Fund-returning exits now require cosmic alignment, favorable lunar liquidity, and a clean bill of health from the quarterly hallucination audit.
Investors stopped funding companies. Instead, they breed unicorns in temperature-controlled chambers, feed them narratives, and release them briefly for valuation season.
It is not clear to me why the original VC model would not be able to co-exist next to the now institutionalized VCs based on this assay. I do not doubt that these old VCs have become a different type of business, and I agree with the description of how they have changed and that they have started using regulatory capture and guaranteed income schemes to grow.
However, that game is so fundamentally different compared to the original VC model, that I do not fundamentally see a reason why they should not be able to co-exist. The institutionalized VCs are probably becoming saturated and it is hard (probably impossible) to start another "a16z" or "Sequioa". Especially if you list the catalyst as being the pensions, retirement funds and late-stage wealth firms being forced away from guaranteed income to create the new institutionalized VC during a long period of low interest rates. These funds were never playing the game of the original VC model and were not deploying capital in true high-risk, high-reward startups. In that sense, it was a shift of a large market of treasuries and bond-seeking funds into a new system of institutionalized VCs. In other words, by lowering the rates to zero, the US Treasury basically gave room for an entire new job market, the job of the institutionalized wealth manager trying to find ways to generate a guaranteed annual income of 5~10%, like the original treasuries or long-term bonds. The first people to realize this new job market was available were the original VCs and investment banks, they stepped in to take this role as they were well-positioned in an adjacent industry (wealth generation) and potentially because it provides more job security (2% management fee) and less stress (low risk).
However, that implies that the original VC model is/was slowly being left vacant, but as the institutionalized VCs are arguably starting to become saturated, new entrants should be able to take on this role of the original VC model as it fundamentally was working, albeit with more stress and risk. Unless you have other reasons for devalidating that model. For example, maybe our current technological/energy level does not provide a sufficient catalyst to drive enough 1000x start-ups (e.g. the computer/internet/web in the 60~90s made all tech giants of today possible, the discovery of DNA, proteins and the basics of life made Genentech, Regeneron and others possible, and AI is now driving a select market of startups).
Thanks for the comment! In theory, yes, the old VC model could coexist alongside Big VC. But in practice the opportunity space that sustained “classic” venture doesn't exist anymore. The middle market of VC (Saas that created multiple $1–$20B outcomes without involving regulation or lobbying etc) has vanished. There's just no explosive growth in asset light industries anymore. What’s left is a barbell distribution of return generation: Big VC at one end chasing the "whales" that require government demand curves. The other are small or micro funds looking for niche opportunities, often actually in SaaS that's already generating revenue and not "startup" but rather "small". The startups that gave the original model its returns (so, cheap compute, fast distribution, no regulation) have already scaled. It’s not that classic VC "cant" coexist per se; it’s that the returns they depended generating have gone.
This is a great question, and I've been pondering it since I read it. Thanks for sharing.
It depends, I suppose, on whether the regulatory and market capture of Big Venture is sufficiently complete to alter the whole game for everybody. There are doubtless some industries where this is happening, or has already happened. Given that the author is a defense economist, with a background in space technology, I can see why this transformation would look all-consuming. I imagine that in those industries, it has been!
In theory, this doesn't have to consume all industries and markets, or all sizes of business. Where it does necessarily bleed over, however, is when no-one with the ear of power screams while SBIR/STTR programs end, or other small business initiatives are quietly closed, to give just two examples. In other words, the question is not (or at least, no longer) one of economic crowding out, but the totality of political capture.
What percent of a given sector's flows interact with government spending or regulation? What is the relative velocity of money associated with each stream of monetary flow?
These kinds of questions become more central in determining whether a given change or flow is on balance beneficial, predatory, or parasitic within a system's architecture.
Reality presents a dilemma: the San Francisco Bay Area has now been supplanted by "geopolitics, money and power". The spiritual totem culture upon which Silicon Valley built its reputation – that ethos of "free-spirited rebellion and the relentless pursuit of innovation" – has receded from our grasp.
This is a crucial point that many tend to overlook.
It’s interesting to see that people loved Tesla until Elon crossed the line to team Red.
All companies you mentioned are “infrastructure” companies (Open aI is both infrastructure and consumer) - it makes sense that the state has to be involved in some capacity!
That being said all funds under $500m can be returned playing the old game so I am not sure it makes sense to complain the game has changed. The factory farm model of funding SaaS companies in the late 2010s until 2022 was as ridiculous if not more and led to much less value creation!
Hey readers! I just launched The Impact Report, a newsletter for founders, operators, analysts, researchers, VCs, and investors who want to understand the people and systems shaping the future of infrastructure.
Here’s the first issue if you want to check it out.
Fund-returning exits now require cosmic alignment, favorable lunar liquidity, and a clean bill of health from the quarterly hallucination audit.
Investors stopped funding companies. Instead, they breed unicorns in temperature-controlled chambers, feed them narratives, and release them briefly for valuation season.
It is not clear to me why the original VC model would not be able to co-exist next to the now institutionalized VCs based on this assay. I do not doubt that these old VCs have become a different type of business, and I agree with the description of how they have changed and that they have started using regulatory capture and guaranteed income schemes to grow.
However, that game is so fundamentally different compared to the original VC model, that I do not fundamentally see a reason why they should not be able to co-exist. The institutionalized VCs are probably becoming saturated and it is hard (probably impossible) to start another "a16z" or "Sequioa". Especially if you list the catalyst as being the pensions, retirement funds and late-stage wealth firms being forced away from guaranteed income to create the new institutionalized VC during a long period of low interest rates. These funds were never playing the game of the original VC model and were not deploying capital in true high-risk, high-reward startups. In that sense, it was a shift of a large market of treasuries and bond-seeking funds into a new system of institutionalized VCs. In other words, by lowering the rates to zero, the US Treasury basically gave room for an entire new job market, the job of the institutionalized wealth manager trying to find ways to generate a guaranteed annual income of 5~10%, like the original treasuries or long-term bonds. The first people to realize this new job market was available were the original VCs and investment banks, they stepped in to take this role as they were well-positioned in an adjacent industry (wealth generation) and potentially because it provides more job security (2% management fee) and less stress (low risk).
However, that implies that the original VC model is/was slowly being left vacant, but as the institutionalized VCs are arguably starting to become saturated, new entrants should be able to take on this role of the original VC model as it fundamentally was working, albeit with more stress and risk. Unless you have other reasons for devalidating that model. For example, maybe our current technological/energy level does not provide a sufficient catalyst to drive enough 1000x start-ups (e.g. the computer/internet/web in the 60~90s made all tech giants of today possible, the discovery of DNA, proteins and the basics of life made Genentech, Regeneron and others possible, and AI is now driving a select market of startups).
Thanks for the comment! In theory, yes, the old VC model could coexist alongside Big VC. But in practice the opportunity space that sustained “classic” venture doesn't exist anymore. The middle market of VC (Saas that created multiple $1–$20B outcomes without involving regulation or lobbying etc) has vanished. There's just no explosive growth in asset light industries anymore. What’s left is a barbell distribution of return generation: Big VC at one end chasing the "whales" that require government demand curves. The other are small or micro funds looking for niche opportunities, often actually in SaaS that's already generating revenue and not "startup" but rather "small". The startups that gave the original model its returns (so, cheap compute, fast distribution, no regulation) have already scaled. It’s not that classic VC "cant" coexist per se; it’s that the returns they depended generating have gone.
This is a great question, and I've been pondering it since I read it. Thanks for sharing.
It depends, I suppose, on whether the regulatory and market capture of Big Venture is sufficiently complete to alter the whole game for everybody. There are doubtless some industries where this is happening, or has already happened. Given that the author is a defense economist, with a background in space technology, I can see why this transformation would look all-consuming. I imagine that in those industries, it has been!
In theory, this doesn't have to consume all industries and markets, or all sizes of business. Where it does necessarily bleed over, however, is when no-one with the ear of power screams while SBIR/STTR programs end, or other small business initiatives are quietly closed, to give just two examples. In other words, the question is not (or at least, no longer) one of economic crowding out, but the totality of political capture.
What percent of a given sector's flows interact with government spending or regulation? What is the relative velocity of money associated with each stream of monetary flow?
These kinds of questions become more central in determining whether a given change or flow is on balance beneficial, predatory, or parasitic within a system's architecture.
Reality presents a dilemma: the San Francisco Bay Area has now been supplanted by "geopolitics, money and power". The spiritual totem culture upon which Silicon Valley built its reputation – that ethos of "free-spirited rebellion and the relentless pursuit of innovation" – has receded from our grasp.
This is a crucial point that many tend to overlook.
How much government procurement money is needed to sustain this loop?
It’s interesting to see that people loved Tesla until Elon crossed the line to team Red.
All companies you mentioned are “infrastructure” companies (Open aI is both infrastructure and consumer) - it makes sense that the state has to be involved in some capacity!
That being said all funds under $500m can be returned playing the old game so I am not sure it makes sense to complain the game has changed. The factory farm model of funding SaaS companies in the late 2010s until 2022 was as ridiculous if not more and led to much less value creation!
Hey readers! I just launched The Impact Report, a newsletter for founders, operators, analysts, researchers, VCs, and investors who want to understand the people and systems shaping the future of infrastructure.
Here’s the first issue if you want to check it out.
https://substack.com/home/post/p-178938966