Venture Capital Isn’t the Problem—It’s Venture Capitalists

The market downturn has sent many tech company valuations into freefall, leading to questions about whether the venture model—based on the power law, the notion that a small number of mega-successful bets will outweigh a larger number of abject failures—can continue to replicate its past wins.

Critics point to the drought in new, era-defining VC-backed behemoths such as Facebook or Google, while defenders of the VC model argue that our current downturn is a natural part of long-term investing, which comes with ebbs and flows. Noah Smith recently tried to split the difference in a Substack essay arguing that the lack of a fresh grand slam represents a permanent structural change in the venture industry. Increased competition, greater access to information about business formation and a shift out of high-barrier-to-entry markets like chip manufacturing into lower-barrier markets like software, he wrote, has made it more difficult for venture capitalists to sustain their past level of performance. What’s required is a new approach to investing, one that’s more diversified and less reliant on a small number of big hits.

There’s no denying that the VC industry is changing. The days of easy money seem to have ended for the time being, and many investors are beginning to realize they can no longer rely on hype to drive up the value of their portfolios. But suggesting that these changes represent a permanent structural shift in the fundamentals of venture is ludicrous. If, say, a restaurant chain were underperforming, would we say it’s because the restaurant model is flawed? Or would we not first guess that the restaurant needed to serve better food?