Reflections from Four Decades in Venture and What’s Next: How Will the 2020s Impact the Venture Capital Industry?
Over the last 23 years, I have seen venture capital evolve from a small apprenticeship business to a global economic engine. I’ve witnessed the irrational exuberance of the 1990s bubble, the crash of 2000 and slower than expected recovery, the brief but powerful “RIP” financial crisis of 2009, and the unprecedented 10-year bull market of the 2010s — fueled by a significant expansion in the venture capital TAM (i.e. companies staying private longer) and a corresponding increase in LP funds flowing into the industry.
As I enter my fourth decade as a venture capitalist (holy sh#t!), I wanted to take the opportunity to reflect on the past, open the aperture, and make some predictions about some of the macro forces that will shape our industry during the 2020s.
Unlike some other blogs I’m not going to focus on predicting which investment areas will be hot in the coming years — that’s for someone with a clearer crystal ball than mine. Raise your hand if you guessed that ride-sharing, disappearing photos, and streaming music would define the 2010s. Rather, I’d like to identify some high-level forces which could shape our industry and our behavior during the 2020s:
1. Sustainability will become a broad investment theme. While Cleantech investing had mixed success during the mid-2000s, “Greentech” investing during the 2020s will have the advantage of more efficient business models and heightened consumer awareness, interest, and urgency. Plastic is destroying our oceans, so we’ll see startups focus on innovative reusable packaging and new ways to re-imagine single use plastic (See Rothy’s*). We struggle to feed the world’s population, so we’ll see an emphasis on sustainable farming and an efficient food ecosystem. Entrepreneurs will start more secondary markets for goods (shout out to eBay, Vinted*, and The RealReal). We throw too much stuff in landfills, so we’ll develop new methods to recycle, reuse, and re-imagine computers, building materials, cellphones, mattresses and other people’s garbage. We’ll even use technology to save animals from extinction and help people reinvent themselves. And of course, we’ll see a resurgence in solar, wind, and hydroelectric sustainable energy sources.
2. Social Impact will become a new North Star for our industry. As venture capitalists, our main job has been to invest money from our customers (LPs) and give them a lot more money back. However, that is slowly changing. Our LPs, many of whom are public pensions, sovereign wealth funds, and university endowments, are starting to ask the question “what are your portfolio companies doing to benefit society?” These questions will increase to a regular drumbeat — and social impact will become another factor in how LPs choose their managers and how VCs filter their deals. We are likely to see a more holistic approach to stakeholder interests across investors, employees, customers, and our communities. We’ll see more attention given to mission and values rather than a pure focus on revenue growth and return multiples.
3. We fully enter the “machine age”. Machines will not only drive us around, they’ll deliver our packages, fly our freight, and harvest our vegetables. They’ll manage our travel, organize our calendar, manage our email (fingers crossed), cook our meals, and perform many other aspects of our day-to-day life. Machines will fight our wars — which might help make conflict less interesting. Machines will also start to replace white-collar jobs. They’ll do the work of lawyers, accountants, doctors, actors, and yes, even venture capitalists. Perhaps they’ll start to do the work of politicians…
4. The specialized fund model breaks down as less money flows into our industry. As funds flowing into venture capital have reached unprecedented levels, we’ve seen the rise of fund specialization by stage. We have dirt funds, pre-seed funds, seed funds, incubators, accelerators, early stage funds, Series B funds, product/market fit stage funds, expansion stage funds, growth funds, late-stage funds, pre-IPO funds, crossover funds, and of course whatever you want to call the Softbank Vision Fund. The problem is, most of these funds are predicated on either feeding upstream funds their deals or getting deal flow from downstream funds. As less money flows into our industry — and it will eventually happen — the ecosystem will weaken and there will be a shakeout among specialized funds. The best ones will survive and get stronger, the weaker ones will be forced to reinvent themselves or fade into the sunset.
5. The venture capital industry will come under greater scrutiny and attack by federal policymakers. If extreme views continue to dominate party politics, the target on our industry’s back will get larger over the next decade. As a result, we’ll need to defend our industry, advocate for entrepreneurs, and differentiate ourselves from other special interest groups. We are not large buyout funds. We invest early to fund R&D, we invest again to fuel revenue growth, and when we’re successful, we create a lot of jobs. The hate/hate relationship between Washington and big tech is also likely to continue. We are not big tech. We are not Facebook and Amazon. We are investing in entrepreneurs and companies that are trying to disrupt and unseat them.
As a result of the changing world around us, the 2020s are shaping up as a watershed moment for the venture capital industry. Yes, I know, some of my predictions sound like wishful thinking — and perhaps they are. However, our industry has never been in a better position to shape the future, so why not do it.
*indicates Lightspeed portfolio company