Stories

Venture capital's stakes are getting much higher

Illustration: Axios / Lazaro Gamio

Tech startups aren't the only ones in Silicon Valley that want to be unicorns. More and more VC firms are seeking to raise new funds of at least $1 billion, either for new flagships or growth-focused sidecars.

Why it matters: The last time we saw such a trend was during the dotcom era's waning days.

Why this time it's different:

  • Startups are staying private longer, thus requiring more capital.
  • VCs need deeper pockets to at least avoid major dilution. Even Sequoia Capital has seen its original Airbnb ownership fall from 20% to around 13%, per a source.
  • SoftBank, even though none of these new funds is really seeking to compete with it.
  • There has been intense valuation inflation for venerable tech stocks —yes, even compared to the bubble days — so private valuations are really just following their public market peers.
  • There are viable markets for new tech product (i.e., the startups aren't ahead of consumer and enterprise demand/willingness to try).
  • Increased fund sizes in 2000-2002 were to write bigger checks for the same early-stage strategies, whereas this time it's for complimentary strategies.

Why this time it's the same:

  • Per a longtime LP: "Never get confused. It's almost always a fee grab."
  • Everyone is still judged on comparative returns, so individual funds won't be exorcised for broad-based growth-stage carnage.
  • Fund capital is widely available, in part, because of a reverse denominator effect.
  • The business just looks so easy right now, which is why so many novices (and corporates) are pushing in.
  • Overcapitalizing startups hasn't become any smarter of an ROI strategy.
  • Fund size tails will wag check size dogs, no matter how often VCs tell themselves they won't.

Bottom line: We won't know who's right for at least five years, if not longer. But for now we do know that the stakes have become much, much higher.