analyzes that the decline from 2024 onward is largely driven by AI technology. Startups are saying "a team of 10 engineers has become so much more productive with AI tools that there's no need to hire an 11th engineer." Peter states bluntly, "I'm not one of those people who says AI won't take jobs. It's already having an impact to some extent."
ARR per FTE: VC's New Key Metric
Regarding team size, the metric VCs currently consider most important is "ARR per FTE" (Annual Recurring Revenue per Full-Time Employee). The average headcount of Carta companies at the Series A round was 20-22 in 2022, has since dropped to about 15, and is expected to decrease to 12-13 by year-end. This shows the trend toward growing as fast as possible with smaller teams.
According to Silicon Valley Bank data, the median ARR for Series A startups in 2021 was about $1-1.5 million, but in 2024, it's approaching nearly $3 million. The top 25% of companies reach about $7 million, a sixfold increase in just two years. VCs are placing increasing importance on "capital efficiency" -- generating more revenue with fewer people. For engineers, understanding these metrics to assess a company's financial health is crucial. For example, a Series A company with 15 employees generating $7 million in ARR means roughly $400,000 in revenue per employee -- indicating high productivity, and some companies can even achieve profitability at this level of efficiency.
4. The Importance of Valuations and Funding Rounds
Peter explains "Priced Seed" rounds. Unlike the "SAFE (Simple Agreement for Future Equity)" popularized by Y Combinator, where investors give money now and the company promises to provide equity in the future, a priced round actually values the company and prices the shares. SAFEs are useful because it's difficult to accurately value early-stage startups.
The Allure and Danger of High Valuations
There's an incentive for founders to raise at high valuations. Peter points out the emotional satisfaction of saying "I'm the founder of a $50 million company!" The current median pre-money valuation for U.S. seed rounds is about $16 million. When the investment (e.g., $3 million) is added, the post-money valuation reaches $19 million -- higher than even 2021 levels.
2021 was a time of extreme overheating in the venture market -- zero interest rates, pandemic-driven digital transformation acceleration (Peloton, Zoom, etc.), and the best job market for software engineers. But the market cooled in 2022 and 2023, and ChatGPT's emergence brought yet another shift.
Currently, AI companies are riding a new hype cycle with high valuations, while non-AI companies are feeling the effects of the market slowdown. The VC market is so split that some say "this is the hottest time in VC history" while others say "it's completely frozen." This parallels the current hiring market where AI engineers are in high demand while the number of general full-stack engineering jobs is shrinking.
5. The Pitfalls of Bridge Rounds and Down Rounds
Bridge Rounds: A Warning Signal
A bridge round is when a startup raises additional funding from existing investors because it hasn't reached its Series A as expected. Peter explains it as "you didn't do as well as you thought, but we still believe in you" -- essentially additional investment on those terms.
But Carta data clearly shows that bridge rounds are "mostly not a good bet." The probability of a company that went through a bridge round successfully progressing from seed to Series A is much lower than for companies that didn't. In 2020, about 33% of priced bridge rounds led to a Series A, but that dropped to 16% in 2021 and 8% in 2022. This is a clear signal of company distress. Peter advises that early-stage startups "are still most likely to go to zero," and that people should approach large equity packages with caution rather than being dazzled.
"Startups are still most likely to go to zero. So when you're thinking about the value of equity, a job -- keep in mind that this 1% is very unlikely to be worth even a single dollar in the future."
From an engineer's perspective, if a company is going through a bridge round, it's realistic to treat this as a "red flag" and prudently explore other opportunities as a contingency.
Down Rounds: A Cultural Taboo
A down round is when a company raises investment at a lower valuation than the previous round. While similar to stock prices going up and down in the public market, in startup culture it's seen as a major issue. Peter says "doing a down round is a kind of 'admission' that things aren't going well." Because startups need to present an image of "growing like a rocket," a lower valuation can lead to employee demoralization and attrition.
Founders should be careful not to accept too high a valuation to avoid down rounds. From an engineer's perspective, it can be disappointing to learn that the company "learned more, acquired more customers, yet the value decreased." Peter adds, "like the scene in Silicon Valley on HBO where someone says 'nobody told me I could get less money or a lower valuation' -- founders need to consider the realism of their valuations." VC always evaluate investment targets by comparing them to other startups, so even great companies may not get funded if they're not "the best" at that time.
6. The Value of Working at a Startup
Peter emphasizes that working at a startup is an "incredibly amazing experience." He says that after working at a large company like Carta, he'd want to go back to a smaller company, and explains that startup experience is not just about high compensation -- it's an experience that maximizes "responsibility and agency."
"Working at a startup isn't a move to maximize compensation. It's a move to maximize responsibility. At a 200-person company, you can have far more autonomy to build what you want than at a 2,000 or 20,000 person company."
Quoting the anonymous VC "Startup L. J. Jackson," Peter says startups don't maximize compensation but they "maximize learning" and provide opportunities to earn higher salaries in the future or join the next "rocket ship." Even successful startups like OpenAI tend to hire talent from other startups.
7. Summer VC Funding and Deal Closing Timelines
There's a common stereotype that VCs go on vacation in summer (July-August), making it hard to raise money. But Peter says Carta data shows "that's not the case." Granted, this is based on when deals are actually signed, and negotiations typically start a month or two earlier. Peter advises founders that starting fundraising at the end of August isn't great, but if a deal is already in progress, VCs will continue to process it. In fact, January is the month with the fewest signed deals, as many deals close at year-end and January serves as a recovery period.
The time to close deals (raise VC investment) has also gotten longer. In the past, due diligence was relatively short, but recently VCs are asking more questions, conducting customer interviews, and more closely scrutinizing financials, extending the diligence period.
From an engineer's perspective, understanding the company's cash situation and monthly burn rate is important. Especially at smaller companies, this information is often shared openly, allowing you to assess financial health and detect warning signals. For example, Fast, a once-promising one-click checkout startup, suddenly went bankrupt, shocking employees -- but if financial information had been available, the risk could have been spotted in advance. Peter says "founder transparency" is an important indicator, and advises that "going to early-stage startups where founders are more open will teach you much more" than companies where everything is secretive.
8. AI Reshaping How Startups Are Built, Team Size, and Funding Trends
AI has clearly changed how startups are built, significantly impacting team composition and methods -- a "sea change," as Peter emphasizes. Carta data clearly shows the rise of solo-founded companies. In 2024, more than one-third of startups using Carta were solo-founded, the highest proportion in the past decade. As the cost of starting a business drops and one person can do more, solo founding is becoming more common.
However, VCs still don't prefer investing in solo-founded companies. While 35% of Carta-using startups are solo-founded, only 17% of VC-funded startups in 2024 were solo-founded. VCs generally cite several reasons for not favoring solo founders:
- Lack of both a tech leader and a business leader: Traditionally, founding teams were expected to have both a technical and a business person.
- Key person risk: If something happens to the single founder, the entire investment is at risk.
- Talent attraction ability: VCs think "if you couldn't convince a co-founder, you'll have a hard time recruiting other employees."
Peter notes that despite AI making solo founding easier, VC funding trends haven't changed much -- which is interesting. This suggests that "personal dynamics" remain critically important to startup success. Meanwhile, the rapidly growing dev tool startup Cursor started with three co-founders and is benefiting from their synergy.
9. Employee Stock Option Plans (ESOPs) and Employee Compensation in M&A
The equity employees receive when joining a startup comes from the "Employee Stock Option Pool (ESOP)." In the past, this pool was 15-20% of total equity, but these days it often starts at 5-10%. The option pool expands with each fundraise, which means more shares are created, diluting existing shareholders' ownership percentage.
"Dilution is really hard. You can see why venture capital is so difficult. An easy way for employees to think about it is this: if your company were acquired today, the investors who put money in get paid first."
Employee compensation in M&A is often less than expected. Investors typically get their money back first through a "1x liquidation multiple." For example, if an investor put in $10 million and the company sells for $20 million, the investor takes the first $10 million, and the remaining $10 million is split among employees and founders. If a company raised $1 billion and sold for $1.2 billion, the press makes it look like a big $1.2 billion exit, but investors take the first $1 billion and employees and founders are left with only $200 million. Peter says many employees are disappointed because they don't fully understand these "dilution" and "liquidation preference" mechanisms.
Comparing ESOPs Between Deep-Tech and Software Startups
According to Carta data, there's not much difference in ESOP size between deep-tech (startups making physical products like hardware and biotech) and software startups. The conventional wisdom is that deep-tech needs larger ESOPs to attract more specialized talent, but the data shows otherwise. Peter points out, "There's always been a narrative that deep-tech startups cost much more to build, but look at OpenAI -- they make a software product but need enormous funding," noting that conventional wisdom is being challenged.
10. Startup Advisors: Roles and Compensation
Startup advisors generally receive a small amount of equity. Early-stage startups are cash-strapped, so they offer equity in exchange for time. Some pre-seed stage advisors request 1% equity, but that's very high -- in reality, more than 90% of advisors receive less than 1%. As of 2024, the median equity granted to advisors is 0.25%.
This is reasonable compared to the typical founding engineer (a startup's first formal employee), who generally receives 1.5% equity. Founding engineers work full-time building the core product that directly impacts the company's success or failure.
Peter identifies two types of truly valuable startup advisors:
- Technical Advisors: World-class experts in a specific field who help startups solve difficult technical problems. For example, an engineer who built marketplace matching algorithms at Uber -- a tech expert with experience building large-scale systems -- is extremely valuable.
- Commercial Advisors: Advisors who facilitate introductions to large enterprise customers that startups can't reach on their own, contributing to actual revenue generation.
On the other hand, Peter bluntly says that generic advisors who meet once a month to give advice on business plans or marketing websites don't add much value.
11. Rising Difficulty of Seed to Series A Transition
Looking at the lifecycle of VC-funded startups, the average time between funding rounds keeps increasing. It used to be considered an "immutable law" that seed to Series A took 18-24 months, but currently it can take 2.5 years from seed to Series A and nearly 3 years from Series A to Series B. This means startups need to stretch their current funds longer than expected. Peter explains, "this is related to generating more revenue with smaller teams."
Declining Seed to Series A "Graduation Rate"
In 2021, nearly half of startups that raised a seed round showed a "graduation rate" to Series A. Peter says this was evidence that "there was too much capital floating around and it was too easy." At the time, the perception was that working at a startup wasn't risky, and struggling companies would often get acquired by larger firms.
But now that risk has returned. Currently, only about 25-30% of startups that raise a seed round progress to Series A. This means more than half fail -- similar to the typical failure rates of 2008-2010. Peter advises, "if you're thinking of joining a startup that raised its seed round four years ago, the chances of it making it past Series A are very low."
12. Realistic Advice: "Sometimes Quitting Is Better"
There's a difficult topic that many founders and VCs don't like to discuss: "when to shut down a business." Many startups that raised seed rounds in 2021 or earlier have lost their growth momentum and are stagnating. While emotionally very difficult for founders, Peter emphasizes that "the best investors need to have these hard conversations."
Silicon Valley is full of "never give up" stories like Figma and Slack, which struggled for years before achieving massive success. Slack famously started as a gaming company before pivoting to success. These stories convey the message "never give up, quitting is bad," but Peter points out that "for every hundred examples like Figma or Slack, there are hundreds of companies that didn't make it."
Data shows that founders who raised seed rounds 5-6 years ago with no progress are still running their businesses. They haven't achieved the "growth" that VCs pursue, and many persist by generating small revenues like a bootstrap company or running at a slight loss. Peter emphasizes, "if your goal is to build a bootstrap company, grow at the pace you want, and maintain profitability -- that's a great approach. But if you take money from VCs, you're committing to their growth rate."
Even if founders shut down and return some capital to investors, investors are likely to reinvest in the same founder's next idea if they were honest and gave their full effort. Carta's CEO Henry also failed at his first business but used that experience to make Carta a success.
For engineers, it's important to check when the company last raised. Joining a company that raised a long time ago and is showing minimal growth can be riskier than joining a bootstrap company with similar growth. Don't be afraid to ask these questions during interviews:
- "What is the company's revenue?"
- "What is the business's growth rate?"
- "How much capital was raised and on what terms?"
- "How long has it been since the last fundraise?"
13. How Engineers Should Evaluate Before Joining a Startup and Skills for Success
Peter advises that engineers should approach joining a startup with an "investor's mindset." Like becoming a VC, you should ask: "How does this company compare to its competitors?"
- Growth speed: How fast is it growing?
- Technical moat/defensibility: What is this company's unique technical strength? In a world where AI can create product features instantly, why will this company win in this space? Sometimes "speed of execution" itself can be a competitive advantage.
- Founder back-channeling: When you reach the deep interview stage, it's important to learn about the founder through "back-channeling" with employees or people who've worked with the founder before. Especially when joining a seed or Series A stage startup, you're essentially betting on that founder. Peter emphasizes asking yourself, "Is this someone I want to follow, someone I strongly believe will have the next great idea to lead the company?"
Skills for Success as an Engineer at a Startup
Of course, technical ability is important everywhere. But at startups, personal capabilities different from big tech are important:
- Player-coach capability: At startups, team sizes can be small or nonexistent, so even engineering leaders need to write code directly -- a "player-coach" role becomes more important.
- Swiss Army Knife ability: Beyond pure coding, willingness and ability to participate in diverse tasks is needed -- talking with customers, evaluating the market landscape, proposing new product ideas, and building broader business understanding.
Peter says "the hidden magic of startups" lies right here. Two years after leaving a startup and looking back, you'll have learned not just coding skills but far more about business growth, contraction, and competition. This experience becomes a tremendous asset when starting your own company or taking on greater responsibility later. Like the "PayPal Mafia" or "Airbnb Mafia," Silicon Valley is full of cases where people who worked together at one company meet again and succeed at various other companies. This demonstrates the importance of networks, and joining the most popular company itself becomes an opportunity to be part of a critical talent pool.
Conclusion
Despite active investment, the venture capital market is undergoing fundamental changes in how startups are founded and operated, driven by declining deal counts, hiring slowdowns, and AI's impact. Small teams pursuing higher efficiency are making metrics like "ARR per FTE" increasingly important. Engineers should carefully evaluate a company's financial health, funding timing, and founder capability when joining a startup, and develop not just technical skills but versatility and business understanding suited to the startup environment. The startup experience offers long-term growth and learning opportunities rather than short-term compensation, and can become a valuable asset that sometimes leads to successful entrepreneurship.