In the clubby world of venture capital, layoffs were once a rarity. But as the industry reels from one of its worst years for fundraising in a decade, it’s starting to feel like open season on venture jobs.
Firms that had to scale back the size of funds they planned have made cuts. Others are staffing up less quickly and scuttling junior staffers to work at portfolio companies. More still are going out of business. According to about a dozen investors who spoke to Business Insider on the topic of venture’s bloat, the industry is heading for a brain drain of investors that it hasn’t seen since the carnage of the dot-com era.
But that’s only half the story. Some of these sources had a stern warning for the industry: Firms don’t need to worry about layoffs so much as weary investors leaving of their own volition.
Tired of chasing riches that will take much longer to realize, or eager to get out from under bleeding portfolios, some will decamp from established firms to retire or work a cushy gig in Big Tech. Investors say a number of them are raising their own funds in spite of a capital crunch.
“The big risk for venture firms is not layoffs, it’s that some of their successful partners decide they don’t want to be part of a big bloated team when they could leave and start their own partnership,” said a founding partner of a small venture fund who did exactly that. He asked not be named because he didn’t want to be seen as disparaging the large venture fund he left.
The departures are already piling up. Last year, Index Ventures saw four partners move on, including Mark Goldberg and Rex Woodbury, who are both in the swing of raising solo funds. Anna Patterson, a longtime Google executive who helped found its AI fund Gradient Ventures, announced in November that she “will be moving on from Gradient” but did not say whereto.
Last week, the early-stage firm Village Global added another name to the list. Erik Torenberg, who’s better known as a cofounder of On Deck, said he’s stepping back as partner to focus on something new. Though that firm unwrapped a substantially larger third fund in November.
‘Much more attractive to do your own thing’
There are a few reasons for the flight of dealmakers, according to sources. Some are merely bored.
For a decade, venture firms raised bigger funds faster to invest in a Cambrian explosion of startups. That, in turn, prompted them to hire more people to source and execute deals.
Then, a tech stocks decline, higher-for-longer interest rates, and a reshuffling of private equity assets by institutional investors crashed the funding frenzy. Last year the industry notched 474 funds closed, the lowest count since the venture-capital bull run began in 2013, according to PitchBook data. The cash raised fell to about $70 billion from $173 billion in 2022. The data also shows that money is increasingly concentrated in fewer pedigree funds, leaving less for emerging funds and middling performers. The shift triggered a new era of capital conservation.
PitchBook estimates the number of investors who participated in two or more venture deals plunged by 38% in the first three quarters of 2023 compared to the same period in 2022. The slowdown means more investors — who compete eagerly at large firms for cash to invest in their deals and grow their carry, or share of the fund’s profits — were sitting on their hands.
“If you’re hungry, excited about doing things, it’s much more attractive to do your own thing,” said the investor who left an established fund to raise a fund.
Others may be eager to get out from under bleeding portfolios, two sources said.
The massive valuations that investors granted startups over the last few years are now wildly inflated, and many startups are struggling to raise amid a bleak fundraising landscape. PitchBook estimates one in four investments was done at a flat or reduced valuation in the third quarter. For many investors, “their carry is not worth as much as they thought,” said the chief operating officer of a large venture firm, who asked not to be named so she could speak freely.
Those investors who are earlier in their career have a few options. They might decamp from one firm to another or join a portfolio company. “They know which ones are healthier than others, which ones are growing,” said Frank Rotman, a cofounder and chief investment officer at QED Investors. There are some who will raise small funds as lone-wolf or “solo capitalist” investors.
Kyle Harrison, general partner at Contary, an early-stage venture firm, said he noticed an uptick in first-time fundraisers starting last fall. He pointed to two main drivers. “Either people think they have a legitimate thesis on how to do things differently and I respect that a lot,” he said. “On the other hand, they’re trying to get out from under the burden of their existing portfolio and start fresh. But most big firms don’t want to bring somebody in who has an overpriced bag at their last place. So it’s just easier to start from scratch.”
Growth is out, seed is in
The migration of investors has another, more generous explanation. Some investors may be tempted to move upstream, investing in companies earlier at the pre-seed or seed stage, so they can get an inside lane on the most promising startups as they scale.
“These moments of volatility have historically been the best moments for early-stage investing,” said one person who’s raising a debut fund, who asked not to be named because of solicitation rules. “Growth is tough right now; it will be for a few years. But down rounds and shut-downs unlock talent, and that talent starts companies.”
The same thinking may explain why the world’s largest startup factory, Y Combinator, axed its growth investing team early last year. The Information reported that Anu Hariharan and Ali Rowghani, who led the late-stage effort, were regrouping to set up a fund of their own.
If there is a surge in debut seed funds, it won’t show up in the data for some time. PitchBook data shows the number of first-time funds raised last year is pacing to hit its lowest count since 2013. That’s because the family offices and institutions that front money to venture funds are inundated with pitches, and they’re more likely to invest in bulge-bracket funds than first-timers.
The newbies who are poised to succeed are the ones who can show institutional investors a track record of having delivered outstanding results to their investors. And, given how valuation multiples are contracting across the industry, that will be a great difficulty for many investors.
Factoring in the AI effect
The harsh reality is that the turnover won’t all be voluntary. There are whispers of “quiet firing” arriving in the industry.
With fundraising happening more slowly now, firms are rethinking where to put their money, which can result in some roles becoming obsolete.
“Venture firms have quietly realigned investment strategies this year and onesy-twosy investors have left because a tops-down decision was made to stop investing in certain sectors,” Michael Yang, managing partner at OMERS Ventures, told Business Insider in an email.
Some of those firms are piling into artificial intelligence and pulling back from other focus areas. Greycroft let go of five investors in October after it fell short of fundraising targets and shifted resources away from healthcare and fintech investing. Shortly after, two partners stepped back at Menlo Ventures, which has a new $1.35 billion fund earmarked for artificial intelligence companies, as it backs down from fintech investing. The Information first reported on the moves.
Meanwhile, Andreessen Horowitz has been reshuffling parts of its investment organization to sharpen its focus on artificial intelligence, Business Insider previously reported. It pulled Martin Casado from enterprise investing and Alex Rampell from fintech investing to lead the effort.
Even as the fervor cools, artificial intelligence will continue to attract a lion’s share of capital as long as firms bulk up funds to invest in the sector.
“When a firm says ‘we only do AI now’ it’s a pretty sure bet a bunch of people will leave,” Yoni Rechtman, an investor at Slow Ventures, said in a message, “and possibly that was even the point in the first place.”
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