A Tale Of Two Cities In Venture Capital
Like a desert and an oasis, there is a tale of two cities in venture capital
'It was the best of times, it was the worst of times.' On the heels of Super Venture & Super Return Berlin, and a LP/GP summit in Montreal organized by Inovia, I wanted to reflect on what felt like a panoramic view of the industry, across 1) managers of VC funds 2) startups raising capital and 3) incumbents in the public markets. What struck me most wasn't any one deal or datapoint, but the duality of two starkly different realities.
The technology industry today, for startups and venture capital firms alike, is best described as a tale of two cities.
In venture capital, the divergence could not be more stark. Research by Pitchbook demonstrated that nine firms collected 50% of all venture funding last year. The top 30 took the vast majority, across a few hundred firms that announced raises.
At SuperReturn, partners from megafunds spoke about oversubscribed raises. Meanwhile, emerging managers are scraping to survive and define their edge.
As Scott Hartley, co-founder and managing partner of Everywhere Ventures told me: 'For emerging managers differentiation is key, as venture returns heavily skew due to a long tail of large outcomes. While it may seem safer to get on-base at bats, median venture returns barely outpace other asset classes. The reason allocators look at VC is for asymmetric exposure, which means providing capital to yet undiscovered drivers of the future economy.'
First-time and even second-time funds have faced arguably one of the hardest fundraising markets in history. Similar research from Pitchbook suggests a risk of certain emerging managers dying off.
One panelist summed it up succinctly: 'Consolidation is the new diversification.'
The gulf between the haves and have-nots is perhaps even more stark in startups, the companies VCs fund.
Asaf Horresh of Vintage explained during his Super Venture keynote: 'if you're AI it's 2021'. Capital is flowing freely into foundation model startups, AI infrastructure plays, and workflow automation layers. Several venture firms have reoriented their entire sourcing around AI, and LPs are watching closely.
But for nearly everyone else, Asaf put it perfectly: 'you're in the desert.' Even solid companies are seeing down rounds or resorting to insider-led bridges. The bar has never been higher.
While I am nervous about nosebleed valuations and non-Camel strategies- the potential for AI justified. But the capital imbalance is striking. At SuperReturn, AI was on nearly every main stage. As Arpan Punyani, Co-Founder and General Partner at Garuda Ventures told me: 'Like the transistor, cloud, or mobile, AI is a foundational enabling technology. If you're not building an AI company at some level, the bar is just incredibly high to raise venture capital now.'
Carta noted that seed deals are growing scarcer, demonstrating the growing scarcity. However, average valuations, pulled up by A.I. startups have increased.
The other vector in startups was geography.
Today, like it or not, capital is re-concentrating in the old capitals partially because of AI: San Francisco, London, Tel Aviv. Startups in non-central ecosystems are finding it that much harder to raise capital. From side conversations, there's a growing sense that global GPs need to 'earn the right' to go abroad again.
The irony (and certainly central to my day job at Fluent Ventures) some of the best startups are being built in emerging ecosystems—with less burn, less competition, and lower valuations.
The bifurcation is not limited to venture. In the public markets, the 'Magnificent Seven' (Nvidia, Meta, Apple, et al.) account for the lion's share of returns. Small caps and international equities remain underloved. It's the same pattern: consolidation of value, divergence of experience.
In the technology industry, the power law is the rule of the game.
But the magnitude of the power law is not. As exits increase, releasing DPI, market sentiment calms, and desire for diversification outside the U.S. grows, I expect much of this to normalize. But this will take time and there will certainly be collateral damage.
But, as history tells us, sometimes, the revolution begins in the second city.
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