The Death of a Venture Fund

When I was at Index we would include two sections in our memos that were popularized by Larry Summers. We would write about a company's "pre-parade" and "pre-mortem." Not only a "dream the dream" scenario, but a "dream the nightmare."

Roelof Botha brought up this same topic in a recent Invest Like The Best episode in an even more poignant way: "Imagine the venture business in a decade, and Sequoia is gone. We presided over the decline of Sequoia, this team, the people here in this room, it was us. What happened? What did we not do?"

Asking friends what would kill their firms, I heard; Performance. Succession planning. Politics. There was plenty of overlap in their answers. What stuck out to me the most was how a lot of these fears closely aligned with the revolutions already going on in venture that I've been writing about. The productization and improvement in a venture funds... See more

VCs are facing the "Big Budget Effect" that is plaguing Hollywood studios right now. In the year 2000 you had just three movies that had made $1B+. Titanic, Jurassic Park, and Star Wars Episode I. Today you have 45+ movies that have made over $1B, and some of them have made $2B+ like Avengers and Avatar.

I loved this concept of evaluating your own potential cause of death as a venture firm. Over the last few years the number of venture firms has grown from ~900 to nearly 2,000 different firms managing $500B+ of capital. In a market correction some people predict as many as 50% of those firms could fail. One prediction I have is that as venture fund... See more

As a result of these much larger outcomes we've built a movie-making system that is focused on big hits because the business model can't really absorb too many massive flops. So you get sequels, prequels, and spin-offs. Established IP and bankable stars. No big risks. And you don't get nearly as much experimentation, innovation, or creativity.

This is exactly what's happening in venture.

why VCs think they might die