Portfolio startups are cautioned by Lux Capital to prepare for market dangers

Venture capital firm Lux Capital has sent a letter to founders of its portfolio companies, urging them to prepare for potential business headwinds, according to The Information’s Dealmaker newsletter.

In the letter, the firm said that “signals suggest something is off,” pointing to falling 10-year bond yields even as stock markets remain near record highs — a pattern that can sometimes signal an approaching recession.

To prepare for possible economic stress, Lux Capital advised founders to extend their cash runway, review venture debt covenants — especially clauses requiring companies to maintain certain cash levels with lenders — and closely examine operating costs. It also flagged risks for startups dependent on imported goods, which could be impacted by tariffs.

Such cautionary notes are not unusual during shifts in business cycles. Similar memos were circulated in 2022 as stock markets declined at the end of the Federal Reserve’s low-interest-rate cycle, and again at the start of the Covid-19 pandemic.

Lux Capital cofounder and partner Josh Wolfe also raised concerns 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 venture industry privately share these worries, they often remain silent due to a culture of optimism.

Wolfe estimated that among AI startups, “less than 10 matter,” though he did not name specific companies. He suggested that startups consider going public while investor enthusiasm for AI remains strong. Major players such as Anthropic PBC and OpenAI are reportedly preparing to list, while xAI — now part of SpaceX — could see an IPO as early as June.

Despite the warnings, Wolfe said he remains broadly optimistic about startup investing, including in AI. He emphasised that challenging economic periods can still produce major winners, but cautioned founders against overconfidence.

“Failure comes from a failure to imagine failure,” Wolfe said, urging entrepreneurs to test their assumptions beyond overly optimistic scenarios.

Lux Capital has backed several AI-focused companies, including Cognition, Hugging Face, Applied Intuition and Runway. In early January, the firm announced it had raised $1.5 billion to invest in advanced science and technology startups.