From: allin
The current period is described as a “hard reset” for venture capital and a “complicated place” [00:58:09] for the industry. It marks “the end of the super cycle” and the “beginning of the next” [01:03:51]. This environment involves significant restructuring and “a lot of mess to clean up” [01:03:38]. Despite the difficulties, some believe it’s a “better time to be an investor” [01:04:06] compared to recent years, due to corrected valuations and the emergence of new technological waves like AI [00:58:51].
Fund Adjustments and Valuations
Several major players in the venture capital space have made significant adjustments:
- Founders Fund: The firm is splitting its latest fund, Fund 8, in half, from 900 million funds [00:54:51]. This decision, reportedly led by Peter Thiel, suggests that deploying a large fund in the current economic climate “doesn’t seem to make a lot of economic sense” [00:55:16].
- Stripe: The company experienced a 50% reduction in its valuation [00:55:50]. This is particularly notable as Stripe was considered “the single best run, most highly valued company in Silicon Valley” [00:55:53], and such a haircut “will eviscerate private company” portfolios [00:55:51].
- Tiger Global: The firm wrote down the value of its private investment book by 33% for 2022, effectively reducing its valuation from 50 billion in a year [00:56:43].
- Y Combinator (YC): YC laid off its growth team and shut down its Continuity Fund, which focused on late-stage investing [00:56:57]. This move signals a return to YC’s core focus on the earliest stages of companies [00:57:15].
These adjustments collectively indicate a “complicated place in venture capital and startup land” [00:58:06], characterized by a “hard reset” [00:58:29]. There are concerns that it’s “tough to make money,” [00:58:11] and “a bunch of valuations are totally wrong” [00:58:14].
Investor Performance and LP Impact
The State of Venture Capital and Exits reveals challenges even for top-tier firms:
- Sequoia Capital: A public information request showed that UC Berkeley, a limited partner (LP), invested over 40 million in returns [00:56:31]. This has led to the assessment that UC Berkeley is “effectively out of business in being a limited partner for the foreseeable future” [01:00:53].
- J-Curve Effect: While some losses might be attributed to the normal “J-curve” of a fund where initial value goes down before markups [01:02:42], the lack of returns after five years can indicate an “impaired” capital allocation cohort [01:02:27]. Normally, a good fund should return 1x DPI (distributions to paid-in capital) within five to seven years [01:01:50].
This situation means that U.S. and European limited partners are in a “really difficult spot” [01:00:20], making it challenging for them to justify new investments even if new vintages are projected to be better [01:01:00].
New Environment for Founders and VCs
The current market environment is forcing a shift in how founders and investors operate:
- Focus on Building: There’s a return to “dogged, pragmatic, absolutely customer-centric, product-centric Founders” [01:07:11]. The previous era of “theatrics and white papers and ICOs and just nonsense and absurd valuations” [01:07:17] is over [01:07:42].
- Milestone-Based Funding: The system is reverting to “milestone-based funding” [01:08:20], where progress is rewarded, creating a “great pace and dynamic” [01:08:31].
- Investment Opportunity: Despite the “Wipeout” [01:04:00] and reset, the lower asset prices mean it’s a “great time to be investing” [01:05:28] and “buy shares pretty cheap” [01:06:15] in fundamentally strong technology businesses [01:05:08]. The current period is seen as a better time to be an investor due to corrected valuations and the emergence of new product cycles, such as AI [00:58:51].
Overall, the venture capital industry is undergoing a significant correction, leading to major shifts in investment strategies and a renewed focus on fundamental business value and disciplined execution.