PS#101: An Opportunity in the “Great Unbundling”

In the last issue, I touched on the current state of the market (i.e., the amount of capital, flight to quality, the concept of Mega Funds, etc.). Despite the broader narrative (and trailing data), I think we are actually seeing a great opportunity emerge for aspiring investors.

We are simultaneously watching the rapid growth of Mega Funds and the rise of the individual investor, even within these major brands (or funds).

It’s a strange juxtaposition, but it actually makes sense.

These Mega Funds were able to deploy such large amounts of capital with the help of a new generation of investors. And now, this new generation is rising to power, spreading their wings, and setting out on their own.

Ultimately, I believe this “Great Unbundling” will lead to new opportunities for those looking to break into the industry. It’s early, but the next generation of investors are moving into positions of leadership, with new opportunities sure to follow.

Over the next few issues, I’m going to break down these current trends and provide some insights into how aspiring investors can capitalize.

Mega Funds, the new asset managers.

First, if you haven’t, I recommend reading Kyle Harrison’s article, ​Venture Capital Unbundled​. His article is the foundation for this concept. He does an excellent job of explaining what’s happening and why it’s happening (in detail).

For the sake of this article, I’ll give a quick recap and add in some of my perspective…

As Kyle puts it, Venture Capital is evolving to focus on “2% of the biggest number.”

In this case, the “2%” refers to management fees and the “biggest number” refers to bigger and bigger funds (i.e., Mega Funds). Previously, venture capital had been an industry predicated on taking great risks for great rewards. However, with this new mantra, it’s moving much more into the asset manager camp. The focus has shifted from taking these potential, generational risks to overwhelming the market with scale and size.

To put it bluntly, these Mega Funds are just playing a different game now. In 2024, Mega Funds absorbed 75% of the capital raised. Many of them are looking to expand their businesses to include broader investment strategies (i.e., early, growth, crypto, AI, etc.), new products (i.e., corporate venture capital, wealth management, etc.), or entirely new business structures (i.e., going public).

To be fair, the idea of expanding beyond their core product is not all that unique. We saw a similar phenomenon happen in the private equity industry with firms, such as Blackstone, Carlyle, KKR, etc.

It’s safe to say the Mega Funds and their multi-stage/multi-product strategies are here to stay. However, the rich getting richer (or the big getting bigger) isn’t the only result of this shifting landscape…

The “Great Unbundling” and the rise of individuals.

In the chaos of the pandemic, we generally saw an increased distrust with corporate brands, across industries. As a result, we also witnessed the rise of the individual.

Compared to a large, faceless corporate brand, individuals were easier to trust. They felt more genuine, more authentic.

Venture Capital was not immune to this trend.

In fact, we saw all sorts of solo and smaller funds launch during this time. Unfortunately, not all of them have continued on, but it did show that there was a demand for this brand of fund in the market. As stated, it was an unbundling of broader corporate brands to individual brands.

What’s funny is those Mega Funds mentioned earlier helped create this dynamic. They drove significant amounts of capital into the VC industry, created platforms for individual investors to establish their brands, and helped drive generational wealth to founders, who looked to investing as their next act.

All of this set the stage for a more individual-based version of venture capital...

If you look around, you’re seeing a lot of shifting in the individual investor landscape – investors are stepping back, starting their own funds, moving from one fund to another, etc.

In all the chaos, the power of the individual investor is rising and the capital is following.

In my view, there are a few reasons for this…

(1) Retirement

Older VCs are stepping down before jumping into another ~20 year cycle. Venture capital is a long game. It takes years of grinding it out with your portfolio to see the returns. Many investors have benefited greatly from the past 2+ decades and have decided it’s time for other pursuits. This is leaving an opening in the market for new leaders, the next generation, and a new way of doing things.

(2) Succession Planning

As I mentioned, with this retirement, funds are looking for their next generation of leaders. For some firms, those leaders are already in house. For others, they are looking outside the firm to find the next rising stars. Historically, making partner (even more so GP) was about grinding your way to the top of a firm, earning your way into the partnership over years. Now, we are seeing rising stars jump from one fund to another to secure these positions more quickly (akin to Big Law and law firm partners). Personally, I think the “build in public” mindset combined with a more institutionalized version of venture capital has made it much easier to judge the performance of investors and identify rising stars.

(3) New Funds

While some investors are switching seats, we also have investors launching new funds. These investors were able to establish themselves under another firm’s brand before going off on their own (exactly what I mentioned above). The current dynamics of the market have allowed these investors to more quickly establish their brand/reputation, prove out their track record, and build a host of LP relationships to raise funds for their new firm.

(4) Strategy Leaders

While not quite to the same level as launching their own fund, there are other investors who are looking for their next challenge, looking to take on a bigger role. We’re seeing this come in another form, namely running a larger fund’s specific vertical or investment strategy (i.e., Fintech, Healthcare, AI, etc.). It looks a lot like launching your own fund, just with the safety blanket of being a part of a larger platform. You’re building out a team, owning a pool of capital, establishing a deeper track record, etc.

What’s old is new (but more and faster).

As I mentioned, none of this is entirely new.

We’ve seen the idea of Mega Funds in private equity, expanding out until they became publicly traded entities with all sorts of financial products.

And, similarly, investors have been retiring, succession planning, switching firms, and launching new ones for a long time.

However, the amount of change and the speed at which its happening does appear to be setting the stage for a new era. Investors are able to build a reputation, establish a track record, and secure LP relationships more quickly than ever before, accelerating this pace of change.

And with this chaos, comes opportunity.

In my opinion, all this change creates a great opportunity for aspiring investors. The landscape is changing, new modes of thinking are emerging. More so than ever before, I think there is an opportunity to move away from the traditional norms and break into the venture industry.

In the next issue, I’m going to discuss some strategies to do so, as well as touch on some important lessons that I think could be helpful along the way.