I’ve got a gut feeling. More often than not, I’m right about these things.
Venture capital is headed for another reckoning. As if 2022 wasn’t enough.
The mega VC funds that have over-inflated the tech funding landscape are in for a historical course correction over the next decade. AI is here to stay, but the valuations for AI companies are wildly unjustified. There’s no scenario where this ends beautifully for everyone — not for the mega funds, not for their LPs and certainly, not for founders.
Yet, these mega funds drunk on greed coupled with a massive lack of self-awareness continue to lure founders into taking money at ridiculous valuations.
The AI bubble bursting is not a matter of if, but when. And when it does, the LPs who’ve poured large sums of money through these mega funds hoping to beat the S&P are going to lose a shit ton of their cash.
The reality of starting a tech business today, especially around AI, is that you need a lot less to get started. This means if you’re a founder, you should be raising less capital than what you would’ve 5-10 years ago. Yet, every single day, I continue to see a $20-$50M seed or a $100M Series A valuation for ideas that are frankly, not positioned for being sustainable, long-term businesses. Lots of these people seem to forget or overlook the one age-old business principle that will always be true: make more money than you spend.
There are two culprits here:
- mega funds preaching “bigger is better”
- status-chasing founders high on empty calories of LinkedIn broetry — the echo chamber of wannabe thought leaders, each sounding like Gary Vee with an MBA
Once venture capital firms start acting like private equity firms, they’re going to lose and badly. As this recent piece from NFX by James Currier noted, VCs are dreamers; PEs are realists. Both are needed. However, when dreamers start playing the realist’s game, it usually doesn’t end well.
That’s the blind spot. Call it hubris or the Dunning-Kruger effect. Still riding the high of a few wins, people like Marc Andreessen start thinking they can do anything. But what they often do is distort the market and poison the mindset of founders with ego-driven narratives masquerading as wisdom.
On the other side, you’ve got VCs I actually respect. The ones who run lean firms, stick to principles and don’t buy into hype. They raise modest funds, invest early, underpromise, overdeliver and most importantly — stay grounded, amidst the noise. Firms like Benchmark. These are the boutique firms I’d bet on to survive the next decade.
Artificial intelligence is real and here to stay. But it’s grossly overvalued right now from a business & profitability perspective. Ironically, AI tools being multipliers of productivity will be a key factor in the undoing of a lot of these mid-to-large VCs over the next decade, exposing their bloat but no moat. When the correction comes, capital will flow to safer assets like it always does. What that might mean is some of the best small VCs — the ones who should survive — getting wiped out, and that’ll be a real loss.
If you’re an analyst or associate today in venture capital, your job is probably on borrowed time. Same goes for a lot of VC “partners” — the ones who got the title after a few tweet threads, some jargon on a podcast appearance and a $400 vest.