Investor Essentials Daily

Venture capital’s magic has worn off

January 13, 2025

Venture capital (VC) originally focused on spreading small investments across many startups, expecting most to fail while a few delivered big returns. 

Over time, VC has grown into a $1.2 trillion industry dominated by large firms like Andreessen Horowitz, prioritizing massive bets on bigger ventures instead of smaller, riskier startups. 

This shift, amplified by high interest rates, has squeezed smaller VC firms and led to more concentrated investments with greater downside risk, as seen in SoftBank’s costly bets on WeWork and Uber. 

SoftBank’s massive losses show how diverging from VC’s original principles can backfire. 

Meanwhile, microcaps remain a promising alternative for early-stage investment potential, as they are less saturated with large capital. 

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The original business model of VC was lean and scrappy. 

As its name suggests, the goal of venture capital (“VC”) was to spread small amounts of capital across many ventures, knowing most would fail but few would deliver sizable returns.

VC firms used to focus on fueling innovation and driving growth by owning small stakes in startups.

It was the opposite of the private equity (“PE”) strategy of owning whole companies.

However, as with many industries, VCs have faced challenges alongside their success.

The industry has ballooned into a $1.2 trillion giant, more than five times what it used to be in 2009. As its size has increased far from its modest origins, so has its concentration.

And this shift could mean the industry is past its peak already.

Furthermore, the VC landscape is increasingly dominated by massive players…

Firms that operate against the VC textbook like Andreessen Horowitz—which manages $44 billion in assets—are at the front of the pack.

On the other hand, old-school VC player Benchmark is raising funds of a similar scale to those it raised in the 2000s. It’s focusing on more small investments rather than fewer large investments.

High interest rates have further accelerated this trend, squeezing smaller VC firms that lack the financial resilience of their larger counterparts.

As these smaller firms struggle, or even exit the market, the influence of the big players grows even stronger.

As they gain power, bigger players have started to make bigger bets on bigger ventures, often sidelining riskier early-stage startups.

And since they’re making fewer and bigger bets, it’s a bigger deal when those bets don’t pan out.

You might recall Softbank’s (9984.T) disastrous investment in coworking “unicorn” WeWork in the 2010s.

It’s the perfect example of what happens when VC diverges from its founding principles.

In its quest to go big, SoftBank raised an unprecedented $100 billion and funneled massive amounts of money into startups.

At first, the Softbank Vision Fund’s prominent investments were hailed as revolutionary. But before long, they became notable for their disappointing outcomes.

The Vision Fund has invested a total of $18.5 billion in WeWork, which was destroyed after failed initial public offering (“IPO”) plans exposed numerous financial and cultural issues.

WeWork’s valuation has plummeted from $47 billion to a mere $8 billion.

Softbank’s investment in Uber Technologies (UBER) didn’t go much better. The Vision Fund poured $9.3 billion into the ride-hailing company in 2018, valuing the company at roughly $70 billion.

Uber went public a year later at $41.57 per share. The stock lost 50% of its value within the first 10 months on a public exchange.

By the time SoftBank ditched its Uber shares in 2022, the company was valued at around $55 billion, or roughly $23 per share. SoftBank recorded a huge loss on the investment.

SoftBank’s focus on massive bets meant it prioritized scale over balanced gains. It deviated from VC’s original goal of smaller strategic investments.

And that decision hasn’t paid off. The Vision Fund posted losses of roughly $19 billion and $32 billion, respectively, in 2022 and 2023.

Big VC players either win a little… or lose big…

… or they do their best to avoid risk completely, which leads to smaller returns.

That was never supposed to be the goal of this type of investing. VC is supposed to be about fostering agile, innovative startups.

If you’re looking for a place to make concentrated bets with big upside potential, the VC space doesn’t seem like a great approach anymore.

We’d recommend putting some money in microcaps instead.

Unlike VC, the microcap space hasn’t been flooded with cash. In fact, it’s one of the few places in the market that still can’t be.

Most large investors cannot invest in stocks until they hit a certain size, leaving the very smallest stocks ripe for the picking.

Getting in before big investors can lead to huge gains.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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