At the end of the day, what startups do matters more to the trajectory of the world than what VCs do. Sorry, VCs.
That’s at least true on the individual startup level. As every founder knows, funding environment matters a lot in terms of both what you can achieve and how fast you can go—and it’s controlled largely by how VC is doing and acts.
We’re seeing Sequoia “blow up the VC model.” Tiger Global and other hedge funds are piling into VC. In response, “traditional” VCs are desperately reviving their long-neglected seed practices.
So, what’s next? Will this flood of capital in VC continue? Will it all come crashing down?
We’ve seen this movie before
Investment banks. White shoe firms that are laser-focused on their clients, avoid being flashy and stay small to be bespoke—despite giving up profits to do so. If you happen to be awake in the past few decades, you’d go, “What the hell are you talking about?”
This was what investment banks were… until the late 20th century when they became bigger and bigger, traded for their own profits, and eventually went public. Goldman Sachs, a stodgy firm that cared more about its reputation for trustworthiness than profits, became the great vampire squid wrapped around the face of the world.
Hedge funds. Financial iconoclasts with fairly tiny amounts of capital who preach the ability to have stable returns by “hedging” certain risks and are fiercely independent—both intellectually and by temperament. Or… bloodthirsty titans with More Money Than God, like SAC and others who hinted at going public (and with entities like Apollo, Sculptor, and—depending on how you categorize them—KKR actually doing so).
From their small beginnings to now, the story is familiar, even if the entities themselves look unrecognizable from their original form. VCs have been following this path. There’s even been speculation about Andreessen in particular going public.
What will be the effect of this?
More money. Probably more regulatory oversight. More disconnection from the original stakeholders.
No one thinks that the well-being of community stakeholders is a high priority for investment banks. However, in their early forms, many of them explicitly talked about their role in their communities—which is not that surprising, given the bankers were “closer to the ground” in their communities.
In the same way, VC started almost as a hobby. Tech or tech adjacent men (specifically, wealthy white men) invested in new companies getting off the ground in the shadow of Bell Labs and government initiatives, especially around the area eventually known as Silicon Valley. Obviously, they cared a lot about their money, but they also cared about the relationships they had and the founders they invested in.
VCs obviously tout their founder friendliness today as well. However, the bigger these VCs get, the more staff they hire, and eventually the more they are beholden to public markets rather than closer-to-the-ground stakeholders, the more divorced their natural incentives will be from entities they work with.
They certainly will be able to invest more money. And perhaps founding companies will become a more regulated and regimented affair. In some ways, this is good, though, in many ways, we’ll likely see many traditional VCs start to misalign themselves with founders and other stakeholders.
If you think that’s impossible, well, the head of Goldman once said that “the reputation of the firm… is the great satisfaction of my life. Other people may be a great deal richer than I am, but that’s unimportant.” Now, that was in the early 20th century when Goldman made virtually no profits, but even so. Things change, and we have to be prepared to see where that change takes us.