In Silicon Valley, venture capital meets generational change
Reid Hoffman, founder of LinkedIn and longtime venture capitalist, is no longer the public face of venture capital firm Greylock. Michael Moritz, who has worked at Sequoia Capital for 38 years, officially separated from the investment firm last summer. And Jeff Jordan, a top investor at Andreessen Horowitz for 12 years, left in May.
They are among the most recognizable of a generation of Silicon Valley investors who are retiring from venture capital at the end of a lucrative 15-year boom for the industry.
Many more are leaving. Investors at Tiger global, Paradigm, Lightspeed Venture Partners, Emergence capital And Spark Capital have all announced plans to step back. Foundry Group, a venture capital firm in Boulder, Colorado that has backed 200 companies since 2006, said in January that no new fund would be raised.
All told, the steady number of departures has created a sense that venture capital – a $1.1 trillion A corner of the financial world that invests in young, private companies, sometimes spawning companies like Apple, Google and Amazon, is in a moment of transition.
“We are at an inflection point,” said Alan Wink, director of capital markets at EisnerAmper, which provides advisory services to venture capital firms. While there have been waves of retirements in the past, he said this one was more pronounced.
The turnover creates an opening for new investors to step up, potentially changing the power players in Silicon Valley. That could also change the calculus for young companies as they decide which venture firms to seek funding from.
Yet the latest generation of investors is faced with a startup investment landscape that has become more challenging. Few venture capital funds benefit from the huge windfalls – which come from start-ups going public or being bought – that can safeguard an investor’s reputation. That also makes it harder for venture capital firms to raise money, with industry fundraising falling 61 percent last year and some major companies lowering their targets.
The latest generation of investors, including Mr. Moritz, 69; Mr. Hoffman, 56; John Doerr of Kleiner Perkins, 72; Jim Breyer of Accel, 62; and Benchmark’s Bill Gurley, 57, rose to prominence by betting on consumer internet startups such as Google, Facebook, Uber and Airbnb, which grew into giants.
Today’s emerging venture capitalists are waiting for their version of those winners. Some of the most valued startups — like OpenAI, the $86 billion artificial intelligence company — are in no rush to go public or sell. And it could take years for the frenzy surrounding generative AI to translate into big wins.
“We are in a period of reset, based on where the technology is and where it is going,” said David York, an investor at Top Tier Capital, which invests in other venture capital firms. “These stars will emerge.”
Industry stalwarts like Vinod Khosla of Khosla Ventures, Marc Andreessen of Andreessen Horowitz, and Peter Thiel of Founders Fund continue to write checks and exert influence. (All three companies have supported OpenAI.)
But many others are stepping down as a 15-year winning streak that has generated billions in profits for the industry recently turned into a downturn. Venture capital firms typically invest in ten-year fund cycles, and some aren’t eager to commit to another decade.
“There’s a bull market element to it,” said Mike Volpi, 57, an investor at Index Ventures who recently said he would withdraw from the firm’s next fund. Mr Volpi’s decision was previously reported via the Newcomer newsletter.
EisnerAmper’s Mr. Wink said that in some cases, the investors backing venture capital funds would like fresh blood. The message he said: Get on top.
“Don’t be like many professional athletes who sign that last contract and your on-field performance is nowhere near what it was in your glory days,” he added.
For years, venture capital could only grow, driven by low interest rates that encouraged investors around the world to take on more risk. Cheap money, the proliferation of smartphones, and abundant cloud storage have allowed many technology startups to flourish, delivering huge returns for investors who had bet on these companies over the past fifteen years.
According to PitchBook, which tracks startups, investment in U.S. startups increased eightfold to $344 billion between 2012 and 2022. Venture capital firms grew from small partnerships into huge asset managers.
The largest venture capital firms, including Sequoia Capital and Andreessen Horowitz, now manage tens of billions of dollars in investments. They have grown into more specialized funds focusing on assets such as cryptocurrencies, opened offices in Europe and Asia and entered new areas such as asset management and public equities.
Andreessen Horowitz, Sequoia Capital, Bessemer Venture Partners, General Catalyst and others also became registered investment advisors, meaning they could invest in more than just private companies. For a short time, venture capital was the job for ambitious young people in the financial sector.
The expansions have contributed to some investors deciding to take a step back. Mr. Volpi, who joined Index Ventures in 2009 after 14 years at Cisco, said he got into venture capital because of a change of pace from the corporate world. He has backed startups including work messaging company Slack and AI startup Cohere.
But over the years, Index – and the venture industry as a whole – grew bigger and more professional.
“Maybe it’s up to someone else to fight that battle,” Mr. Volpi said.
Many venture capital funds have also grown so large that owning a stake in a “unicorn,” or a startup valued at $1 billion or more, is no longer enough to generate the same profits as before.
“If you want to give three times your money back, a unicorn is not enough,” said Renata Quintini, an investor at Renegade Partners, a venture capital firm. “You need a decacorn,” she added, referring to a start-up valued at $10 billion or more.
The largest companies have moved from providing profits to their investors from the traditional definition of venture capital — very young, risky companies with the potential for outsized growth — to a more general idea of “tech exposure,” Ms. Quintini said.
Manu Kumar, founder of venture capital firm K9 Ventures, has felt the shift. Since 2009, he has written checks of $500,000 or less to invest in very young companies. Some of those investments, including Lyft and Twilio, went public, while others were sold to larger tech companies like LinkedIn, Meta, Google and Twitter.
But starting last year, he said, the venture capital investors who would have provided the next round of funding to the startups he backed began demanding more progress before investing. (Startups typically raise a series of increasingly large financings until they go public or sell.) And potential buyers were laying off workers and cutting costs, not acquiring startups.
“Companies today have only one option,” Mr Kumar said. “They need to build a real business.”
In October, Mr. Kumar told investors that the math of his investment strategy was no longer working and that he would not create a new venture capital fund. He plans to keep an eye on the market and revisit the option in a year.
“I want to be convinced of what my strategy will be,” he said. “I don’t have that belief at the moment.”