So Harry Stebbings brought us back to 20VC again this week with Rory O’Driscoll of Scale Venture Partners to do a deep dive on the latest tech, AI and VC news and insights.
Top 3 Hot Takes:
- Benchmark’s famous 10% hit rate is actually proof the VC model is broken for everyone else.
- Early stage VCs aren’t “partners” — they’re just subscription salespeople for their growth funds.
- No VC firm in existence has actually achieved the market share required to make their model work mathematically. Full stop.
Benchmark’s 10% hit rate on unicorns versus other funds’ 2% showcases the stark reality of the mega fund vs. focus fund dilemma – one that’s reshaping the entire venture capital ecosystem.
The Bundling of Venture Capital: Why Your Fund Stage Strategy Might Be Obsolete
Venture capital has fundamentally transformed into a bundled good. What we’re seeing now is early-stage investments (seed and Series A) being treated as loss-leading products designed primarily to secure the right to invest in later, more lucrative rounds. The implications are profound: to win Series A and B deals today, funds increasingly must participate in pre-seed rounds, as top firms are prioritizing relationships established at the earliest stages.
This bundling creates a structural advantage for mega funds with massive capital reserves. These funds can afford to pay premium prices for early deals, knowing they’ll make up the difference in later rounds. They also bring substantial platform resources to the table, making it increasingly difficult for smaller, stage-specific firms to compete.
Most founders don’t actually care about the nuances of a venture investor’s stage-specific strategy. They prioritize access to capital and support throughout their journey, naturally gravitating toward investors offering this bundled approach.
The $100B to $400B Private Market Compounders: The Mega Fund Justification
The mega fund strategy only truly works if we see more companies like SpaceX and OpenAI that can compound from $100 billion to $400 billion while still in the private markets. This creates an entirely new game with different economics than traditional venture.
The cost of capital for mega funds is remarkably low, enabling them to make investments at valuations that would be prohibitive for smaller players. Most sovereign wealth funds and mega players have already chosen their partners, leaving limited options for new entrants to this space.
Looking at the data: Benchmark achieved an impressive 10% hit rate on $5B+ companies between 2013-2018, while other investors averaged just 2%. The focus fund model performs better as a percentage, but delivers fewer absolute wins compared to the shotgun approach of mega funds.
AI’s True Impact: Customer Service ROI and Labor Force Disruption
The clearest ROI for AI implementation is emerging in customer service, where AI can now handle most calls without human intervention. This explains why Decagon recently raised at a staggering 100x ARR valuation (15M ARR at $1.5B), reminiscent of 2021-era multiples.
The labor implications are sobering: AI could potentially replace half the tech labor force, creating trillions in value for tech companies, though the exact magnitude remains uncertain. Many traditional roles – sales representatives, marketing managers, customer success positions – will become obsolete as AI adoption accelerates.
The impact on the workforce will be significant, with many jobs being automated, forcing people to either find new careers or rely on alternative forms of support. However, AI’s impact on overall GDP growth may be more gradual than revolutionary, despite its efficiency gains.
Why VCs Are “Upside Junkies” and AI is “Maiming” Growth Companies
Venture capitalists fundamentally prioritize option value over intrinsic value, constantly hunting for asymmetric upside potential. Intrinsic value, with its predictable growth and returns, is actually less desirable in the VC model.
This explains why growth companies like Census are being acquired for disappointing valuations – they’re being “maimed” rather than killed outright by AI disruption. This trend will likely continue, with many unicorns forced to merge or sell for valuations well below expectations.
New deals in high-growth sectors, particularly AI, present more attractive options for investment capital that might previously have supported existing portfolio companies. The defensibility of AI-powered enterprise software remains uncertain, though strong enterprise deployments can provide meaningful competitive advantages.
The Hard Math of Venture Returns: The “Arrogance School” Reality Check
Perhaps most sobering is what was termed the “venture arrogance school” reality: Firms must honestly assess whether there’s enough market share available to execute their business model successfully.
The analysis requires determining what percentage of total market value is needed to make the fund math work, and how many successful deals that requires. The uncomfortable conclusion? No firm has actually achieved the market share required to make their model work mathematically for venture investors – a truly sobering statistic.
This explains why so many VCs are desperately chasing the next OpenAI or SpaceX – these outliers represent the only path to delivering the returns their models promise.
10 Key Takeaways That Will Change How You Think About VC
- The VC world is bifurcating between mega funds with 2% hit rates and focus funds with 10% hit rates – but mega funds win on absolute deal numbers.
- The $3B Windsurf acquisition by OpenAI strengthens their position in one of AI’s largest use cases, creating ripple effects throughout the competitive landscape.
- “Letting winners run” remains a cornerstone strategy in venture capital – being overly risk-averse leads to missed opportunities for generational returns.
- Pre-seed investing has become a strategic necessity for funds wanting to win Series A and B deals, as relationships now trump stage specialization.
- The volume vs. focus debate continues: doing 20-30 deals annually creates a consistent flow of “positive news” that can mask underperformance elsewhere.
- AI is currently creating “massive unemployment” in tech specifically, not broadly across all sectors, with customer service showing the clearest ROI.
- Harvard potentially losing tax-exempt status could create downward pressure on endowments, making it harder for small, early-stage funds to raise capital.
- Venture capitalists are “upside junkies” structurally uninterested in stable, predictable returns – explaining why intrinsic value businesses struggle to raise.
- The “venture arrogance school” math reveals an uncomfortable truth: no VC firm has achieved the market share required to make their financial model work.
- AI is “maiming not killing” growth-stage companies, forcing disappointing exits and creating a bifurcated market of massive winners and struggling also-rans.
