What Does It Mean to Be a Venture Capitalist Today?

Some thought on our business and where things might go from here

Yesterday, we announced the successful close of our $66 million fifth fund at Precursor Ventures. So much has changed about the venture business in general and the seed stage venture market in particular since I first started working on pre-seed investing almost ten years ago. I feel very fortunate to have raised our fifth fund in this environment, but I also have many questions about our industry and where we are heading.

What it means to be a venture capitalist has dramatically changed over the last 10 years. Our business has become much more institutionalized than it was back then. We have many more venture capital funds than we did a decade ago. When measured by assets under management (AUM), the largest funds in our business are bigger in both absolute size and relative to the median-sized firm in our industry. What was once a cottage industry of small, boutique firms has become a more mature, concentrated industry that looks a lot more like other mature segments of the finance industry.

One consequence of this maturation is that our industry has become very prescriptive regarding what works. Limited partners have developed relatively fixed views of portfolio constructions and investment strategies that will generate returns and primarily back VC firms that conform to those models. Increasingly, venture capitalists focus on algorithmic approaches for founder selection, emphasizing folks with low employee badge numbers at well-known companies, people in their social or professional networks, or people who have otherwise achieved some level of fame or notoriety online. Maybe it’s just me, but it feels like our industry is trending in a direction where everything feels the same - firms feel the same, the founders we back feel the same, and certain parts of the business feel like they’ve devolved into a cookie-cutter approach to finding and funding businesses. This is not a good direction for an industry focused on finding and backing outlier businesses.

Some of these prescriptive processes worked well in the past. Some repeat founders do have a gift for starting multiple successful businesses. Some portfolio constructions and fund strategies have performed better than others over time. Somewhere along the line, though, these best practices have hardened into an orthodoxy that crowds out different, new ideas about how this business could work for fund managers and entrepreneurs. There are many days when it feels like there is an odd contradiction in the venture business; we are very focused on funding people who have disruptive ideas that challenge the status quo but the leaders who run VC funds and the limited partners who provide capital to funds are stuck in a dynamic that makes it very difficult to try new things when it comes to the mechanics of who we fund and how funds operate.

This feeling of unease is not new for me. I first felt this way when the venture capital business went from an industry with a relatively healthy balance between B2B and B2C companies to an industry almost exclusively invested in B2B software-as-a-service (SaaS) companies. We narrowed the focus on one sector and found a way to reduce most of these businesses to a series of core metrics that made them easy to evaluate on quantitative dimensions. We focused on customer acquisition cost (CAC), lifetime value (LTV), net revenue retention (NRR), and many other metrics that made it easy to compare these businesses in spreadsheets and databases and put them into percentiles and histogram bins to determine where they ranked relative to their peers. Somewhere along the way, these KPIs went from ways to measure these businesses to goals in and of themselves, in a weird recreation of Goodhart’s Law.

The dramatic increase in money flowing into and through the venture capital business has exacerbated this trend toward conformity. More global limited partner dollars are looking to invest in venture capital funds. Venture capital funds have expanded their appetites for LP capital and can now absorb and invest more money than ever. Ambitious startups are willing and able to raise more money than ever before. Our industry is finding ways to put more capital to work than ever before. While the venture industry has increased its ability to put more money to work, it comes at a cost.

Somewhere along the line, we traded metrics for taste. Metrics give you the comfort of absolute and relative comparisons. Venture firms can invest like algorithmic hedge funds when metrics are the only input that matters. But taste is where the magic is in this business. Taste does not scale. Taste requires a point of view about an industry, a founder, and his or her vision for what to build. Investment themes are not taste. Themes are the opposite of taste. Themes reduce taste and insight into formulas that skip the vital work of building your point of view of what will work and what good looks like. Themes are just a terrible shortcut to original thinking and taste.

Part of the inspiration for this post is the current moment. We are in a moment where we have what I call concentration squared. We have not only concentrated most of the money in this business in fewer hands; those firms that control the money have also gone all-in on a very narrow set of investment themes, including AI and defense tech. Even in an industry with many firms, I suspect most of the industry’s dollars are going to the same themes regardless of which firm writes the check. And, in my experience, most themes only produce a very small number of really meaningful winners. I worry about what this means for the venture ecosystem.

This job used to be about hunting for the most revolutionary, high-risk ideas. From the earliest internet days to the social media revolution, these ideas were so visionary that they sometimes sounded unbelievable. That promise of invention brought us the most formidable tech companies of this generation. I worry that we are losing the ability to invest in weird and wonderful new ideas that will be the great companies of the future. Determining who exactly can break those patterns is part of the magic of demonstrating taste. Taste is revealed by the decisions you make about who and what to fund and why.

Venture capital is at an inflection point. We have the opportunity to lean into new and interesting areas or continue forward toward what feels safe. I hope we choose to go where innovation flows.