What happened to the future?
On the stagnation of venture capital, the would-be fuel of progress
Hi there, Patrick Ryan here from Odin - the seamless way to raise and deploy capital in private companies, used by over 10,000 VCs, angels and founders globally.
Today another opinion piece from Dan Gray (@credistick) on the long stagnation of Venture Capital, followed by some comments from me.
“In the early days of Valar, a lot of VCs passed on us because they didn’t believe we could raise the money.” - Isaiah Taylor, founder of Valar Atomics
Yes, VCs will pass on a company out of fear that other VCs will pass on it.
This is institutionalised insecurity. Venture capital emerged from opportunity of frontier technologies; huge idiosyncratic risk, huge upside potential. Power law meets portfolio strategy.
Today it is dominated by low-agency herd animals that have traded that opportunity away for easier personal enrichment and job security. Instead of independent judgement, and the implicit accountability, they outsource to the collective via market signals that manifest in everything from round pricing to discourse online.
This exposes venture capital to major systematic risk, unmanageable via portfolio design, exacerbating the boom-and-bust nature that leg-sweeps the market every few years.
That’s a taste of how problematic this behavior is. It gets much worse.
The influence of “signals” fundamentally erodes the quality of decisions and the competence of investors.
This basic economic principle is described by Keynes in “The General Theory of Employment, Interest and Money”, and Abhijit V. Banerjee, in “A Simple Model of Herd Behavior”.
tl;dr — At some point, if signals are a significant driver of activity, and incentives aren’t well designed, the market becomes a snake eating its own tail. All that matters is a mindlessly recursive consensus.
Thus began the financialisation of venture capital; the point at which the opportunity mutated from chasing great investments to chasing pools of LP capital with “venture banks” as the brokers.
This is why from 2010 to 2022, a period of generational abundance, venture capital produced increasingly bloated B2B SaaS companies and monkey JPGs. Technological stagnation.
Capital that could have gone to reindustrialisation, to energy or biotech, was instead recycled through fragile ARR-printing machines into bigtech profits.
Farming markups to raise more capital to farm more markups — progress be damned.
This is all a direct result of the incentives. Indeed, these incentives are powerful enough to manifest as market capture:
Implicitly, the VC media playbook that has emerged over the last decade allows firms to develop influence over signal-driven activity (they become kingmakers).
Explicitly, research looking at VC activity indicates that firms who refuse to play along are strategically frozen out of capital networks.
Evidence of this behavior is everywhere. Most investors have never known anything else.
The following sentiments are all gateways for this financialisation and the associated market capture:
Venture capital is a relationship business
Access is all that matters
The best deals are competitive
Entry price doesn’t matter
Consensus is good, actually
Indeed, many established practices (like pricing on ARR multiples) are symptomatic of this problem, reflecting a goal of exploiting badly designed incentives (concentrating capital and power) rather than chasing outlier outcomes.
Venture capital will continue to fail entrepreneurs, innovation and LPs (especially in times of abundance) until these incentives are addressed. There are exceptions, such as the early believers in Isaiah Taylor, but those exceptions should not make the industry complacent about glaring structural flaws and obvious failure.
Frustration with this issue led me to write “Why venture capital should be consensus-averse”, at around the same time Valar Atomics was getting started.
A thought-provoking piece. Valar Atomics have their share of critics in the nuclear community, but the point remains - it is frustrating to see how much capital we are shovelling unproductively into non-problems.
Dan is not alone in calling out this issue - many of the world’s top VC investors have said something similar in different ways.
Chamath Palihapitaya (Social Capital) calls it the “VC Ponzi Scheme” - the conspiracy to blindly throw capital at hot deals in the hopes of bidding up valuations, rather than thinking about what fundamental new value the business actually creates. The question becomes not “is this an amazing company” but rather “can this company raise more money”. The real winner in all of this is the Magnificent 7, who receive ~40% of every venture dollar (through ads and cloud spend).
Roelef Botha (Sequoia) calls the current state of affairs “return free risk”. In essence, over the last 20-30 years, there have only been only 20 or so companies a year that are worth $1B or more in realised exits. With more cash plowing into VC, there isn’t a noticeable change. About $250B a year goes into VC now. If you assume 12% net IRR (worse than the nasdaq over last 15 or so years (16%)), that’s about a trillion dollars a year coming out. Assuming investors own 2/3 of these companies that’s 1.5T in exit value per annum. That means even if you take a big IPO like Figma (40B), you need ~40 of those a year! Or more like 100 average-sized unicorn exits every year. That’s simply not going to happen.
Peter Thiel (Founders Fund) has an entire manifesto on this problem, called “What Happened to the future?”. My favourite quote:
“VC has ceased to be the funder of the future, and instead has become a funder of features, widgets, irrelevances.”
I am unsure how this can be fixed, but for the sake of our progress as a species, it needs to be. Our view at Odin is that it starts by supporting dealmakers, fund managers and companies doing things differently.
Breaking the mould in VC? Do it with Odin.
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