Precisely why the VC market is a pyramid schemes for managers and portfolio companies. Forcing the deployment of money is the reason we’re seeing so many poor investments deployed by technologically-illiterate, Harvard new grad VCs. And it’s been them for a decade.

The current VC market as mentioned has been riding on an industry growth curve. Tech wise, the old models of SaaS are being “disrupted” on the daily, but the justification is tech rather than tech enabling new ways of competing on an industry’s incumbent business theses.

FDEng are an expesive method of distribution for a business searching for PMF. A glorified consulting shop for dropout, inexperienced early 20 somethings never exposed to an industry. But the huge capital vehicles in VC enabled this behavior.

We’re now just keeping the software industry employed rather than solving real problems. It’s not just founders not fitting in an industry, the investors don’t fit either. This was the opposite a few years ago:

someone with some industry knowledge and experience finds an investor who’s operated in an industry and can help with initial sales and advice. See ScaleAI. In the last 5 years, instead of betting on companies solving direct business problems, folks are betting on innovating tech

As the article mentions, investors and founders are betting that new AI tech by startups will be useful in any industry, not just for a specific business problem, and prove it with large companies paying huge contracts to test them.

But these are guesses, not theses with an aim to solve a problem in a market. That’s why an AI lab is better equipped to innovate than a startup masquerading as one. Labs have direction, but startups innovating in tech don’t have an aim large enough to justify their capital.

The industry is deploying capital at a pace with the thinking that the majority of capital in the industry will have sound ROI. But this was under the 2010s assumption that businesses were fixing real business problems and tackling the legacy. 2020 businesses do not fit this mold

In respect to the article, the high valuations and higher number of startups’ inability to exit can be explained by the waste of these vehicles of capital and their deployment. Waste is fine; a total garbage dump will see a lot of non tier 1 VCs fail the old model of breakeven.

But how is this all a pyramid scheme? The fees VCs took were vacation money. Make a couple of coinvestments, and you would’ve likely at least broke even. VCs still play with their money, but the uncertainty of break even isn’t being internalized because of the long time horizons.