A Future Of Venture Capital

Venture Capital is in a state of transition, bifurcating as it does between mega funds, and everyone else. a16z (latest fund $7.2bn), General Catalyst ($6bn) and Khosla Ventures ($3bn) have recently raised as much capital as all of the American emerging managers did in 2023.

But is this just a fear-move post ZIRP? Will it be a winner takes all market? What will VC look like in 10 years – will it even exist as we know it?

That’s what I’ve set out to explore in this note.

To know VC you must look across the pond.

It’s where it started, it’s where it shines. At the global venture peak in 2021 there were 3909 funds that raised $372bn – with $128bn in the US alone. If you put that into context by population, that’s $386/capita compared to the UK’s $104.

However, if you look at the rate of growth it skews the perspective – Europe (let’s include the UK) is catching up. Between 2012 and 2021, European VC investments grew by 159% year-over-year, compared to a 92% increase in North America. If you squint, we’re perhaps only a decade behind… said the optimist.

It is worth noting that 77% of ‘VC’ investments made in the heady days of 21/22 weren’t actually VC. Losing those tourists has muddied the numbers somewhat.?

As the mega funds do their mega thing, on the flip side it’s being widely reported that many firms are closing their doors, merging or retreating. 38% of US VC firms didn’t do a deal in 2023.

Where was that “buy when there’s blood in the streets, even if the blood is your own.” energy! So often touted by the investment community.

Between 2004 and 2014 there were 6800 new VC funds added to the list, globally. Between 2015 and 2024 that number doubled. As of today there are around 40k active funds (in the broadest sense of venture), 14k in America across approximately 3500 firms. Globally, around 5k are known to be fundraising currently, with around 8k having 10% or more of their dry powder left.

Josh Wolfe, from New York VC firm Lux Capital recently commented that half of US firms will soon close their doors due to “feckless strategies that are too weak to fix” as well as an investor overcommitment to an illiquid asset class. In any event, a shake-out was needed and is welcome.?

VC isn’t going anywhere.

Look around you. Pretty much everything on your desk right now was venture capital backed. In 2023 VC added ~11% to US GDP. With early stage investment in innovation being a net creator of jobs and opportunities, compared to corporate net destruction.

US economist and Nobel Prize Winner, Kenneth Arrow once stated “Venture capital has done much more, I think, to improve efficiency than anything.” That’s where VC shines beyond shareholder returns. It makes new things, and old things better. We get to do more, with much less.

Conversely when it goes wrong, it goes very wrong.

I accept that many of the following are not widely accepted as ‘wrong’ but personally I’d put Uber, WeWork, Crypto, anything metaverse, and most web3 projects in the ‘wrong’ bucket for various value-less or greed fuelled reasons. Putting aside the horror stories from the dot com period, or obvious fraud such as Theranos , Wirecard or Nikola , the VC push to go global, own the market and monopolise is a forceful one. The only one, according to Power Law.

Sometimes it’s meaningful, but in bubbly bull runs we get to see the uglier side of foie-gras-VC, shoving cash down founders' throats - fuelling the ‘pass the parcel’, when too often there’s not all that much within the shiny wrapped sheets.?

Is the world better because of these businesses?

It’s a worthy debate.

Thiel’s zero to one monopolistic mentality was first seen in the men who built America – Vanderbilt, Rockefeller, Carnegie, Morgan, Ford, who all had the same winner takes all mentality – win at all costs. Raw and rapacious capitalism. It’s embedded in the culture, emblematic in the American dream.?

Will this mindset continue to work in our new world?

Greed isn’t going anywhere anytime soon, there will be more. But it’ll pivot. Kinder. Smarter.

If a VC does 3 things well, they will make money – source, select & support. We must do the first two just to keep the lights on. The third, the ‘support’ as in ‘value-add’ can sometimes be contentious, often ridiculed. “Just give me the money and go away” is often a sense reflected by founders, which I totally get. Until the penny drops that the highest performing business people, athletes and performers of any kind have coaches, managers and support networks.

Founding is not a solo game. Ever. Stat. Period.

However maverick it may look from the outside.

That said, VC may well be. The next iteration of firms will be co-piloted and automated using AI. Hoping not to sound too hackneyed, I truly believe AI will transform our industry just as it will for most sectors – perhaps more so, and definitely in shorter shrift.

Let’s face it, much of what we do should be automated away.

As one example, the founder <> funder journey is so broken with friction and ego it’s a little ridiculous, but it is being opened up and democratised with tools such as Specter , Signals , CarriedAI , championed by Moonfire , Earlybird and many other VC firms.

Within the business the operational stack that supports CRM, DD, KYC, PM etc. is all being optimised and orchestrated by AI – with new tools delivered daily such as Looker , Domo , Sisense , eBrevia , Fundrbird , Amplitude , Spot , Gust and so so many more. It’s hard to keep up.

AI as the truest accelerator of productivity, and therefore efficiency, is right here right now, just when society needs it most. And as for venture capital? It will become AI. Full stack. Sourcing to secondaries – up down, left to right.?

The AI automation upshot?

Founder <> funder <> investor PLUS the back office will be fairly fully automated. But then what? Once everyone can see everything, and do everything, how can you position selling money as a VC firm!?

This is where that third ‘thing’ comes into play. How we support founders and their startups will become front and centre, a key differentiation. A great thing for them, their clients, the economy, and therefore all of us. (for as long as there’s a healthy focus on fundamentals startups).

More startups will be enabled to solve more wide ranging problems, in some instances venturing where classic VC historically wouldn’t. New niches, new products and new markets will be created by this next wave of automated VC firm. And because smaller funds tend to outperform, all of this combined may well put a dent into the mega fund approach.

The next a16z may well be one guy or girl, working part time from their basement bedroom in Hackney Wick.

Perhaps not the future we were expecting.

(sources: Pitchbook, FactSet Insight, KPMG, Cambridge Associates, Dealroom, Equanimity)