I am a huge fan of venture capital and the impact that VC funding at all stages has on spurring innovation, building products, and enabling us to be where we are today. The VC world is evolving rapidly, but perhaps not for the best.

Here is why:

The term ‘Quiet’ perfectly depicts what is happening in the worldwide VC sector today. Not including the insane Gen AI investments and hyper-inflated valuations, the remainder of the VC world in 2023 and 2024 is having two not-so-great years. The term Quiet is appropriate because things in the world of VCs can be hidden and non-transparent, to the public and often to their LPs (Investment Partners). I am an LP in a number of VC firms, and it is insane how little information I have regarding the state of investments in the portfolio. Remember VCs are not public companies, so nothing is required to be public as long as the hype and image are kept pristine!

Fact: VCs are now laying off staff and partners. While very large funding rounds were expected, the actual funds are closing at much lower amounts. This, of course, does not include the top 10-20 VC firms, but there are thousands of VCs impacted. Investors are pulling money out. Let’s explore some of the facts and consequences:

Investors are not seeing the 2021 and pre-2021 returns, very few IPOs, and limited acquisitions are lowering returns for investors. Investors are not happy! Unhappy investors don’t make contributions when they get their capital investment calls and start to retreat in large masses.

Let’s break down the VC world today. You can find supporting evidence in Pitchbook, business literature, and funding research publications:

1. The world of Venture Capital is flooded with VCs, super angels, corporate VCs, and insanely large foreign investment funds. And let’s remember, over the last decade or so, VCs have become risk averse and operate with group think. Whatever is hot today, is what every VC wants to invest in. This leaves a large number of high-potential startups starving to extinction. Too many VCs – too few opportunities within the group-think mentality!
2. Many VCs are not getting first dibs in a round, fighting to get in the next over-inflated valuation ‘unicorn.’
3. Remember, with VCs, you only need one massive hit and you are golden. However, the next ‘Google’ or ‘Meta’ are hard to find.
4. VCs over-hired and now have to adjust and reduce staff, given the reality of the investment climate. This leads to Quiet layoffs.
5. Only the top VCs are getting a seat at the investment table, leaving many VCs out of play.
6. Beyond all, let’s remember that VC companies operate in secrecy. VCs have to present a strong, huge capital front, often expressing hundreds of millions of dollars of capital available, while the truth is something very different. Image is everything. Low available capital, tons of uncertainty about future capital availability, AND shrinking staff are the reality for many VCs. Leaving them not meeting investor desires and worried about future capital. All behind closed doors, all Quiet! This leads to frugal investments to protect capital.
7. Many VCs are working with existing portfolio companies to reduce previously hyped valuations AND keep their companies alive.
8. And more…

Unfortunately, this is creating negative consequences for incredible startups looking for funding – too little raised, too late.

In the past, VCs made many seed investments, in many different sectors, creating massive future potential. Being ultra-conservative and cautious is starving startups to the point of shutdown. Let’s remember… these same startups could be the next ‘Google and Nvidia!’

To me, perhaps the most alarming sign of the current VC state is the lack of risk-taking and the term Venture in Venture Capital. If a startup had all the assurances, it would no longer be a startup and would not need early-stage funding.

The consequences of such risk aversion are quite serious for startup funding and the future of innovation.  In Part II of this article (coming to you by the end of July), I will discuss practical, logical, and clear solutions to remedy this problem, bringing my expertise as a serial AI entrepreneur, seasoned executive, and investor.  Stay tuned!

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