Has VC Become So Big It Must Be Disrupted?

Nathan Heller published an article called Is Venture Capital Worth the Risk? in the New Yorker. It’s a well-researched critique of the venture industry. The key question he poses is: has the industry become so large that it needs to be disrupted?

It’s a thought provoking question and a good opportunity to ask for feedback on how we can imrove. If you have ideas for how to improve venture capital for founders, please tweet me or send me an email with the link above. I’d love to hear them.

What can we learn from an adjacent space? The evolution of the venture industry parallels the private equity industry. KKR started the leveraged buyout trend in the 1970s. A few others joined the fray and competition intensified, but fortunes were made.

The LBO was reinvented after the Savings and Loan Crisis in the 1980s. Then these firms raised larger funds to invest in LBOs, but they diversified, too. Real estate, hedge funds, derivatives, all kinds of assets.

In the 2000s, a wave of PE funds went public. Now, you can own shares in Blackstone, Blackrock, KKR, Carlyle among others. (If you want to read more, Merchants of Debt and King of Capital are good books.)

Venture capital has evolved quite a bit in the past decade, in parallel ways to the PE industry. The competitive dynamics in the market where access to invest is more valuable than capital. This supply/demand shift that provides founders more leverage in conversations has catalyzed some innovation in venture.

First, venture capital has become much bigger. 2018 and 2019 exceeded the heady days of 2000 in terms of dollars deployed. One major reason is startups stay private about 8 years longer, and this costs $100m+ or more in many cases.

Second, as competition has intensified, VC funds have invested in platforms (we call it founder experience at Redpoint). These operating divisions of venture firms provide talent, marketing, PR, and business development services to startups. PE firms have similar operating platforms.

Third, VCs have specialized. There are SaaS focused funds, crypto funds, bio funds, double bottom line funds, middle-of-the-country funds, diversity focused funds, university seed programs, and many other flavors. Some firms run multiple strategies: different industries, geographies, and stages, akin to PE specialization and diversification.

No venture firms have yet gone public, but I wonder if we won’t see that occur before 2030.

Also, more venture firms and startups are choosing debt as a non-dilutive financing alternative.

Last, pricing stock has become much more sophisticated and analogous to public market valuations, particularly in Series B and later.

There is no doubt that there are many more opportunities for venture capital to evolve, to provide better financial products and services to founders. As the scale of the industry has blossomed, market forces (competition and founder demand) have pushed the industry in positive ways.

I hope those dynamics engender more innovation in the venture market, so founders are better served and more innovation comes to the market.