As we turn the page into 2025, my colleagues and I at Asymmetric Capital Partners are optimistic for what the next year holds for growth and innovation. We do not expect these gains to be shared uniformly, however, we see distinct winners and losers.
On the positive side, we expect to see truly valuable AI companies outperform and prosper as flash-in-the-pan and hype companies falter. Simultaneously, we foresee the rise of vertical integration plays and those pursuing buy and build strategies for markets in need of technology streamlining.
We also expect limited partners investing in technology to continue their shift toward capacity-constrained, returns-oriented upstarts (versus asset gatherers who have optimized for fees). Finally, we see the beginning of the end for the 2020-2021 cohort of overfunded growth companies.
Artificial intelligence
It is no secret that AI has seen an utter explosion in funding rounds and dollars since the release of GPT-4. As many will tell you, this moment was far from the beginning of commercial AI.
Yet, for many investors, the release marked a watershed turn in AI’s practical availability. While many applications are quite compelling, we remain concerned that hype has exceeded reality in many instances. Additionally, for categories that do indeed make practical sense, so many competitors have been funded that it will be nearly impossible for average returns to be compelling in a winner-take-most market.
There is a fixed amount of enterprise value available in any given market, and excessive competition along the way results in increased costs of customer acquisition and superfluous upward pressure on input prices — compute, salaries, etc.
While the privileged few backing the winners of these subsectors will make out just fine, most venture capital markets ultimately have just one or two breakouts who capture virtually all of the excess return. For these few, returns may be mind-blowing. For others — and in the end, in venture, they’re mostly others — we expect returns will disappoint.
Vertical integration
There is a gap between the number of vertical end markets for which technology can meaningfully improve a business (very big) and those into which software can be sold, serviced and retained attractively (much smaller).
This is primarily due to the costs of acquiring small-business customers. We at Asymmetric believe we have a hack: buy and assemble the companies to which you would have sold the software. This works most practically when the increase in enterprise value due to technology integration is on roughly the same order of magnitude as the company’s value.
We have executed on this thesis in the residential pool services and dental spaces, among others. We are tremendously excited to see what other industries in 2025 will be revolutionized by technology and improved with new ownership.
Industry capital flows and fundraising
In 2006 I wrote my college junior paper on venture capital: “Too Much Money Chasing Too Few Deals.” Unfortunately, two decades later, the fact remains true: venture is simply an asset class that doesn’t scale.
Folks have analyzed the current amount of capital chasing returns in the sector and found that for all funds in the space to hit their LP-promised MoIC, or Multiple on Invested Capital, many multiples of existing current tech GDP would need to be created in the upcoming decade.
This will of course not happen. As we’ve canvassed LPs, we’ve heard a consistent refrain: subscale and emerging managers will continue to gain share versus those who’ve reached a scale that makes premium returns impossible.
This obviously won’t come in just 2025 but will be a decade-long process, not necessarily different from a parallel one in control-oriented private equity.
ZIRP-era deals
Finally, we expect 2025 to be the first of many years of ultimate reckoning for the excesses of 2020 and 2021.
While many of those companies have thoughtfully extended runway and cut costs, raising money on discounted but not capped notes, eventually nature will take its course.
Companies continuing to run deficits will need to cover them with fresh capital from outsiders who will want a fixed valuation; we fear that these valuations may often roughly approximate the amount of total capital raised to date. The resulting implication: Common equity is worthless at many of these companies, so founders and employees will need to be reset in order to remain motivated — further crushing existing shareholders already being diluted by new inbound equity.
For those companies systematically generating value for their customers, and doing it with reasonable cost, elegant solutions may be reached.
For those not particularly valued by their existing customers, or for whom prices are unsustainably low, we believe some fire sales and even failures will occur.
In summary: We expect 2025 to represent a further return to sanity. Ideally, venture investment will return to its core DNA: artisanal, hand-knit fostering of important innovation. And some of the industry’s worst impulses — hype over economics, GP asset gathering, excessive funding of every concept with dozens of players — will be finally tamed as reality sets in.
Rob Biederman is the managing partner of Asymmetric Capital Partners, where he invests in and advises early-stage companies. Prior to that he was co-founder and co-CEO of Catalant Technologies, and now serves as chairman of the board. He started his career at Goldman Sachs and was a private equity investor at Bain Capital before attending Harvard Business School, where he founded Catalant. His experience as an entrepreneur and investor provides him with unique insights into the challenges and opportunities faced by startups today.
Illustration: Dom Guzman
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