Software Abundance: Replit Raises ~$100 Million
Replit, an AI-driven coding platform and software marketplace in ARK Venture Fund’s portfolio, raised ~$100 million at a valuation of more than $1 billion. A16z led the round.
We believe artificial intelligence (Ai) is poised to transform the software-related world completely: more and more people will code, and code will stitch everything together. It’s all happening on Replit. By eliminating back-end friction and providing AI coding assistance to developers, Replit is expanding the developer market. 22 million software developers currently work on the Replit platform, a community which formerly contained around 30 million people globally.
Traditional Venture Fund Returns Are Beginning to Reflect Reality
Pitchbook’s 2023 Fund Performance report suggested that venture funds are seeing their worst 1-year rolling performance since 2009: -6.7% 1-year rolling internal rate of return as of third quarter of 2022, with preliminary fourth quarter reporting suggesting rolling returns of -16%.
The situation is likely to look worse over the next few quarters. Venture fund performance reporting tends to recognize write-downs at a 6-month smoothed lag to public market performance, as shown below. This indicates that several investments made during the market’s peak in late 2021 have not yet been reflected in the performance data. This is further emphasized by data indicating that additional funding rounds for venture capital are happening at significantly lower valuations compared to previous high points. If its correlation with public markets were to hold, that number likely will deteriorate toward -30% through the first half of this year 2023.
More Context, Please
Anthropic, a generative AI company that competes with OpenAI, upgraded its flagship language model’s context window, enabling the AI system to “read” 100,000 tokens (roughly 75k words) at a go. This follows on the heels of MosaicML open-sourcing a model that could take in 65k tokens, and OpenAI’s GPT-4 32k, released in March. Available context windows for AI models have increased 50-fold over 3 years.
AI system performance is improving at an astounding rate. Broader context windows allow users to feed more information into an AI model at runtime, which enables the AI model to analyze longer documents or engage in lengthier interactive dialogues and problem-solving sessions. Until this year, the cost of expanding context windows was estimated to scale as a square of context window size. A 100k context window should cost 2,500x more than a 2k context window. Anthropic’s 100k context window costs as much per token as GPT-3’s 2k context window of 3 years ago, suggesting—based on that measure—that AI costs are declining at 90+% per year. Though cost declines are unlikely to continue at that blistering pace—we think 3x per year is a reasonable forecast through 2030—the discontinuous improvement suggests plenty of opportunity for further engineering optimizations amongst AI model providers. Both Anthropic and MosaicML are ARK Venture Fund portfolio companies.
In 2019, 30 million software developers were known to be active across the globe. Replit’s 22 million on-platform software developer represent an expansion of that pool. https://www.future-processing.com/blog/how-many-developers-are-there-in-the-world-in-2019/ https://blog.replit.com/replit-developer-day-recap
Traditional venture capital funds in this context are pooled investment vehicles that invest in startups in exchange for ownership in those companies. Venture capital is a type of private equity, which means investments are not made available on a public market. Private funds differ from registered investment companies in that they are offered only to a limited number of financially sophisticated investors rather than to the general public. At its most basic, the two and twenty is basically the standard fee structure for venture capital firms to charge their investors. The 2% is the annual fee that the fund charges investors to manage the fund. And the 20% is the percentage of the upside that the fund managers take.
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