Venture capital’s new reality check: ‘A ton of people looking to get out everywhere’

As venture capital boomed over the past decade, college graduates and MBAs flocked to the industry, hoping to source the next Airbnb or Uber. Would-be VCs scoured the internet for any publicized open roles, while savvy ones networked their way in. They believed that with hard work and relentless networking, they could become the next Michael Moritz.

But increasingly, over the past two years, this energy has dissipated. Investors — from analysts to partners — have grown increasingly frustrated and disillusioned.

2021 and 2022 made VC sexy, an early-stage associate said, likening the industry to fashion and entertainment. During the zero-interest-rate years, the ranks of the VC industry swelled, a trend that was supercharged by the pandemic. Money poured into the sector for the high returns promised by venture capital.

Established firms expanded their scope; early-stage firms began to try their hand at growth, and vice versa. Private-equity shops and hedge funds dipped into venture with crossover funds. Corporations flush with cash from record profits sought to make strategic investments. Firms multiplied, and investors struck out on their own.

Now, the market downturn has cast many aspects of the industry in a harsh light. Rising interest rates, delayed initial public offerings, and a slump in public markets have hit the venture industry hard. While it once seemed that firms could only grow in size, many are shrinking. PitchBook forecast in a May report that venture firms would raise less than $200 billion in 2024, a 48% drop from the industry’s peak in 2021.

Greycroft, for example, parted ways with five investors in October after it missed its fundraising target by about 40%, The Information reported. In March 2023, Y Combinator laid off 20% of its staff and cut back on growth-stage investing and remote programming, TechCrunch reported.

Frustrations that were manageable in the glow of a bull market seem like deal-breakers in a bear market, and investors are coming to terms with limited growth opportunities. Fierce competition over deals has worsened the daily grind and intensified office politics.

B-17 spoke with 11 partners, principals, and associates at VC firms across the country. All these people were granted anonymity for their fear of retaliation from the firms where they’re employed.

VC’s ‘zero-sum’ game

These “publicly announced layoffs have only been the tip of the iceberg,” Will Champagne of recruiting firm SCGC Search told B-17.

For instance, some senior and midlevel investors at certain firms are being told that they have six to 12 months to find a new job. Some firms are opting not to promote junior investors after their two-year programs and encourage them to explore other options.

Even for those still in the industry, being a VC has lost some of its luster. Fewer promotions are available, limiting investors’ career growth.

While it’s never easy to make partner, the first few years of the pandemic provided relatively more opportunities. Promotions happened faster when deals were getting marked up, and firms were raising bigger funds — this is a “bull-market phenomenon,” an early-stage partner said. But when the market is contracting, promotions don’t happen unless someone leaves. Otherwise, someone has to take a cut in carry to promote another investor.

“It’s probably even harder to get promoted today than it was when I did,” the same early-stage partner said. “You just have more people at the top,” and even if firms say they’ll promote someone, “the bar is just so high” — investors would need to “find the next Snapchat or something,” they said: “It’s kind of unrealistic.”

These unrealistic expectations are par for the course. Venture firms often set expectations and timelines that they have no intention of upholding, a Bay Area partner said: “You’re never going to get a metric that’ll make you happy. You’re never going to get a timeline that’ll make you happy. You’re just never going to know.”

As a result, investors have to make the case for themselves — sometimes forcefully. “A lot of people have to do things like threaten to leave and get offers elsewhere to compel their firm to finally make a promotion,” an AI investor said.

And even if someone is performing well, they might not get promoted if others are ahead of them in line, the AI investor added. “Maybe people are ready in terms of the quantitative metrics, but maybe they’re not ready in terms of being first in line,” this person said.

The process can also be very subjective. “You are going to be measured in the short term by how people feel about you and whether or not they like you,” an ex-VC said, adding: “It was on me to speak in words that my partner understood, to adjust my communication style to them to make them like me, to make this relationship as seamless as possible.”

Female investors, in particular, were frustrated by this, the ex-VC said. “I knew a lot of women who” sharply expressed that they just didn’t have time for these efforts, this person added.

At the end of the day, the promotion decision can simply come down to luck. One investor described an extreme example of this: Someone accidentally got promoted because the firm mistakenly changed his title to “partner.” After getting a lot of inbounds due to the title change, the firm officially promoted him. “Now there’s no room for anyone else in the fund to make partner,” the investor said.

But even if investors make it to the top, it’s not all rosy.

Poor fund performance has made carry worthless, a growth-stage principal said. Many investors received meaningful carry in funds only a few years ago. But funds from the pandemic years didn’t perform well because many companies were overvalued. “They may not see any carry dollars for a long time, maybe into full deployment to the next fund,” the growth-stage principal said.

“And then you start to think about how long will you have to work in venture before you start to see any kind of significant financial return,” the growth-stage principal added.

The compensation model at Big Law firms like Kirkland & Ellis is influencing other firms to adjust their pay practices to stay competitive in a busy lateral market for equity partners.

‘This is an individual sport. It is not a team sport.’

Fierce competition over the same deals has amplified daily frustrations and office politics.

Despite the large increase in venture dollars after the pandemic, the “number of great companies has stayed the same and possibly even shrunk,” the AI investor said, adding: “There’s just a lot of capital chasing the same few deals at the same time.”

Many are focusing on artificial intelligence, with firms like A16z merging teams to prioritize this sector. However, investors hired to focus on specific areas, such as consumer, fintech, crypto, or healthcare, are now forced to invest in fields outside their interest, a venture recruiter said.

AI deals, in particular, are highly competitive, requiring firms to make quick decisions. For example, Haize Labs received multiple term sheets for its early-stage round. “It’s a lot harder to get shots on goal when there’s so much competition,” an AI investor said.

This increased competition has demanded more sourcing. Firms require junior investors to meet with dozens of companies each week, a Bay Area partner said. Despite numerous meetings, this doesn’t necessarily translate to a strong investment track record. “You can meet with bad companies all day long,” they said.

Additionally, some find the sourcing process tedious. “When the market is slower, in times like now, sometimes you just spend six hours a day cold-emailing people and scraping through prospect lists,” a growth-stage associate said. “If I have to write another cold email to some founder about how I’m excited about what they’re doing, I might lose my mind.”

When the market is tough and deals are scarce, infighting at firms has intensified, too. Investors are increasingly stealing each other’s deals, one Bay Area partner said.

Stealing credit is common among peers, including at the partner level, and even occurs between different levels, such as principals and partners, the Bay Area partner added.

This rivalry extends into the deal-execution phase. One multistage investor said that they observed partners killing junior VCs’ deals for arbitrary reasons, like finding the founder arrogant.

Some junior investors have also sabotaged partners’ deals. Junior VCs would do all the grunt work but then help kill the deal by going to a competing partner and explaining why they didn’t believe in it, despite what they wrote in the investment memo, a growth-stage principal who observed this at their previous firm said.

But this type of internal competition, including deal theft and sabotage, has always existed, the growth-stage principal added.

“It would be wrong to say that VCs don’t compete with other partners at their firms,” an ex-VC said. “This is an individual sport. It is not a team sport.”

‘A ton of people looking to get out everywhere’

As the market continues to correct itself, more turnover is likely. “I know a ton of people looking to get out everywhere,” the growth-stage principal said. “But the issue is because it’s largely a marketwide problem from LPs, there’s not really a ton of good places to go who don’t face the same problem.”

Senior and midlevel investors, involved in fundraising, can especially see the writing on the wall, Champagne said. “I’m getting approximately four times the number of inbounds consistently in the last 18 months from principal and partner-level candidates looking for new roles as opposed to 2.5-plus years ago.”

Many are done with venture entirely. “I was like, shit, I need to refresh my investor network,” the early-stage partner said, noting the many departures in their network. Another principal added: “I’ve had a number of friends leave this industry.”

While venture is a fun, intellectual exercise, investors are not really making a positive impact, the growth-stage associate said: “I just realized that this stage of my career, where I want to grind and get shit done, venture is not really the place to do that.”