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For sure, this article captured my interest. In some way, this is something I've been thinking of for a long time. The VC business is not scalable like a normal company, but you can't avoid that firms raise billions and hire hundreds of people to manage that capital. In this case, the problem is twofold:

a) The more companies can stay private, hiding behind VC financing, the less they are incentivized to create a sustainable business and go public. That's bad for everyone: founders, investors, and the market.

b) When you have a multi-billion dollar fund to manage, you collect hundreds of millions in fees. In some way, carried interest becomes less critical, and the investor becomes a big corporation. VCs should remain agile and small startups. Sure, if you have $200M fund, you can invest in research and services--even if I don't believe in VCs as providers of services. Research and market reports are valuable internal assets, however. Fund's partner are another asset thanks to their experience as entrepreneurs.

Interestingly, the more the M&A market becomes regulated, the less high-tech companies will stay private. A startup should always aim to get an IPO in 7-8 years to create a healthy business. Founders seem not to understand that remaining private for way many years is not a good deal for them. You constantly live in a tutored environment, where your market cap is decided in a closed room, with no need to disclose your financial data to the outside world. Sooner or later, that becomes a problem.

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Spot on. Another issue with VCs is lack of accountability. They can make nice salaries off the fees without generating any returns above benchmark. Here are a few examples:

Why has the Sequoia partner who lost $214M on FTX not been held accountable? https://yuribezmenov.substack.com/p/sequoia-ftx-214million-disaster

Why has the 8VC partner who was the only external board member on UBiome, the fraudulent gut health company, not been held accountable? https://www.businessinsider.com/who-is-on-the-ubiome-board-of-directors-after-fbi-raid-2019-5

Why didn't SVB have a chief risk officer for almost a year before it imploded due to poor risk management? https://yuribezmenov.substack.com/p/svb-linkedin-receipts

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Good essay, be good to think about what next in more depth.

Scenario 1-party continues

All the VC money, FOMO, high valuations based on too much money to deploy justified by large AI (1tr+) outcomes. Pretty easy to pivot into AI for founders and investors. The party sort of continues because investors and founders all like more money to spend.

Scenario 2- party moves

Software startups are more capital efficient, need less capital, investors look elsewhere to deploy large amounts of capital. Hard to justify pouring multi millions into AI startups when you can’t buy growth in a new rate environment. Semiconductors, space, new computing systems, biotech. All these types of startups can take and spend more money.

Scenario 3 - party stops

345bn can’t be deployed in enough VC cases, 10 year timelines are too short, too much risk because venture capital is useful. VC is no longer culturally able to be risk capital rather than growth capital. Allocations to the VC asset class shrinks by 50%? VC returns to a small asset class with little cultural weight?

I sort of come down between 2 and 3. 2 requires VCs to be structurally different, take more risk and understand the science. If they can then we end up funding more systematically “important” technologies. We wanted flying cars, etc

2 if you think VCs can change, 3 if you don’t

Thoughts?

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