Honey, We Need To Talk About Venture Socialism

It’s not you… it’s state-sponsored inefficiency

Disclaimer: Before we begin, a gentle note for my friends, colleagues, and long-suffering acquaintances who work in VC: I love you. Truly. Many of you are brilliant. A few of you are even competent (ha!). This essay is not about you personally, it is about the system you work in, which is doing strange things to all of us. Please don’t stop inviting me to your swanky dinners and champagne-fuelled networking functions. I promise I’ll behave myself at those, even if I cannot do it here.

“Party Conference” by Irfjan Ajvazi (2023), Germany.

So. Here we go.

Venture capital was once a single idea contained within a simple asset class: take a risky bet on the future, and if it works, everyone gets rich. It was easy and very California-coded. But somewhere between the dot-com boom and the AI arms race (bridged, of course, by monkey jpegs), that simple model fractured into two very different political economies.

I am, of course, talking about the US and European economies.

On one side of the Atlantic, as I wrote about recently in a piece that went further than I could have imagined, venture capital mutated into venture mercantilism, a fancy term for a state-aligned, power-accumulating machine that has learned to rapidly multiply private capital through the White House’s national strategy.

These are funds that no longer merely “invest” in markets because they just control too much money; instead they must co-design these markets. Because (1) this guarantees success (if you’re the house and the player, great!), and (2) the volume of capital that these VC megafunds deploy actually moves the market itself.

These funds operate in the grey zone, somewhere between private industry and public governance, and a venture mercantilist doing their job will simultaneously lobby for favorable policy in the morning, raise a billion-dollar fund in the afternoon, and advise the Pentagon on autonomous warfare acquisitions (i.e. “buy my portfolio technology”) before their dinner in the White House Rose Garden.

In the US, Big Venture didn’t just get close to the state, it fused with it. And then it… just kept going.

Ok, so that’s the US. But what about Europe?

Well, on the other side of the Atlantic, something entirely different has emerged. Unsurprisingly, and unlike its US counterparts, European venture has instead evolved into what I am going to henceforth call “venture socialism”, a publicly subsidised, low-accountability system where VCs:

• Rely on the state

• Are insulated from consequences of their (often bad) investing

• Cannot credibly advise founders on capitalism because they do not operate within it themselves.

It is an asset class that, despite at least a decade-long run, has never metabolized risk, never internalised market discipline, and never built the instincts required to scale companies into competitive international markets. European VCs have managed the pretense of performing capitalism while living entirely outside of capitalism’s feedback loops. Which is, in itself, impressive.

In other words: there are two systems of global venture, both of which are fused with the state, but in opposite directions.

Where one became more powerful, learned to govern industries and acts like a sovereign actor, the other became more dependent on the state, got good at filing grant applications and is essentially a subsidised consultancy (with mandatory equity options).

These are the twin mutations of modern venture capital, venture mercantilism and venture socialism, which mirror everything about how innovation, risk, and power now move through the Western economy.

Now, I’m going to discuss in detail the latter of the two.

Capitalism for Thee, Socialism for Mee

To understand why these two venture species diverged so dramatically, I don’t need to retrace the cultural and mathematical history of Silicon Valley the way I did for the US. I also don’t need to start with Fairchild, or Lockheed, or DARPA, or even Peter Thiel’s origin story as a Bond villain (!).

Instead, I’m going to look at something far more banal, yet far more revealing: how a VC fund, and hence investors, actually gets paid!

Because the following dynamic is what I’ve written about in pretty much all of my Substack posts to date:

Incentives build institutions → Institutions create behaviors → behaviors create political economies.

So through this lens, it becomes clear that US venture industry became mercantilist not because of “vibes”, or patriotism, or techno-optimism (although it exhibits these in vast quantities), but because its compensation structure scaled with proximity to the state.

Simply, it became rational for US funds to embed themselves inside national strategy because that is where the certainty, and thus the returns, lived.

European venture, by contrast, has become socialist not because Europeans are allergic to capitalism (although… well…), but because the way European funds are paid makes socialism the only stable equilibrium.

To see this clearly, you have to ignore everything VCs say about themselves (if you’re not already doing this, by the way, this is good life advice). Ignore the mission statements, the founder-first platitudes, the thought-leader LinkedIn posts, the “we write the first cheque” and instead examine the very boring plumbing of venture fund economics.

And that plumbing boils down to two things: fees and carry.

You will often hear that VCs get paid “2 and 20”. This is technically true, in the way that “gravity exists” is technically true, but in reality rarely happens. Let me explain:

Management Fees (2%)

The “2%” is called the management fee, and this is where the real (read: only) money comes from.

What does this mean?

That every VC fund charges about 2% (sometimes more!) of the total fund size. Every. Single. Year. Simply for existing! This is what investors are willing to pay to the VC for being smart and investing their money wisely (ha).

So if a VC raises a €200m fund, they immediately lock in €4m per year, for many years, regardless of performance, to pay their salaries and fund their thought-leadership-adjacent travels around the world to speak on various, nondescript panels about their non-specific expertise.

Interestingly, they get this money regardless of how successful they are at investing. Even if they return nothing to their investor, and even if half the partners couldn’t calculate a discounted cash flow if you threatened them with an excel sheet. (I urge you: next time you meet a VC, ask them whether they think the discount rate is likely to go up or down with inflation, and what this means for their portfolio value, and watch how they will look at you like you have three heads!!).

This fee is the base salary of the venture industry, which pays partner compensation, junior staff, office space, “offsites”, parties, networking dinners, etc etc.

Now scale that across multiple funds, overlapping vintages, and investor money that cannot be withdrawn (unlike hedge funds, which can be withdrawn if investors are unhappy!), and what you have is a Partner at a VC fund who is earning millions a year to tweet their anti-intellectual hot takes.

Carry (20%)

The “20%” part, the carry, is the theoretical upside of being a VC investor. Simply: if the fund makes a profit, the VC gets 20% of that profit.

Here’s an example:

Imagine a VC raises a €200m fund. Over the life of the fund, they invest the whole €200m into startups. Now imagine that after all the wins and losses play out, the portfolio is worth €300m at the end. That means it made a €100m profit. The VC carry is 20% of that €100m, so the partners split €20m between them.

This is the famous justification for why a VC portfolio can withstand 99 failures so long as one company becomes enormous: the single outlier is supposed to return the fund and more. Again, I’ve written here about why this math don’t math no more.

(Yes, some of you will say that I’m leaving out something important called the hurdle rate here; that’s fine. This will not change any of my following points and just adds unnecessary confusion!).

But this tidy story hides the real math, unfortunately.

VCs are not actually investing €200m. They are investing what’s left after fees, which are enormous. So if a standard fund charges ~2% per year during the let’s say six-year deployment period, that’s €24m in fees in those six years alone. By the time the investments are made, the fund has often spent €25–30m on fees, and not into startups. Which means less bets into fewer companies that might hit the jackpot to return the fund.

So in reality, the VC is only deploying €170–175m, while still being benchmarked against the full €200m they raised. That means simply returning €200m to investors (breaking even in nominal terms) is nowhere near enough to earn carry.

They must first refill the sunk money created by fee drag, and then generate the kinds of outsize returns that produce a competitive return, which is typically 20–30%, because anything below that looks pathetic next to the S&P 500’s boring, reliable 8–10% annual returns.

I mean, consider that the S&P requires no capital “lockups” (you can remove it when you want), no decade-long waiting periods, no storytelling, and no VC podcast bullshit theatrics.

In short, and extremely importantly: for a VC fund to justify its existence, it doesn’t just need to beat the stock market; it needs to fucking obliterate it.

Or put differently: a fund advertised as “€200m” may actually need to return €240–260m just to break even in real economic terms and then produce additional HUGE upside before carry even begins to accrue. This is why the power law matters so much in venture: the math forces the entire model to depend on a single, colossal winner. Without one company going stratospheric, the numbers simply do not work.

This is also why the industry mythology around “picking winners” is so loud and performative (eyeroll).

Yes, most startups will fail. However fees, not carry, guarantee the VC gets paid anyway. Because without that one spectacular startup outlier, which barely exists anywhere anymore, carry is nothing more than a mirage.

TL;DR: since most funds never achieve invest in that outlier, because outliers are becoming so rare these days, the theoretical upside stays theoretical.

The fees, however, remain very real.

Thus, VCs don’t need to earn carry to get rich. They only need fees. And this is why fund sizes have ballooned, and why the European model has become a parody of capitalism.

Who Funds This Fun?

So who actually provides the money for most European venture funds? Who are the investors for the investors?

In Europe, the largest source of capital is not wealthy individuals or university endowments like it is in the US (and in fact Alex and I made a podcast on how tragically VC funds perform for universities, as well).

Nope, in Europe it is disproportionately the government.

In other words, the biggest investors in European VC funds are organisations like the European Investment Fund (EIF), national development banks, regional economic agencies, and state-backed “innovation programs.”

And unlike the traditional investors into VC funds in the US, these are public institutions with mandates such as “ecosystem development,” “entrepreneurship stimulation,” and “economic uplift” as opposed to “make a fuck ton of money”.

In VC lingo, these institutions are called Limited Partners, or LPs. They are the people or organisations who give money to a VC fund so that the VC can invest it on their behalf. But unlike private investors, pension funds, or endowments in the US, European government-backed LPs do not behave like normal investors at all. They do not demand strong financial returns in order to invest in subsequent funds. In fact, many don’t seem to remotely care about returns.

Instead, these government LPs operate according to public-policy objectives, not financial return objectives.

Their goal is not to make money, but to distribute money: in service of economic-development targets. This distinction matters a lot.

As long as the VC fund claims to support innovation, helps “build the local ecosystem,” or ticks the right bureaucratic boxes, the capital keeps flowing. This is why you’ll find entire funds that are focused on investing into things like Northern Swedish female-founded environmental startups (for which there is not a market size to generate the types of returns needed to justify this asset class!). Or university founders coming out of Manchester and Liverpool in Northern England. (Again, chances of a multi-billion euro startup here? Hmmm.)

And that capital, with the correct boxes ticked, will literally just keep flowing. Even if (when) the VC fund performs terribly. Even if (when) it never returns money to its investors. Even if (when) the portfolio is a literal graveyard of failed companies.

In other words, European VCs get paid as if they are in the private sector, but they are evaluated like they are in the public sector. Let me say this again differently: European venture capital is a publicly subsidised industry where failure has no consequences, performance barely matters, and the next fund can be raised regardless of how the last one performed.

European VC: the real champagne socialism

If you’re shocked (you should be), consider the underlying reasoning. That Governments behave like:

“We budgeted €300M for innovation this cycle, and we have to spend it or we lose the budget next year.”

Instead of private investors which behave like:

“If you don’t make me money, I’m never giving you another cent. And also: explain why I shouldn’t fire you.”

Which is why European VC returns and performance are not gating functions for raising a new fund, essentially meaning that they can:

• Underperform benchmarks (which they do)

• Never return capital (which they pretend they don’t do)

• Destroy 90% of portfolio value (well… hard to destroy what doesn’t exist I suppose)

• Bail out your own failing companies with new state money (Very few actually manage to achieve this)

• Still raise your next €200M fund (like clockwork)

Why?

Because if you are a European VC, your performance is irrelevant to your pay. You are not being judged as a capitalist. You are being judged as a mechanism for economic development. A grant-compliant allocator of public money.

And this is what I mean when I say European VC isn’t capitalism at all.

It is venture socialism: a system where capital is public, outcomes don’t matter, and the people deploying the money are insulated from the very market forces they claim to help founders navigate.

Loro Piana Socialism: A Field Guide

Here is the unspoken truth across the entire global VC industry today, in a world where those big exits have stopped coming around:

The incentives of this industry reward increasing your assets under management (AUM), or the amount of capital moving through your various funds, and not the returns that those funds generate. Thus, you raise bigger and bigger funds, so that your management fee increases.

If you return capital with those funds? Great. If you don’t? In Europe: also great!

So indeed, the kicker to all of this is simply that there is no ceiling on how much you get paid for failure, only for how much you raise!

The compensation model therefore literally becomes:

1. Raise as much capital as possible

2. Deploy it as fast as possible

3. Collect fees while waiting for exits that may never come

4. Raise another fund before anyone runs the numbers

5. Rinse + repeat

This is why fund sizes keep growing despite the number of good companies not growing, creating the most deranged dynamic possible:

European venture socialists who are terrible at investing are the ones making the most money!!!!!!

Because they raise the most money → because they are fundraising machines, not investors → because their job is storytelling, not underwriting.

Which brings me to another important point…

Who are these venture socialists, anyway?

In Europe, many of them do not arrive through the path that exists in Silicon Valley.

They are rarely former founders, technologists, or investors with deep sector expertise. More often, they have come out of corporate finance tracks at European business schools and happened to take the class on how to audit a balance sheet, but have never actually invested in anything, never operated a company, and have no real exposure to venture capital, private equity, or specialised risk underwriting.

Importantly, they wear an expensive shirt under their cashmere Loro Piana sweater instead of a Patagonia vest, and have quadruple-barreled last names.

Gstaad Guy, who will no doubt launch his own VC fund in Q2 2026

So you end up with an industry filled with people who may have degrees in accounting or corporate finance but lack the foundational skills that VC investing actually requires, with:

• no concept of macroeconomic cycles or capital markets

• no operational experience in building companies

• no ability to evaluate emerging technologies

• no sense of competitive market structures

• no sector depth or technical intuition

• no real capacity for diligence beyond what’s written in a pitch deck

I feel uniquely qualified, by the way, to make the above assertions because these venture socialists call me all the fucking time asking me rudimentary questions about the industry they get paid millions to invest into, despite knowing nothing about it…

I mean, it’s not that they’re stupid, because again they’re not. If you are smart enough to wrangle hundreds of millions of dollars, risk-free, from the government, this actually makes you incredibly smart!

Rather, my point is that in an asset class defined by asymmetric risk, these venture socialists are trained for symmetry. And compliance. And asking for permission. And then we wonder why the returns look the way they do 🤡

What they do have, though, unlike their US venture mercantilists counterparts:

• A polished logo on their website

• A Substack post about AI algorithms (which they’ve read about, but never actually created themselves)

• A vague belief that they “invest in people” because this is what Silicon Valley told them generates returns

• A team photo featuring five, distinctly Swedish looking, 45-year-old men in “business casual” uniform holding kombucha in a nondescript, beige office environment.

I suppose where I take offense at this whole setup in Europe is the following:

I spend time with lots of people across the entire asset-class stack, and work with all types of funds (from family offices to bond investors, PE funds to hedge funds, both quantitative and macro and everything in between).

And of all the people, and frameworks, and sheer effort, and modeling and comprehension of industries, the micro and macro world, and risk, and asymmetry, and desperation to outperform the market,

Venture socialists get paid waaaaay more than the smartest, hardest working and most competitive hedge fund PMs I know!

While the socialists get paid 2% or more a year on fees, private equity investors gets around 1.2%, and hedge funds are down to about 0.7% fees.

This seems even more absurd when you consider that hedge funds:

• must generate returns every quarter (and in fact are marked-to-market daily!)

• with actual mathematical skill!!

• in markets that punish stupidity instantly

So, unlike the socialists, hedge funds live in a much more accountable, real world where:

• If you are wrong, you lose your job (otherwise known as capitalism)

• If you are wrong twice, you lose your fund (also known as capitalism)

• If you underperform, capital flees (well, the hint is in the world: capital)

And again, for the sake of comparison. The venture socialists live in a world where:

• If you are wrong, you blame “market timing” and get rewarded

• If you are wrong repeatedly, you rebrand as “deep tech” or “defense” or “AI”

• If you underperform, you raise a bigger fund.

Why? Because their compensation is decoupled from markets, incentives and pricing. Just like socialism.

(un) Intended Consequences

This entire warped incentive structure doesn’t just distort European VC behavior, it distorts the entire trajectory of European companies. This is why European VC return distributions look so bad, and why most European VC funds have never returned meaningful capital.

But unfortunately, the damage doesn’t stop inside the funds. It cascades directly into the founder experience and, ultimately, the continent’s growth potential!

So, by the time a European founder reaches Series B (the stage where scaling the company become existential, and where financial literacy starts to actually matter), they are often being “guided” by investors who have spent their entire investing careers inside publicly subsidised structures, insulated from consequences, sheltered by guaranteed salaries, and never once exposed to the brutality of real market discipline.

If you are a founder of one such Series B company, you should probably stop and ask the socialists sitting on your board: if you did not use capitalism to grow your own fund, how can you possibly advise me on how to engage with capitalism at global scale?

And I want to stress this one more time, for those at the back:

In this scenario, you end up with a surreal dynamic of ambitious founders trying to build global companies while taking strategic advice from VCs who rarely raise private capital, do not compete for LP euros, do not operate within a competitive financing ecosystem, do not manage true risk, and cannot even imagine having their own livelihoods tied to performance.

When socialism is your professional habitat, you cannot coach someone through the brutality of markets. And yet this is exactly what European founders are expected to rely on.

But somehow (!), this does not stop venture socialists from:

• Distributing their capitalist wisdom on conference panels

• Opining on innovation strategy

• Lecturing founders

• Collecting salaries higher than hedge fund managers

• Preparing to raise their next €150M “development-oriented, sustainability-focused” fund

Because the European venture system is not designed to reward outcomes. It is designed to reward deployment.

And so, inevitably, the result is predictable:

Europe underperforms not because it lacks ambition, talent, or ideas (it does actually have this, in spades!), but because its capital allocators are structurally incapable of guiding companies into globally competitive scale.

European innovation is commonly misdiagnosed; it is bottlenecked not at the founder level, but at the investor level.

This is the impact of venture socialism: a hand-wavey, vibe-driven, state-sponsored aristocracy gesturing at capitalism while insulated entirely from its consequences (and dragging the continent’s growth potential down with it).

And here’s the part that should make every European policymaker choke on their caffè latte (or Riesling, if after 11am):

The very funds created to distribute economic development are, by design, preventing it.

Because by shielding VCs from market discipline, by rewarding deployment over performance, and by insulating investors from the consequences of their investing decisions, Europe has built a system where the institutions meant to catalyse innovation end up suffocating it instead.

The venture socialism mechanism becomes the bottleneck, and the subsidy that is the VC’s salary floor becomes the continent’s economic ceiling.

Go figure.

Thus, the capital meant to accelerate growth ensures it never happens at scale.

Two Venture Economies Enter a Bar…

Let’s go back to comparing venture mercantilism with venture socialism:

In the United States, venture captured the state. In Europe, the state captured venture.

The systems on both sides of the Atlantic have fused with public power, but the direction of fusion, and thus the resulting political economy, is completely different.

In the US, Big Venture embedded itself inside of the national strategy to create the Venture-State. It aligned with defense, energy, AI, and industrial policy. It built influence, scale, and leverage, thus consolidating power. Venture mercantilism, therefore, is a system where private capital extends the reach of the state, and the state extends the reach of private capital.

The result is an asset class with sovereign instincts.

In Europe, the opposite happened!

Instead of capturing the state, European venture capital became absorbed by it. So rather than shaping governmental policy, it is necessitated to feed off policy instead. Likewise, rather than building supranational, it became dependent on those very powers. Venture socialism, thus, has become an administrative arm of government development programs.

The result is not power consolidation as seen with the venture mercantilists, but power dilution and dispersion of what little influence it could have had, as accountability evaporated, performance disconnected from pay and the asset class remained stunted across the UK and mainland.

Both systems, ironically, produce distortions. And both systems are, in their own way, failures of pure capitalism. But only one of them produces globally dominant companies. (Hint: not the socialists!).

The venture mercantilism model, hence, may be messy, over-leveraged, and politically unsettling, but it does at least produce scale, and therefore creates corporate giants through systematic production of outliers. It produces technological power.

Venture socialism, dissimilarly, produces comfort, stability and soft incentives. Endless panels about “sustainable ecosystems.” But certainly no outliers, global champions, or companies that can survive levels of competition beyond their region.

Therefore what we are seeing in the development of venture capital are two mirror mutations of venture capital.

Both have fused with the state, but only one generates power. The other merely… manages grants.

Capital Deployment Isn’t Capitalism

So, something a little more positive to end this on! If you look closely, European VCs are not failing at capitalism, per se, in that they have totally nailed the “let’s be extractive in lucrative ways!” model.

In this sense, while they may be failing at venture capitalism, they are succeeding at something else entirely.

They are succeeding at a game where:

• The money comes from the state,

• There is no accountability

• Feedback loops are broken,

• Outcomes don’t matter,

• Everyone can pretend they are participating in “innovation” while avoiding the danger, volatility, and discomfort that actual innovation requires.

And for those who are in this system, it’s not at all a bad system! Who wouldn’t want this!

Indeed, venture socialists are actually winning at creating a self-serving welfare system that protects allocators (themselves) from market-driven consequences while exposing founders to all of them, and pretending that the mismatch doesn’t exist. (Indeed, I’m actually not entirely sure many have even considered this mismatch to exist at all).

And the great irony that should hit the hardest? Is that Europe built these funds to distribute economic development, yet in the most European way possible, has managed to structure them in a way that actually prevents this, in a most spectacular own goal.

So yes, honey, we need to talk about venture socialism.

Because until Europe stops paying investors for existing and starts paying them for performing, it will continue to reward capital deployment instead of capital production.

In short: Europe fused venture with the state, but unlike the venture mercantilists, it made the fatal choice of fusing it into the wrong side of the balance sheet.