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

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The market downturn has sent many tech company valuations plummeting, leading to questions about whether the business model – based on power law, the idea that a small number of mega bets succeed the prevail over more despicable failures – can continue to replicate past victories.

Critics point to the drought in new venture capital-backed behemoths, such as Facebook or Google, while advocates of the venture capital model argue that our current downturn is a natural part of long-term investing, which s accompanies ebb and flow. Noah Smith recently attempted to split the difference in a Substack essay arguing that the absence of a new Grand Slam represents a permanent structural shift in the venture capital industry. Increased competition, better access to information about starting a business, and a shift from high-barrier-to-entry markets like chip manufacturing to low-barrier markets like software, he wrote, have made it more difficult for venture capitalists to maintain their past level. performance. What is needed is a new approach to investing, one that is more diversified and less dependent on a few big hits.

It is undeniable that the venture capital industry is changing. The days of easy money seem over for now, and many investors are beginning to realize that they can no longer rely on hype to drive up the value of their portfolios. But to suggest that these changes represent a permanent structural shift in business fundamentals is ludicrous. If, say, a restaurant chain was underperforming, would we say it’s because the restaurant model is flawed? Or wouldn’t we first guess that the restaurant had to serve better food?

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