The End of Venture Capital As We Know It - The Information

8/4/2021 The End of Venture Capital as We Know It — The Information
MODEST PROPOSALS
VENTURE CAPITAL
Published
about 13 hours ago
The End of Venture Capital

as We Know It
BySam
Sam
Sam
SamLessin
Lessin
Lessin
Lessin  Share article
Aug. 4, 2021
6:01 AM PDT
A
ll signs seem to indicate that by 2022, for the first time, nontraditional tech investors
—including hedge funds, mutual funds and the like—will invest more in private tech
companies than traditional Silicon Valley–style venture capitalists will.
Many people are quick to write this off as a momentary blip where extremely cheap money
and the global search for returns are awkwardly pushing all investors toward the private
innovation markets; however, that read misses the main point.
THE TAKEAWAY
• Silicon Valley VCs are at a structural capital disadvantage in private tech
• Seed investing may be immune—for now
• High-reward investment opportunities still exist but move fast
What is really happening is that capitalism is functioning as intended—and as it has worked

throughout history. The era of West Coast–style venture capital that has been shaped by the
growth of the software industry is coming to an end.
In any new market, venture capitalists come in and provide very expensive capital for high-
i k hi h d ii h f i
https://www.theinformation.com/articles/the-end-of-venture-capital-as-we-know-it?utm_source=sg&utm_medium=email&utm_campaign=article_email&utm_conte… 1/13
risk, high-reward propositions at the frontier.
Over time, these investments in new industries become better understood and instrumented.
Their risks and opportunities can be more easily measured, and investors across the board
price them more or less the same way. As these shifts occur, massive flows of capital follow
and investors compete with each other to offer industry builders cheaper and cheaper
money.
This happened in the New England whaling industry in the 19th century (in what was
arguably the first VC cycle), and it is happening today in software. What we are currently
calling venture capital is rapidly becoming just run-of-the-mill globalized, highly
competitive and reasonably low-margin finance.
Now, firms that grew up around software and internet investing and consider themselves
venture capitalists face a choice.
They can become just “capitalists” (drop the venture) and engage in direct and cutthroat
competition with larger East Coast and global institutions to offer cheaper and cheaper
capital. Or they can stick to their roots and move on from the increasingly tame world of
software and internet investing to wild new horizons. (Think biotech, new parts of artificial
intelligence and much more.)
The choice, in a nutshell: Prepare to enter the bigger pond as a fairly small fish, or go find
another small pond.
Historical Analogy: Whaling and the Energy Industry
History usually rhymes, and the first modern VC cycle in New England is worth
understanding.
In the 19th century, demand for energy was growing, and a bunch of entrepreneurs figured
out a high-risk, high-reward energy opportunity—whaling off the coast of New England.
There were fewer than 1,000 of these whaling operations at the peak, and a handful of these
entrepreneurs grew fabulously rich. New Bedford, Mass., became the richest city per capita
in the world
in the world.
But, of course, the boom didn’t last.

The riches in energy propelled technology and innovation that ultimately led to oil drilling.
Drilling was far more efficient and predictable than sending boats offshore to kill enormous
mammals, and the whaling industry collapsed.
As the energy industry became more predictable, the capital market for energy went from a
risky venture proposition to just plain finance, with predictable businesses and returns.
Investors primarily competed for margins by figuring out ways to assemble massive pools of
capital cheaply and then deploy those pools marginally more efficiently. Lots of people still
make a lot of money in the industry, but no one would really categorize it as venture capital.
The Taming of the Wild West of Software and Internet Investing
A few centuries later, the same pattern is basically playing out in software and internet
investing.
For the last twenty years we have been living through the whaling years of the market, where
starting software and internet companies was a high-risk and high-reward endeavor.
People really didn’t know how to start software companies; the strategies for growth were
unclear. There wasn’t much infrastructure in place to support business building. Investors
weren’t sure what metrics mattered, how to instrument companies and how to pick winners.
Fast-forward to today and the West has largely been tamed.
The broad-based knowledge among entrepreneurs of how to start successful companies has
been widely distributed. A ton of infrastructure is now in place–from Amazon Web Services
on down—to support business building. The dark art of growth and engagement has been
demystified and people know the playbooks. And, of course, the finance community’s
knowledge about how to evaluate startups and price risk has gone mainstream.
The net takeaway is that in the last several years, as software investing has gone from fringe
to mainstream, enormous flows of global capital have been unlocked to finance software and
the internet at increasingly competitive rates.
Implications for Traditional Investors
What this means for investors who focus on Series A investment rounds and beyond is that
the market should become more and more efficient while investing becomes less and less
profitable.
Greater predictability of and investor confidence in these early-stage investments will mean
skyrocketing valuations as demand from investors grows. Every investor will see all the same
deals and will have the same tools to evaluate their potential.
The way to win deals in this market is to give startups the cheapest possible capital (that is,
agree to the highest valuation or most favorable terms for them). And you need to be as big
as possible so that your cash-on-cash returns are very high even if your margins compress.
What does this mean in practice?
It means you need lots and lots of cheap money to compete against everyone else globally.
Access to cheap money—through relationships with the world’s largest limited partners and
sovereign wealth funds—is going to be the biggest determinant of success.
It also means investors won’t be very collaborative, because as margins go down they need to
invest as much money as they possibly can in every deal. They need to make up for lower
margins with higher volume.
Firms must look for every possible advantage to help them lower the cost of their capital for
entrepreneurs. This can come from brand appeal (some great firms will help startups raise
cheaper capital downstream because their stamp of approval carries weight with other
investors). It also can in theory come from staffing up big service arms and claiming that the
capital brings with it lots of valuable freebies.
Still, I am skeptical that today’s Silicon Valley firms will end up winning over the long term.
Even the biggest Silicon Valley venture capitalists are very, very small by global finance
standards. And as the parochial world of Silicon Valley finance is exposed directly to the
broader East Coast and global financial system, VC firms that once thought of themselves as
big will discover they are small fish. Some will obviously survive, but the competition will be
brutal. Any VC firm of today that survives will look more and more like every other global
financial shop. That means they will play in every part of the capital stack with lots of
products, including public equity funds, debt funds and more.
The Impact on the Seed Market
One question I care about deeply is what will happen to seed investing. This outcome is far
less clear because a few countervailing forces are at play.
On one hand, as more formal VC rounds shift, seed rounds could shift along with them in
lockstep. When Series A rounds get more expensive, people are willing to price up seed deals
to match. (That brief window of the last few years when Series A prices were rising faster
than prices for seed deals, creating a wonderful temporary window for seed investors, has
closed.)
When Series A and beyond gets bigger, it is easier and easier for any large fund to throw
nearly free seed dollars at entrepreneurs simply as marketing for their main fund, swamping
the market.
On the other hand, seed investing is somewhat insulated from the shifts occurring in the
venture market because, almost by definition, brand-new startups lack the instrumentation
and metrics needed for efficient scale. As a seed investor, you are still mostly betting on
people and ideas—not metrics.
Seed investing is also insulated because seed companies just can’t consume that much
capital before they either die or graduate to financeability in the mainstream system. Seed
investing also rapidly becomes uneconomic for any large fund; even enormous wins from a
seed fund simply cannot earn the sheer dollars needed to make a larger fund successful. It
isn’t worth many investors’ time.
All that given, the seed market is unlikely to be totally immune to the onslaught of global
capital. With more funds bringing in more dollars, the prices of deals will rise as long as they
fit on the conveyor belt that yields the metrics for Series A investments and beyond.
Over time, even seed deals—the riskiest of the startup class—are likely to become run-of-the-
mill investments, priced reasonably efficiently after you adjust for risk.
The Choice for Today’s Venture Capitalists
If you are a young person working in and around the VC ecosystem, you have a big choice to
make right now about how you want to spend your career.
If you want to be in private equity (and let’s be clear, those folks get paid really well), then
staying at a mainline VC firm makes a ton of sense. There is every reason to believe that firms
like Andreessen Horowitz will indeed turn into the next Blackstone, Fortress or KKR, if not
the next Goldman Sachs or Morgan Stanley—and will certainly be in direct and brutal
competition with the whole field. A reasonably early partner, pre–initial public offering, at
these firms can anticipate a very lucrative career.
However, if you want to be a venture capitalist leading the next era, you should look for
opportunities no one else is funding because they are too weird, too crazy or too small—at
least today.
With the speed at which information spreads now, the cycles of real VC opportunities will
come faster and last for shorter periods. Even areas like crypto, which were fringe a few years
ago, have already been subsumed by mainstream finance, at least for certain types of
opportunities.
You will know you are doing real venture capital when you aren’t competing with other
investors to finance a deal but are instead offering to invest in people, industries and ideas
that don’t yet have access to capital. That is where money can be most useful, and also where
returns can be the highest.
In 2015 Marc Andreessen tweeted that he believed venture capital was restructuring into a
few large franchises and a large number of small boutique specialists. The firms in between,
he said, would die.
In the years since he made that statement, many of the large VC brands have followed that
trajectory. But I think Andreessen missed the truth that venture capital isn’t an industry at
all It is just a style of investing that exists for a while in a new market before the big money
all. It is just a style of investing that exists for a while in a new market before the big money
guns show up.
It isn’t that venture capital is restructuring, as an industry does. But it will vanish from
certain types of investments, like software, where bigger financial institutions will swallow
up the opportunities.
Specialists will exist, but they won’t be investing in the things that have defined the VC
playbook of the recent past, like software and marketplace and e-commerce businesses. They
will have moved on to new opportunities at the current frontier.
There is a truism that as startups mature, they eventually look pretty much exactly like the
companies they set out to disrupt. Today’s prominent VC firms will follow the same
trajectory. And the boutique investors will move on.
Sam is currently a General Partner at Slow Ventures and an intern at The Information. He is
also the co-founder of Fin Analytics. He was formerly a vice president of product management
at Facebook from 2010 to 2014. Prior to joining Facebook Sam founded drop.io, a file-sharing
platform that was acquired by Facebook in 2010. Before drop.io Sam was an associate at Bain
and Company. In his spare time Sam enjoys skiing and kite-surfing. He is married to Jessica
Lessin, founder of The Information.
Subscriber Comments
Nat Bullard
A marvelous essay, Sam. Thank you.
One point though about whaling and energy. It was drilling and technology that propelled the
riches in energy, not vice versa. Edwin Drake's drilling in Titusville, PA in 1859 was extremely
speculative, borrowed techniques from salt well drilling, and was after a very specific refined
product (kerosene), not oil in general. It was the product (kerosene) that was in direct
competition with whale oil. An industry built up around kerosene, which proved as you said to be
a far more reliable and predictable product than whale oil. Kerosene left the New Bedford proto-
VCs with no competitive advantage at all; their product was risky, speculative, and without a
smooth supply curve.
The energy business as we know it really derived from kerosene - and as you note, the capital
networks set up to provide it.
Like · Reply · Report · about 13 hours ago 

4
Sam Lessin
Intern - Slow Ventures
Nat Bullard that is a cool historical clarification - thanks Nat -- i think the big picture point
/ analogy still broadly stands, but i love the historical detail :)
Like · Reply · Report · about 11 hours ago
N Norman Fogelsong
I would submit that Queen Isabella was perhaps the first meaningful venture capitalist,
financing Columbus and his quest for a new world not yet known to exist. And he received
his funding without any PowerPoint slides. :-)
Will Hakim
Senior Engineer - The Information
Norman Fogelsong Not to nitpick, but plenty of people knew about and had voyaged to
the "New World" - including many Europeans - long before Columbus. The Vikings had
made voyages to and set up colonies in Newfoundland for centuries. There's robust
archeological evidence for West African voyages to the New World. Etc.
Like · Reply · Report · about 1 hour ago
Peggy Van de Plassche

Roar Growth - Managing Partner
Excellent points Sam. And the services that VC firms are supposed to bring to their porcos (intros
to clients, HR support, strategic advice…) being absolutely not scalable and usually non-existent
their differentiation is more perception than reality

3
JORDAN FUDGE
Partner - Sinai Ventures
Spot on

1
Todd Geist
CEO - Geist Interactive
Good reading Sam, thanks.
How does defi or crowdfunding fit into this trend. Or is it just too small.
Todd

2
L Lo Toney
Awesome article and spot on in my opinion.

2
A Ali Partovi
Brilliant and provocative essay, Sam. Bravo! I’ve been sensing these trends for a while though
never saw it as clearly as I do after reading this.
One minor point: I might argue that shipping expeditions of the 1400s, including Christopher
Columbus’s venture to the “Indies,” were the original venture capital. For the captain and crew,
the reward of keeping a % of the “carried” goods is where the term “carry” originates, at least
according to Wikipedia. For all I know there may have been earlier forms of VC before that too.

7
A Andrew Wilkinson
Sam, according to this the prospects for non digital businesses “softwaretizing” has never been
better! Thanks for the read!
Everett Lynn
CEO - Amenify
Great article, Sam. Thanks for sharing.
J Jon Morris
CEO - NOWHERE
Nice one Sam. Seems like a great time to be a founder. Fascinating the comparison to the
whaling and energy. Seems VCs are pushing towards marketing agencies.
Todd, I also wonder about crypto, DAOs, DIFI and how that will impact if the trend keeps up.

1
J Justin Roff-Marsh
My guess is that, as VC becomes commoditized, seed becomes even more lucrative, because of
the opacity you reference.

3
Julia De Luca
Tech Sales - ITAU BBA
Great article! Congrats
https://www.theinformation.com/articles/the-end-of-venture-capital-as-we-know-it?utm_source=sg&utm_medium=email&utm_campaign=article_email&utm_cont… 10/13
Matt Brown
CEO - Prodigio Media
Love the essay. It'll be interesting to see how quickly the maturation plays out in the emerging
markets of Latam, SE Asia and Latam. I'm finding there's still plenty of space to play in these
markets, although capital is flowing in quickly.
John Hanson
A lot of good stuff in this article, especially your hypothesis of the changes that are likely to take
place going forward in Silicon Valley financing.
The only complication in your whaling-oil business metaphor was the Teddy Roosevelt anti-
monopoly fights with Standard Oil, the coal barons, and the railways. That conflict between
government and business may have been the narrow mouth to the harbor of safe, reliable capital
investment that institutionalized the broader acceptance of fossil fuels and more conventional
ROI in the energy business. We know there was another paradigm shift in the 70's with oil
embargoes which response is still playing out today.
Are anti-monopoly disputes among the technology companies versus autocratic leaning
governments going to catalyze the strengths or weaknesses of any of your go forward models in
particular?
Aamir Virani
This one is totally on-point. I think that's why folks like Earnest Capital and (RIP) Indie.vc are so
interesting when it comes to software company funding.
Anshu Sharma
Co-founder and CEO - Skyflow Privacy Cloud
But WHY?
Wh i hi h i ?A d
Why is this happening now? And not 10
Years ago?
My view is that it has to do with a fundamental shift in “what it takes to decide a winner”.
It’s a skill shift and not just a capital size shift.
R Rafi Syed
Not you? Log Out

Want to edit your profile? Edit Profile
POST NEW COMMENT
Recent Articles

VENTURE CAPITAL
ASIA VENTURE CAPITAL
CRYPTO
VENTURE CAPITAL
Sequoia STARTUPS VENTURE CAPITAL STARTUPS
Capital vs. Founders Crypto SoftBank,

Hillhouse: Fund, Iconiq Software Insight Top List
f
Inside China’s Value Ramp at Startup TaxBit of 10 Fastest-

Fiercest $3.8 Billion in Triples
Investor New Funding Valuation in Growing Tech

Rivalry Round Insight-Led Investors
By Juro Osawa and By Kate Clark Round By Kate Clark
Shai Oster
By Kate Clark
ORG CHARTS ABOUT VIDEO EVENTS
© 2013-2021 The Information. All Rights Reserved.

TERMS · PRIVACY · PAYMENT POLICY · HELP & SUPPORT · RSS FEED · TIPS ·
CAREERS

The End of Venture Capital As We Know It - The Information

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The End of Venture Capital As We Know It - The Information

Uploaded by

Copyright:

Available Formats

8/4/2021 The End of Venture Capital as We Know It — The Information

The End of Venture Capital

• Silicon Valley VCs are at a structural capital disadvantage in private tech

• Seed investing may be immune—for now

• High-reward investment opportunities still exist but move fast

What is really happening is that capitalism is functioning as intended—and as it has worked

Historical Analogy: Whaling and the Energy Industry

But, of course, the boom didn’t last.

The Taming of the Wild West of Software and Internet Investing

Fast-forward to today and the West has largely been tamed.

Implications for Traditional Investors

What does this mean in practice?

The Impact on the Seed Market

A marvelous essay, Sam. Thank you.

Like · Reply · Report · about 13 hours ago 

Like · Reply · Report · about 11 hours ago

Like · Reply · Report · about 4 hours ago

Like · Reply · Report · about 1 hour ago

Peggy Van de Plassche

Like · Reply · Report · about 12 hours ago 

Partner - Sinai Ventures

Like · Reply · Report · about 12 hours ago 

Good reading Sam, thanks.

Like · Reply · Report · about 12 hours ago 

Awesome article and spot on in my opinion.

Like · Reply · Report · about 12 hours ago 

Like · Reply · Report · about 11 hours ago 

Like · Reply · Report · about 11 hours ago

Great article, Sam. Thanks for sharing.

Like · Reply · Report · about 10 hours ago

Like · Reply · Report · about 10 hours ago 

Like · Reply · Report · about 9 hours ago 

Great article! Congrats

Like · Reply · Report · about 7 hours ago

Like · Reply · Report · about 7 hours ago

Like · Reply · Report · about 6 hours ago

Like · Reply · Report · about 6 hours ago

It’s a skill shift and not just a capital size shift.

Like · Reply · Report · about 4 hours ago

Not you? Log Out

POST NEW COMMENT

Sequoia STARTUPS VENTURE CAPITAL STARTUPS

Capital vs. Founders Crypto SoftBank,

Inside China’s Value Ramp at Startup TaxBit of 10 Fastest-

Investor New Funding Valuation in Growing Tech

ORG CHARTS ABOUT VIDEO EVENTS

© 2013-2021 The Information. All Rights Reserved.

You might also like