Is the AI era the beginning of the end of VC as we know it?

"Venture investing involves optionality and power laws. Very few investments will generate any returns at all, but the sector is premised on the idea that within any portfolio there will be just a few startups that will enjoy a spectacular exit, through an initial public offering or by being acquired by a deep-pocketed established firm. VCs are betting on their ability to sniff out the rare winners amidst a sea of potential startups."

"By some accounts 95% of the industry's total returns are generated by less than 5% of its firms. Nonetheless, venture capital is firmly planted in the economy and in the public consciousness as the way that innovations get funded and businesses grow."

"The logic of venture capital was always premised on scarcity. Capital was scarce. Technical talent was scarce. The infrastructure to build, test, and distribute a technology product was scarce. VCs existed to bridge those gaps."

US venture capital has remained structurally unchanged for approximately 50 years, operating through the 10-year fund lifecycle, 2-and-20 fee structure, and pursuit of outsized returns. The industry relies on power law dynamics where very few investments generate returns, with less than 5% of firms producing 95% of total returns. Venture capital emerged to address scarcity in capital, technical talent, and infrastructure needed for technology product development and distribution. Despite founder complaints about misguided expectations, unwanted advice, and unfair equity extraction, venture funding remains viewed as a badge of honor and essential growth mechanism. The sector faces potential disruption as massive investment flows into AI and emerging technologies challenge traditional models.

Read at Fast Company