2025 Annual Letter: The State of Venture

As we reflect on the VC investing landscape in 2025, we believe the golden era continues. AI is everywhere, seamlessly integrating into every aspect of our lives. Blockchains are also evolving rapidly, quietly reshaping how value is transferred and stored¹, even if their impact isn't immediately visible to the everyday consumer.

We are in a moment of compounding platform shifts where personalization, automation, and decentralization converge to reshape how consumers live, enterprises operate, and capital flows. At M13, our strategy is to underwrite the early signs of these shifts by backing category-defining founders and actively helping them scale. 

Simultaneously, the capital markets are undergoing significant transformation where the lines between public and private markets continue to blur. It is only a matter of time before we have the first trillion dollar private company. Secondaries continue to transform how liquidity is generated: in 2025, the secondary market is expected to achieve a record year with $210B in total transactions, which would be a 31% increase in volume from the already record-setting 2024², and is expected to grow to ~$420B over the next five years³. This change requires private market managers to behave differently. To be more active and creative. M13 portfolio company Allocate is at the nexus of these changes, providing both managers and LPs a platform for capital and liquidity.

US deficit aside, the macroeconomic signals are encouraging. M&A is on pace to have its best year since 2021 by deal value, mainly driven by the AI race⁴. OpenAI alone has made nearly $10B of acquisitions⁵. Fintech has come roaring back on the back of the Circle ($55B market cap)⁶ and Chime ($13B market cap)⁷ IPOs and Xero’s planned $2.5B acquisition of Melio. Stablecoins represent a new frontier in fintech. Bitcoin ranked as the best performing major asset in 2024; it outperformed Gold, the S&P 500, and the Nasdaq 100, with an annual growth of 121%⁸.

Our investing framework

At M13, we are focused on understanding second- and third-order impacts of advancements in technologies. Much like cars led to gas stations and highways and ultimately transformed suburban landscapes, we are constantly thinking through the derivative implications and applications. We anticipate that generative AI and LLMs will similarly reshape most industries.

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For the first time in two decades, traditional search has been meaningfully disrupted as consumers utilize Perplexity and GPT instead of clicking blue links.⁹ Google is also under pressure from regulators.¹⁰ There is no going back from this behavior change.

We have been exploring: What will ad units look like inside LLM native products or generative media products? One of our unannounced portfolio companies is building contextual ads inside native genAI applications — more on our broader advertising thesis here from colleagues Brent Murri and Whitney Hazard. There will be automation of services associated with search engine optimization and performance marketing. 

We are also at the dawn of agent-led interfaces: bots that navigate the web, make purchases, and negotiate on behalf of users. LLMs do not care about beautiful landing pages. They read data. What infrastructure will be needed to transform the internet into an agent-friendly environment? 

Coding and application automation through companies like Cursor and Windsurf are making it dramatically easier to build software.¹¹ In a world where everyone can be a developer or creator, what does the future of work look like? If the act of building is no longer the bottleneck, we believe value will shift to platforms that enable distribution, aggregation, and trust. 

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In our view, there will be an inversion of the web - app store - apps paradigm. This is a classic “chicken and egg” scenario, but we think the app store of the future will be owned by developers of killer first-party apps. The ability to stitch agents together (first-party and potentially third-party later on) will be critical. Look no further than OpenAI.

M13 portfolio company Canvas Medical is benefitting from these tailwinds. By lowering the barriers to building custom and compliant healthcare software, Canvas can become the distribution platform for agent-driven applications in the space. 

We’re also deeply invested in identifying and transforming traditionally overlooked "sleepy" segments. In our last letter, we highlighted two of our companies that fit into this thesis.  Prepared leverages AI to help emergency response move off landlines into a world of full context, and Polimorphic leverages AI to help local government move from sticky notes to agentic constituent services. Both have been validated with growth capital from General Catalyst. 

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These “sleepy” industries typically rely on legacy systems of record and costly, low-skilled labor. But we believe now is the moment for transformation. As Bessemer recently outlined, the shift from system of record to “systems of action” creates an opportunity to drive revenue growth while reducing costs. The ROI is simply too great to be ignored. 

Canvas Medical and M13 portfolio company Niural have built agent-first systems of record from the ground up. Others are starting with high-cost, human-intensive workflows as a wedge into broader horizontal opportunities. 

M13 portfolio company Maven began with customer service automation as a path to enterprise AGI. Another M13 portfolio company, RadiantGraph, began with sales automation as a path to allowing health plans better service their members. Finally, an unannounced M13 portfolio company is tackling the temporary staffing market, starting with agentic recruiters to streamline sourcing and placement.  

We believe numerous other industries — from the trades to home health — are poised for similar technical leaps. We are actively searching for founders building in these overlooked categories, where AI can unlock both immediate efficiency gains and long-term platform potential. 

Crypto: Expanding product market fit with regulatory tailwinds 

Amid the rollercoaster of its amplified hype cycles, crypto continues to permeate throughout our lives in both visible and invisible ways. The passage of the Genius Act and the growing adoption of crypto ETFs are positive regulatory and macro examples of the space’s success.¹² Yet, beyond these headline milestones, are there pockets of innovation driving returns? Or should we all just hold bitcoin? 

We believe the answer to the former is a resounding yes. 

Stablecoins have arrived on the global scale. Macro investor Tom Lee has said "stablecoins are the ChatGPT of crypto". Over $200T of value will move better as stablecoins eat traditional finance rails.¹³ As fiat currencies increasingly digitize, we believe stablecoins will become pivotal in connecting global financial networks, offering instant settlements, and enabling 24/7 markets. We are investing heavily in this movement, having backed Lightning Labs which is bringing stablecoins to Bitcoin, and recently co-led a large Series A in a company that we believe can become a defining infrastructure player in the stablecoin era. 

Outside of money movement and payments, stablecoins are also the backbone of prediction markets: Polymarket has processed $15B in stablecoin volumes.¹⁴ They should also become the core for AI-native transactions; Agents will be more comfortable transacting on programmable blockchains. Good luck having Bank of America KYC your agent! We believe human to agent, agent to agent, and agent to business transactions will all migrate to crypto rails.

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Tokenization of real-world assets is another transformative area with early product-market fit today. Over $25B of real world assets have been tokenized on chain,¹⁵ led by private credit and treasuries. We believe most asset classes — from commodities to solar and battery storage financing — will benefit from blockchain's infrastructural and custodial advantages, which will expand markets through instant settlement and continuous operation. Relatedly, Bill Gurley has recently mentioned blockchains as a potential solve for improving the IPO process, and Figma just highlighted the tokenization of its shares in its updated S-1.

But there are nearly $1,000T of assets to tokenize… this is barely the top of the 1st inning!¹⁶

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We invest in both equity and tokens and seek to protect against economic leakage. However, the de facto early-stage token model — VCs invest in a pre-launch network ⇒ network launches ⇒ VCs vest their lock up ⇒ then sell — feels fundamentally broken. These poor incentive models lead to grift and a negative perception of the space, which my colleague Mark Grace has discussed.

An evolution is required. Questions we are wrestling with: what do token vesting performance hurdles look like? How do we make token models more transparent in light of an increasingly positive regulatory landscape? 

Crypto markets are great for capital formation yet they need to become more efficient. While the space will always be susceptible to macro conditions and sentiment, the companies and protocols with the best operating metrics and cash flow should outperform. Consolidation is natural, and the vast number of protocols are likely to disappear — just as it should be in early-stage investing.

Benjamin Graham famously once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Crypto has been an extreme voting machine over the last decade, but we believe asset dispersion is coming, and in the long run, it will become a weighing machine.

With an increasingly positive regulatory landscape and product-market fit across multiple categories, we believe now is the time to build in crypto. We are on the look out. 

The pattern recognition that drives our conviction for early stage investing

As we turn back to the early-stage venture market, we believe the traditional investment stage distinctions—Seed, Series A, B, etc.—have become increasingly meaningless. In our investment discussions we often say “Don’t get blinded by traction.” Instead we see the venture world simplified into two distinct stages: early and growth. More from colleagues Anna Barber and Whitney Hazard here.

The vast majority of our portfolio companies would be defined as early-stage, characterized by ongoing experimentation rather than confirmed product-market fit. At the early stage, revenue is more indicative than definitive. Especially in AI, pilot budgets are everywhere so the real focus is on leading indicators such as early proof of customer love and a willingness to pay.

As I mentioned at last year's AGM, gradually then suddenly, hype cycles reshape entire sectors—AI, crypto, autonomous vehicles, and AR/VR among them. At M13, we look for the founders who not only anticipate the shift, but know exactly how to ride the wave when it comes.

So how do we decide if a company belongs in our portfolio? These critical questions help us determine an M13 deal:

• 1) Is this a founder with the vision, resilience, and expertise to lead through any market cycle?
  
  • Domain expertise, life stage, psychology: finding the right person to ride the wave is imperative.
• 2) Are there powerful tailwinds behind this market?
  
  • Tailwinds can come from breakthroughs in software and technical and regulatory shifts (like stablecoins), or entirely new categories of demand (GLP-1s reshaping obesity medicine, where M13 portfolio company Form Health is leading).
    
• 3) Can the company ride these waves and expand a market?
  
  • In early-stage markets, what looks small today can compound into a category-defining opportunity tomorrow.

At M13, we love sports. We previously highlighted the great parallels between sports and investing (see Carter Reum and NBA champion Shane Battier on stage here). We are very inspired by Roger Federer's commencement speech at Dartmouth: in an asset class where losses are frequent, the need to swiftly move forward to the next play is critical. Roger lost nearly 50% of his points but is one of the best of all time; he won the key points.

With $700M of growth capital raised by our companies since 2022 -- including significant up rounds from Prepared, Allocate, Maven, Niural, and Polimorphic in the past 18 months -- we believe a disciplined focus on founders, markets, and timing is how we consistently win the key points.

As we look ahead, we're energized by the evolving dynamics of the market and remain committed to backing the best entrepreneurs in the world as the golden age continues. Thank you to our founders and investors for their continued trust and partnership.

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Do you agree with this letter? Disagree? Have something to add?

‍I’d love to talk.

Latif Peracha, Partner
latif@m13.co

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