Katelyn Donnelly | Avalanche

Venture Wishlist shares ideas and themes VCs want to fund. Brought to you by Purpose Built venture studio.

Katelyn Donnelly is the Managing Partner at Avalanche, an early-stage venture firm focused on transforming how people learn, earn, and own. She writes about investable trends at Obviously the Future. She’s the former co-founder of Delivery Associates — a firm that supports 40+ government agencies and other social impact organizations in delivering outcomes for constituents and communities.

Katelyn’s Venture Wishlist

🧑‍⚖️GovTech: Developments in procurement tech and efficiency to make government processes smoother and more competitive, replacing outdated systems with nimble, private sector solutions.

🌐 Decentralized Systems: Growth in platforms that allow individuals to own their online experiences, moving away from centralized, ad-driven models to empower user agency and data privacy.

⬆️ Entrepreneurial Shifts: Shifts towards more work being done by entrepreneurs over employees will require different systems. Technology that powers digital native jobs or helps SMBs and solo-preneurs.

📚 Efficacious Edutainment: In a world of AI-generated slop, there is still a need for high-quality, curated content delivered in a gamified and immersive way.

Other insights:

🧑‍✈️ Founder Experience Advantage: Founders with deep, firsthand knowledge of the problems they're addressing have a competitive edge, particularly in fields like education, where understanding customer needs is crucial.

⚖️Venture Viability of AI: Skepticism about the venture scalability of AI solutions that do not fundamentally change business processes or offer clear, differentiated outcomes. AI allows for greater capital efficiency.

🏦 Private Market Dynamics: Insights into the dynamics of private financing, with an expectation of increased liquidity and more sophisticated market mechanisms evolving to facilitate easier asset trading.

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Full Interview

Tell me about Avalanche.

Avalanche invests pre-seed and early seed in companies that transform how people learn, earn and own using technology. We focus on founders who are building their life's work. They have noodled on a problem for a long time and then come up with a solution that they believe can fix a key gap in the industry they are trying to disrupt.

When you talk about a founder having deep experience with a problem, what advantages does that give someone? What counts as deep?

For example, we were the first investor in a company called Prisms, which is the world’s first spatial learning platform in which students learn core math and science. The founder was an MIT-trained engineer and then a classroom STEM educator for secondary schools. She also built the STEM curriculum for Success Academies, the premier charter chain in New York City, and worked for the New York Department of Education. While there, she got a grant from the National Science Foundation to build a math and science curriculum in virtual reality because she saw that the best practice pedagogy for students to learn these concepts was having real-world problems using spatial reasoning and being immersed in that full environment.

Having been in the public education system, she understood the things that the big school district customers would need in order to make a purchase of a new math curriculum. She invested in efficacy studies early on, which showed that it was a highly impactful program, starting with the key hinge point of middle school math. If you don't make it through middle school math, your life outcomes are severely impacted. The public system has a lot of accountability mechanisms built into it around students learning these math outcomes.

Anarupa, having seen firsthand the opportunity, was up for the challenge, knowing that by building this business to be successful, she would need to be on a plane every single day, meeting with superintendents of big school districts and going through school board processes. I don’t think anyone else could build this company.

How did you pick “learn, earn, and own” as your investment focus?

Well, it's the journey every successful person must go through in a capitalist society.

First, you learn to read, and then you read to learn, and then you learn to learn, and then you learn to earn and become productive. Someone pays you for your labor and then ideally you turn your labor into ownership, whether that's like a 401k or owning your own business, or owning equities.

If you're able to turn your earnings into ownership then the government has to step in and provide the infrastructure and assets to provide for your quality of life, which is why we also focus on government efficiency. It's this underappreciated backbone of society that goes through everything.

One of our massive avalanche trends is that many of our traditional institutions are decaying. They haven't kept up with technology and are built for a more centralized, slower-moving world. They need to be reinvented. Technology companies that allow individuals to be empowered to succeed in that journey will rise to prominence as the traditional institutions that people rely upon begin to disappear..

What are some of the other avalanches you’re anticipating?

One of them is the power of decentralized and open-source data architecture to allow people to own the instance of their experiences online.

I was an early investor in Bluesky as it pivoted out of Twitter. The idea was that almost every social media organization is in a walled garden where you're beholden to a specific algorithm, often ad-driven, looking to keep you engaged on the platform.

Bluesky was a Jack Dorsey project for which he gave an R&D grant out of Twitter. He hired the CEO Jay, who spun it out entirely as a new organization and raised a venture round for it ~18 months ago. Bluesky is just one instance on top of decentralized architecture called AT Protocol. For most of 2024 they had about 5 million users, usage was steady, and then all of a sudden, the election happened and a bunch of organizations realized that they were not getting very good engagement on X/Twitter because they couldn't control their experience.

Bluesky has this ecosystem that works and people came over en masse and the network went from 5 million accounts to 25 million accounts in a few weeks. They were adding about a million users a day after the election. Now, growth has slowed pace, which is good because they need time to build out the infrastructure for the next phase of growth.

That's a very clear avalanche of the institutions of Internet 2.0 that people were always dissatisfied with but had no alternative. The alternatives looked nascent and maybe not ideal, but suddenly, people's imagination shifted.

Another avalanche made more evident in the election is the push for government efficiency and last-mile delivery of public goods. The Department of Government Efficiency has ignited excitement in the popular psyche. For such a long time, GovTech has been such a deeply unsexy area. People thought, “don’t sell to the government, don't even talk to them.” It was seen as a monopoly where you wouldn’t be able to get anything through. And now, people are more optimistic that things can change and have to change.. Government is a core institution in our society that needs to have the effectiveness of a high-performing private sector organization.

Do you have a more specific GovTech thesis?

One of the theses we've already invested behind is called from red tape to red carpet about the rise of procurement tech. The key linchpin of the government is the procurement process. Suppose you make RFPs easier for younger, more nimble private sector organizations to bid on, increasing choices in a potentially more competitive way. In that case, you will be able to replace the old and stodgy elements of government with better quality.

We need more competition and private sector delivery of those traditional government functions.The same thing applies in education or healthcare. How do you get people who are not directly government employees to be delivering outcomes for the public?

What's your current obsession?

One thing I've been thinking a lot about is the very amorphous services and software continuum. As AI bounds ahead, to get real productivity, you have to get the human-technology integration right. I feel like you still see a lot of people in technology operating in silos, without thinking about how this actually implements into a real context.

Is that about building a business process around it or making it something people can buy with the right pricing and packaging? Or is it something else?

Well, sometimes I think, “is this even venture-scale?” Is it just Services 2.0? Ultimately, the most effective humans who use these tools will continue to be the most effective. And these are not true technology companies. I think a lot about how the venture game is changing.

People are talking a lot about paying for outcomes. Instead of selling software that helps you do a business process, you just pay for the outcome. I've heard more talk than seen it actually happening. Like service as a software?

I did a site visit to a company that said, “We predict the future.” But they didn’t predict the election correctly, and it’s unclear how accurate their models actually are. Maybe more hype than reality in terms of outcomes.

In contrast, I toured a fantastic K-8 school last week that teaches kids how to be entrepreneurs. Super exciting. I had a two-hour meeting with the principal and at the end, I asked about this hot AI education company. She had never heard of them before.

Nothing about this inspired school requires what the AI education company offers. They say you can create lesson plans with a couple clicks, but at the best schools, they don't need to do lesson plans the day before. They have their own curriculum and the ChatGPT-generated lesson plan is not moving the needle.

On nights and weekends, I think about how much I should be investing deeply in these AI-enabled tools, which look like they've gotten all this traction very quickly. Is it overbuilt, oversold and going to be disappointing? Maybe some will win, some will not.

So, I don’t think we know yet but I believe there will be a bifurcation between almost all online jobs and all offline jobs.

You yourself founded a services business and are not traditionally not seen as VC backable. Does that change if it's mainly AI and it's undercutting price-wise what was traditionally a services business but is delivered by software and a lot fewer employees?

I don’t know. I see many AI-enabled companies with few employees deliver, I wonder why they are raising money. Do they want a nicer office? They might want to ‘grow faster.’ Also, as the AI-services are undercutting price-wise, it might be hard to build a profitable business as you can’t charge as much, and competition is fierce. Where will the margin come from?

That AI prediction company in New York I mentioned had a large office and they were getting paid $30k to do a piece of consulting work. That’s not very much. That either could have been a whole McKinsey study in the past or it was just a tiny piece of the puzzle that the AI model could spit out almost instantly. Without a series of change management and human touch elements, it might get commoditized quickly.

Do you have any recommendations for founders and like customer profiles or problems that you think are being neglected?

High-quality content is still king. With AI-generated slop, there will still be a place for high-quality, engaging, thoughtful content that's curated. I’m not sure if that’s venture-backable, but maybe someone will find a way to do that.

Everyone is an entrepreneur or they'll have to learn to think like one. That means that everyone will be or have their own LLC, where interactions will be more contractual. The atomic unit of the economy will be the individual acting as an entrepreneur. There certainly are a slew of fintech companies that see that and are building behind it. But I haven't seen one that is at my stage and I'd like to back a business that really understands this.

Anything else?

Private companies will choose to stay private longer. There is way more demand for alternative assets and different financing options. At the same time investors are getting pushed to return money to their investors. We will see more marketplaces that seamlessly offer people liquidity and real-time pricing on assets that were more complex and highly illiquid in the past.

Databricks just raised their Series J of $10 billion size. This is unprecedented late-stage financing in terms of size. They’ve taken a bunch of money from some asset managers who have collected money from a bunch of other people. Isn't this just like a public market mechanism but with high fees?

Time will tell, and the pressure may build up in unpredictable ways. It will be fascinating to watch and is certainly something to pay attention to as an early stage investor.

This interview has been edited for length and clarity.