Original Thinking Wins in the Long Run

During the last few years, we’ve seen a significant increase in the number of venture capital funds started. I’m happy that more people are deploying capital to founders. I think this is great for founders. But I’m concerned about how efficiently the capital is being matched to high-potential founders—especially those outside venture capital networks.

I’ve investigated and found that many (not all) funds have similar strategies. Sourcing, evaluating, and supporting founders look similar, with small tweaks. A lot of these funds were raised in 2020 and 2021. Those were great years because the start-up market was booming. These new funds benefited from the rising tide. They didn’t find and evaluate nonobvious founders with high potential. Many used VC network consensus to find and evaluate the companies they invested in. More capital was available, and lots of their investments enjoyed markups because of the abundance of capital—not because of traction earned by solving a problem well.

If the current market downturn continues, companies that aren’t focused on solving a problem well enough to reach product–market fit will struggle to raise additional capital. Their runway will shorten. Early-stage funds with unoriginal strategies that invested in these types of consensus start-ups will face hurdles too. If their portfolios aren’t performing well, they’ll have a harder time convincing others to give them more money to deploy in more consensus deals.

I’m curious to see how this pans out. I believe the non-consensus early-stage investors with original strategies will excel.