The Coming VC Crisis
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VCs have had it good for a long time. Their business model of getting 2% in fees every year and 20% of the returns on the money has been extremely lucrative. There have been a lot of VC "successes" that have driven their returns and it seems like there are new VC funds being found every week.

But beneath the surface, there's a storm brewing. The returns just aren't what they used to be. There was a run in the 90's and 2000's where a single hit would be enough to propel your fund into the stratosphere. A Google or a Facebook in your portfolio was enough to make your fund very profitable.

More recently, there was the ICO/token craze which got VCs insane returns, mostly by scamming retail. These were unheard of exits which were sometimes many multiples in just 6 to 12 months. These were very profitable for a while, but of course, all unsustainable things must come to an end, and we've seen it the last few years. The last two major VC-driven tokens, WorldCoin and BitClout have done horribly and most of these "crypto" funds are underwater.

The problem is that there's way too much demand. That is, there are too many VC funds chasing after too few startups. This is unsurprising in a world of fiat money since there's no opportunity cost for money and as fiat money continually gets printed, a lot of that money finds its way to VC funds. Got a $50M asset? You can get a loan for $40M using that asset as collateral and invest some of that in a VC fund. That loan money, of course, comes from nothing and is printed into existence. So there's essentially a fast growing supply of money whereas the supply of startups is more or less steady, especially as many either die or graduate to being bigger companies.

As a result, we've had the phenomenon of startups getting crazy valuations as there was so much newly printed money chasing a pretty small supply. Higher interest rates more recently have meant that there's been less money printing, and thus less money has been flowing into VC firms. Hence, there was a bit of a correction on startup valuations, but as we all know, this is a temporary situation. There's about to be a lot more money printing and much of it will flow into venture capital. So why am I arguing that VCs are soon going to face a crisis? Doesn't more money printing mean more VC money?

The startup ecosystem isn't what it was 20 years ago. There are fewer and fewer superstar companies like Amazon and Google. The "successes" of the last few years like Lyft and Coinbase haven't fared well in the public markets. Retail knows that they're getting dumped on. The startups coming to market who are supposedly disrupting things aren't really profitable, and that means they're not getting great exits.

What's happening is that the fiat system's natural protectionism of incumbents is hitting up against the money being poured into startups. The abundance of money has made these startups less and less like real businesses and more and more like market playthings. Startups now are less healthy than startups from 20 years ago because they've been coddled by too much money. At the same time, the top firms in the economy are being protected by the fiat system, whether through subsidies or cooperating with intel agencies, they've found ways to build regulatory moats around their businesses. There simply isn't that much room left at the top.

Naturally, this means that VC funds are making less money because successful exits are getting harder. More of them are underwater and the returns for LPs are getting worse and worse.

Then, there's Bitcoin, which has beaten the returns of most VC funds. As more people use Bitcoin as savings, the prospect of putting money into a VC fund looks less and less attractive. The returns that VCs are getting just isn't cutting it and the newly printed money has a much better savings vehicle in Bitcoin.

And that means we'll soon get to a point where many VC firms will no longer be able to raise funds. And that's a good thing. Venture capital is a bloated ecosystem that has gotten fat on fiat money and has largely been able to avoid reality for a long time. A closer alignment with reality, that is profit, is going to make for better companies in the end.

In other words, the long term prospects of venture capital look grim because smart money is headed toward Bitcoin.


just buy Bitcoin


Private Equity is a similar tale. Most PE funds are still valued at ZIRP era valuations.

They’re in for a reckoning.


WELL WRITTEN


GRDI vibes nostr:npub1qny3tkh0acurzla8x3zy4nhrjz5zd8l9sy9jys09umwng00manysew95gx


Yes


Nice write up ✒


A great write up yet again from Jimmy Song
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#siamstr #grownostr #bitcoin


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