This is the perfect time to go into VC

Just my .02. All the venture tourists who raised idiot $50mm funds from hungry allocators who had no business being overexposed in venture, but had major fomo in the summer of 2021 when they saw >50x revenue multiples, will surely be weeded out at an accelerating rate in the next year. Meanwhile, name brand VC firms that got burned on "price doesn't matter" as an investment philosophy will be forced to reset. I see no future where by the end of the calendar year we are not materially closer to the halcyon days of "VC-as-cottage-industry". This to me is much more appealing because it is a real, difficult job rather than a game of spray and pray free funny money at every AI enabled dog washing app there is.

I'm sad for the pain that will be caused along the way as someone empathetic with the individuals who are affected, but I am energized by the structural reset I see taking place. There is an opportunity for regular competition on value-add and relationships to look more similar to pre-GFC times. VC will be harder, it will be less sexy, returns won't be instant and silly, but this is what the industry should be (my .02). I am hopeful.

Comments (12)

ExpatVC, what's your opinion? Comment below:

Certainly agree with this on one level - and as a VC I very much hope that this is true. 2021 and early 2022 made every investor look like a genius when there was more capital than demand for capital, and now that paradigm is reversed. It will certainly become more pronounced in the coming months as the weak and mediocre companies run out of capital and shut down. 

That being said, a worry of mine, especially coming out of the recent SVB crisis, is LP fear leading them to allocate more towards established managers and less towards emerging managers. Given that one of SVB's biggest loan business was short-term loans to VC and PE funds (bridge between deal close and capital call hitting bank account), will likely either have to call capital earlier or call it in larger chunks (and now LPs will be scared about the safety of that capital unless you are banking with a systemically important bank). LPs aren't necessarily looking to maximize returns, rather hit returns targets. Combined with an overall fundraising downturn, VC returns are going to look a lot less appetizing they did back in the frothy days of 2021, and LPs may decide to double down on established managers and entrench their positions as the "index funds" of the VC world.

Coming out of SVB, am also quite concerned abut access to debt & other forms of non-dilutive capital for companies - will take some time to understand how SVB's hole in the debt markets will be filled. 

That being said, I do agree that this is a very promising time to be in venture - valuations are starting to come down and deal quality seems to be holding steady, and I would guess that it will improve given recent layoffs and urgent challenges that need to be addressed (ie climate tech, clean energy, clean transportation). 

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d4c, what's your opinion? Comment below:

I agree VC needs to right-size and that it will be healthy for the industry. However, that doesn't change the fact that you have a massive glut of people of people who were overhired in the past decade (esp junior talent in 2020-2022) who will be gunning for a very limited set of decent seats. I wouldn't recommend anyone join for the traditional reasons (good WLB, fast career progression, decent pay, etc.) as I think those will quickly evaporate amidst hypercompetition for a shrinking pie. Headcount will always lag behind and I think this part of the pendulum swing you don't want to be around for

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VC_associate_13, what's your opinion? Comment below:

I've been in VC for a long time (10+ years) and the industry has profoundly changed in that time. Doug Leone of Sequoia had a great quote in a podcast where he basically said venture has permanently shifted from a high margin cottage industry to a low margin mainstream business. And that's true. It's going through a parallel evolution that private equity/buyouts went through in the 90s/2000s. You now have "megafund" venture shops that are raising fund sizes on par with PE, which was unheard of a decade ago. For the last decade, mid to late stage growth equity has been where the easiest alpha was - put a bunch of money into a basket of SaaS startups at Series B/C/D, and like magic they would IPO in a few years at a 5-10x MOIC. Now it's arguably seed stage, where all the money and deals are crowding now. VC will have its up and down cycles, but it is forever now a true institutional asset class, with tons of competition and decreasing alpha. PE in the 90s up to the early 2000s for example was much less competitive and institutional than it is today. Now it's brutally hard to build a career in buyouts. Still achievable of course, but the degree of difficulty and level of competition is an order of magnitude higher. Venture is undergoing the same dynamic. I don't know if it's honestly a good place to build a career anymore. It's certainly a lot harder to advance and generate returns now and going forward.

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  • Associate 2 in PE - LBOs

Thanks for the thoughtful response. I see your point. Do you see any risk of material capital outflows? I also wonder the extent to which you consider multi-strategy venture firms a reorganization of existing firms into more efficient platforms as opposed to increased net new investment activity. I imagine you would say the latter but is there a potential case to be made that it is simply the former, capital outflows will continue from less mature platforms, and while you are no longer a true "cottage industry", you are back to less capital? My original post banks on the idea that there will be major outflows from growth given that almost the entirety of valuation upticks in the growth markets have been driven by demand from available capital rather than additional supply of growth stage businesses (if you look at the numbers, it is exactly that; more capital chasing fewer deals). My QED was therefore that capital outflows given macroeconomic conditions will "reset" the venture world directionally, but I did not necessarily factor in the role of multi-strategy platforms.

VC_associate_13, what's your opinion? Comment below:

In the near term, yes there are already starting to be outflows. Many institutional LPs are overallocated to VC and doing some combination of 1) not adding any new funds, 2) trimming existing managers, and 3) sizing down their commitments to existing managers. In the near term, this will mean megafunds stabilize or decline in relative size, and fewer new VC firms are created. I think this is just a temporary blip though, and over time the industry will continue to grow and become more efficient, just like PE has become. There will be VC firms that scale and add many different strategies, go global, and eventually go public (think A16Z, General Catalyst, Thrive, Lightspeed, etc). There will continue to be pockets of alpha in more specialized niche sectors (such as climate/clean tech, regional funds), the analogue of lower MM PE funds, while the megafunds dominate the AUM game. So ultimately there will be 2 ways to build a career in venture, both of which are very hard: 1) join and rise up the ranks of a megafund (this is going to eventually be as hard as making it to partner level at Blackstone/KKR/Apollo/TPG/etc), or 2) start or join a highly specialized fund (gotta pick the right sector. If you picked SaaS in 2012 you're a genius, whereas if you picked crypto in 2020-21 you're an idiot).

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anon-anon-anon-anon, what's your opinion? Comment below:

Agree 100% but would also add that there are still verticals that have been relatively untapped by institutions. But, it's exceedingly difficult to make a career out of being an early-stage generalist investor when there are so many institutions crowding the space.

Winnfield, what's your opinion? Comment below:

The industry's reckoning is well-deserved, can't come soon enough, and can't cut deeply enough.

By definition the average VC is incompetent: they don't even return capital, much less deliver superior risk-adjusted returns.  It just takes nearly 10 years to mark their incompetence to market; they can charge their 2% annual management fee for a long time before getting exposed.  There are indeed some stellar-performing VCs, but hard to argue how much is skill and how much is just the usual two-standard deviation performance you'd expect in any set of random outcomes. 

Meanwhile, they get by on balancing their Fear Of Missing Out and their Fear Of Looking Stupid, which essentially means that they wait for signs that someone else has validated a trend, no matter how dumb that trend is, and no matter how many scaleable businesses appear outside of the trend.  Pattern-recognition replaces reading comprehension, and voila, welcome to the modern VC.   

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
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BangarangPanda, what's your opinion? Comment below:

I think this has been a much needed reset for the VC/startup space, much like how a forest fire clears out debris and provides fertilizer for future growth. Overallocation by institutional LPs to VC has led to a lot of inflated valuations and egos, both which is ultimately detrimental to the long term health of a startup as a business. Good VCs and good companies will be fine and continue to grow. VCs will now be forced to focus on what kind of value they can provide to founders beyond just capital. I'm predicting a rise of platform/ portfolio development roles for VC.

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whatnottt, what's your opinion? Comment below:

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