Many people wonder why there is no innovation in the venture capital industry. When I hear this, I share a recurring theme I've noticed; if you’re networked/educated enough to be able to manage someone else’s capital, only then are you qualified to disrupt the industry. Yet if you take their money and start investing, you self-select out of being able to innovate in venture. I’ll explain.
In order to become a VC, it takes a lot of insider knowledge. First, you need to know the right markets, find the right founders in those markets, and convince them to give you an allocation for an angel/syndicate check (to build a track record). Then at some point, you need to convince dozens of rich people (LPs) that you can bring in deals consistently, and evaluate which ones are good. Once you do this, you can raise a fund and you’re now a VC.
It takes a long time, sometimes over a decade, to amass the knowledge and network needed to raise a fund. We can assume (without much confidence), that anyone who is a good VC knows how the system works more than most. In theory, VCs would be the perfect ones to try to fix the system, yet they can’t.
Why not? The moment that someone becomes a VC, they constrain themselves by ONLY being able to help a certain amount of founders. If they raise $5M, they invest it all until they have no more capital to deploy, and they can’t invest more UNTIL they start the arduous process of raising the next fund. Talk about the opposite of scalable.
Imagine if we told Uber that they could disrupt that Taxi industry, but can only operate 50 Ubers at a time. In short, it wouldn’t have worked. That is what it looks like to be a VC trying to disrupt the industry.
This, my friends, is why there is very little innovation in venture capital. Those who can raise the capital are the ones who are most qualified to change the system, but the capital itself constraints them. Those who can’t raise the capital are the least qualified to solve the problem, so their lack of knowledge/network constrains them. This is the capital paradox, and why one of my mottos is “No Capital No Constraints”.