In these challenging times, the world is in dire need of a dose of hope. Just in time, the unstoppable venture capitalist Marc Andreessen steps forward with his latest techno-optimist manifesto. With unwavering confidence, the co-founder of Andreessen Horowitz declares, “Give us a real-world problem, and we can invent technology to solve it.”
Despite the billions of dollars squandered on fruitless crypto and metaverse investments, recent private market valuation turmoil, and the persistently cool state of public listings markets, Silicon Valley’s techno-capitalist machine continues to hum with the conviction that it can shape a brighter future. To external observers, it may seem like “business as usual” in the world of venture capital.
Nevertheless, beneath the surface, many venture capitalists have been discreetly reevaluating their financial strategies. They recognize that the exceptionally favorable conditions that favored their industry over the past two decades are unlikely to recur. Some analysts even speculated last year about whether the industry had reached a “Minsky moment,” where asset values suddenly collapse after a period of reckless speculation (though nothing quite that dramatic has occurred).
This year, questions have arisen about whether we are approaching the end of the VC-driven entrepreneurial era. In an industry built on short-sighted enthusiasm and audacious ambition, doubt abounds as many VC funds struggle to secure capital. The storytellers in this industry need a new narrative.
The VC industry indeed enjoyed a golden era during the first two decades of this century. The widespread adoption of the internet and smartphones created the digital infrastructure for VC-backed e-commerce and social media giants to flourish. With substantial network effects and minimal marginal costs, consumer internet companies were irresistible to VC investors, allowing them to transform relatively modest early-stage investments into mega-sized successes.
Furthermore, the extraordinarily loose monetary conditions following the 2008 global financial crisis allowed VCs to raise cheap capital and funnel it into rapidly growing companies like Uber and Airbnb.
However, the capital-as-a-strategy model, prioritizing revenue growth over cash or profit generation, is much harder to sustain now that money comes at a cost. When Brian Chesky, Airbnb’s co-founder, visited the FT recently, he acknowledged that his company’s growth strategy of the 2010s would not be feasible today.
The permissive regulatory environment in the US has also tightened. It no longer facilitates start-ups and VCs cashing out to voracious tech companies, indirectly recycling funds into new investments. According to a 2021 report from CB Insights, the big tech companies completed over 800 acquisitions in the previous 30 years. However, Washington’s stricter antitrust regulations have closed off this exit route for many trade sales, while the public market listing path remains full of obstacles.
Given this less optimistic outlook, many of the so-called “tourist” investors who flooded late-stage private markets in the late 2010s have retreated. As Sam Lessin, a partner at Slow Ventures, wrote this week in a “techno-realist” manifesto in The Information, the VC assembly line producing standardized software unicorns (start-ups valued at over $1 billion) has come to a halt.
VC is reverting to its roots as an artisanal cottage industry after failing to evolve into an institutional asset class. Some VC firms embrace this change. Danny Rimer, a partner at Index Ventures, describes VC as a “passion industry” and states, “We think it’s a great time to invest. We love to be contrarian.”
Other firms are attempting to draft a new playbook. For instance, General Catalyst, a late-stage US fund, is merging with La Famiglia, a German early-stage fund, combining international expertise with local knowledge.
The VC industry, which has been fixated on a specific formula for funding enterprise software companies, will need to discover more innovative methods of supporting climate tech and industrial hardware companies, suggests Judith Dada, a partner at La Famiglia. She states, “The venture ecosystem will evolve. Tomorrow’s successes will not resemble yesterday’s.”
Just as it is perilous to believe “this time is different” at the peak of any bull market, it is equally risky to maintain such a belief at the trough of a bear market. Above all, VC investors are hoping for lower interest rates, a turnaround in the market cycle, and the rekindling of animal spirits.