The Venture Capital Landscape is Changing
For entrepreneurs (and venture capitalists), 2025–2035 will look a whole lot different than 2010–2022.
Some interesting venture capital data has come out in recent weeks, with a few hints of important trends to notice.
Some history: Andreessen Horowitz raised their very first fund in 2009. That $300M fund did very well — it delivered a whopping 44% IRR. The ZIRP period in the US had begun the year before, in 2008, making venture capital an even more attractive asset class. Suddenly it was like a whole new gold rush on Sand Hill Road as investors poured heaps of money into all the funds managed by the big Silicon Valley VC firms: Andreessen Horowitz, Sequoia, Kleiner Perkins, NEA, etc. Suddenly a billion-dollar VC fund, once a rarity, became common.
VC firms used these new huge funds to employ what Sam Lessin has called the “Factory-farmed unicorn” model of shoveling ridiculously large piles of cash into promising startups to create IPO-bound unicorns. It was kind of like force-feeding ducks — some die, but others yield delicious foie gras.
All good things must come to an end, and in this case it happened in 2022. The end of ZIRP changed the economic equation, the effects of the pandemic caught up with us, and a bunch of really bad VC investment decisions finally came home to roost.
As a result, as we sit here in mid-2024, VC firms are having a much more difficult time raising new funds. Consider this statistic from Pitchbook: In 2021 there were 428 first-time venture funds raised — in 2024 there have been 28 (see graph).
VC’s trying to raise new funds aren’t helped any by WSJ reports that funds raised in 2021 have basically returned nothing to investors so far.
I’m not breaking any news with this post — you probably already knew all this.
But here’s the more interesting insight — at the same time that Silicon Valley VC firms are having a hard time raising new funds, other capital vehicles are doing pretty well raising new funds. Atomico, one of Europe’s most active VC firms, just raised $1.1 billion in fresh money. VC firms focused on Latin America just raised over $2 billion in new money. The number of angel investors (individuals doing direct startup investing) is higher than ever and they have all but taken over the seed financing market. Firms doing revenue-based financing (instead of the traditional VC model of equity-based) are proliferating and taking a growing share of the market for startup capital.
Here’s the bottom line: In this next new era, risk capital available for startups will be much less concentrated in a few Sand Hill Road firms doing old-school equity financings. It will be much more distributed, and much more diverse in the ways that financings are structured.
For entrepreneurs, I think this is a good thing. As I’ve written before, I don’t think the unicorn obsession was necessarily good for us.
2025–2035 will look a lot different than 2010–2022. And I am so here for it.
This post was adapted from my weekly missive for entrepreneurs, innovators, and investors.
