The “Corporatization” of Venture Capital

There is a debate happening in venture right now (Erik Torenberg of a16z has framed it well) about the bifurcation of our industry.

Venture is splitting into two distinct business models:

1. The Artisan: Small team, low fees, high conviction. (The “Stock Picker”).
2. The Industrialist: Massive AUM, hundreds of staff, “Platform” services. (The “Asset Manager”).

We’ve seen this movie before. In the 90s, Hedge Funds were small, agile alpha-generators. Then they scaled, institutionalized, and became fee-collecting beta-chasers. Ultimately their collective performance suffered. Now, Venture is following the exact same curve.

In the last cycle, the lines blurred. Driven by the race for AUM, traditional VC firms tried to scale like the tech companies they invest in. They raised mega-funds, hired armies of staff, and built org charts that look like the Fortune 500.

On the surface, this sounds great for founders. “Look at all these resources!” But there are some hidden costs to the Industrialist model that I have seen.

The “Account Manager” Problem

In the Artisan model, the Partner is the product. You are buying a relationship with a specific human who has skin in the game. In the Industrial model, the Investor is often just an employee. When they leave (and the “churn” at these firms is real), you can become an “Orphan” portfolio company. You still have the brand’s money, but you’ve lost your advocate in the room.

Misaligned Incentives (Fees vs. Carry)

This is the dirty secret of scaling AUM.

Small funds live on Carry (Exits). They need you to win to pay their mortgage. Trust me on this ;-).

Mega-funds can live on Management Fees. (2% of $5B is $100M/year—guaranteed).

When a firm becomes an Asset Manager, the pressure to “deploy capital” often outweighs the discipline of picking the right outlier. Though it should be noted that A16Z has shown some impressive 3X performance on large funds, so it doesn’t mean performance won’t be there, just not for most.

The “Anti-Economies” of Scale

The biggest risk is cultural. Startups run on speed, intuition, and high-velocity decision-making. Corporations run on process, committees, and consensus.

As firms get larger, their “Investment Committees” start to look like formal board meetings. “Conviction” gets replaced by “Consensus.” And as we know: Consensus is the enemy of alpha.

I’m not saying the industrialized model is bad. For a Series C company scaling globally, that army of recruiters is exactly what you need.

And I’m not suggesting that no large funds will even return decently well, but I would submit that the benefits of scale we see in other industries – lower cost of capital, negotiating leverage, distribution advantages, etc – are much less present if at all in early-stage venture capital.