The Inevitable Venture Capital Paradigm Shift: Infinite Funds and Infinite Games

One of the driving factors of invention, technology, and human advancement is venture capital.It organises human, scientific, technological, and political resources to assist innovators in achieving big goals.

Despite its effectiveness in supporting enterprises and entrepreneurship over the last few decades, venture capital has demonstrated its limitations.On the surface, the limits stem from the GPs’ and LPs’ competing agendas, as well as the founders’ and investors’ lack of congruence.Most GPs in the equities market are bound by the fund cycle’s finite years (e.g., 10 years). Due to low listing hurdles and market volatility, many GPs in the crypto market have substantially shorter fund cycles (often as short as 1 or 2 years), and many fund managers are obliged to ditch their investments fast.As a result of this phenomena, certain fund managers have been labelled “weak hands” or “flippers.”

An Initial Public Offering (IPO) is frequently seen as a venture-stage company’s success in the stock market.The primary purpose of most funds is to invest in companies and sell them at their first public offering (IPO).A corporation usually takes at least 5–7 years to become public.As a result, fund cycles are designed to mirror the notion of assisting a startup through its IPO. The difficulty with this method is that if a firm has a longer-term goal, the fund may miss out on a larger potential to stay with the company and profit from its post-IPO expansion and growth. This has proven true for all of the world’s most successful businesses, including Netflix, Tesla, Apple, Google, and others. The Sequoia Fund recently acknowledged this issue. As a result, LP access to its seed and venture capital funds will be revoked, as detailed in a blog post. Instead, the Sequoia Fund uses its secondary market fund to invest in primary market deals, regaining ownership of venture-stage ideas and the option to keep their venture investments for as long as they wish.

A listing on the crypto market happens significantly faster than an IPO in the stock market.A cryptocurrency startup usually goes public in its early stages (less than 3 years, sometimes within a few months after being conceived).The rich returns from listing hypes entice investors.To attract additional LPs, several crypto funds adopt a one-year fund cycle.A successful Web3 enterprise, on the other hand, takes more than one cycle to create, and when a project truly succeeds, the return is significantly bigger than a single hype phase.

Misalignments can be divided into two categories. For starters, there is a disconnect between fund managers and investors. A protracted fund cycle is typically more challenging the wider the knowledge gap between the GP and the LP. Second, funders and fund managers are not on the same page. It’s always more appealing to sell shares/tokens at a liquidity premium at a listing event than to wait years for the project’s actual worth to emerge…

You can read more in our book
“Exploring Web3: My learnings from working & investing in Web3”

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