In Silicon Valley, Venture Capital Meets a Generational Shift

Reid Hoffman, a founder of LinkedIn and a longtime venture capitalist, is no longer the public face of the venture firm Greylock. Michael Moritz, a force at Sequoia Capital for 38 years, officially separated from the investment firm last summer. And Jeff Jordan, a top investor at Andreessen Horowitz for 12 years, left in May.

They are among the most recognizable of a generation of Silicon Valley investors who are getting out of venture capital at the end of a lucrative 15-year upswing for the industry.

Many more are leaving. Investors at Tiger Global, Paradigm, Lightspeed Venture Partners, Emergence Capital and Spark Capital have all announced plans to step back. Foundry Group, a venture firm in Boulder, Colo., that has backed 200 companies since 2006, said in January that it would not raise another fund.

Taken together, the steady thrum of departures has created a sense that venture capital — a $1.1 trillion corner of finance that invests in young, private companies, sometimes spawning enterprises like Apple, Google and Amazon — is in a moment of transition.

“We’re at a tipping point,” said Alan Wink, a managing director of capital markets at EisnerAmper, which provides advisory services to venture capital firms. While there have been waves of retirements in the past, he said this one was more pronounced.

The turnover creates an opening for new investors to step up, potentially shifting who the power players are in Silicon Valley. That may also change the calculus for young companies as they decide which venture firms to seek money from.

Yet the latest generation of investors faces a start-up investment landscape that has become more challenging. Few venture capital funds are reaping the kinds of enormous windfalls — which come from start-ups going public or being bought — that can secure an investor’s reputation. That also makes it harder for venture firms to raise money, with fund-raising by the industry falling 61 percent last year and some large firms cutting their targets.

The last generation of investors, including Mr. Moritz, 69; Mr. Hoffman, 56; John Doerr of Kleiner Perkins, 72; Jim Breyer of Accel, 62; and Bill Gurley of Benchmark, 57, rose to prominence by making bets on consumer internet start-ups like Google, Facebook, Uber and Airbnb, which turned into behemoths.

Today’s up-and-coming venture capitalists are waiting for their version of those winners. Some of the most highly valued start-ups — such as OpenAI, the artificial intelligence company valued at $86 billion — are in no hurry to go public or sell. And the frenzy around generative A.I. could take years to translate into big wins.

“We’re in this period of reset, based on where the technology is and where it’s going,” said David York, an investor at Top Tier Capital, which invests in other venture capital firms. “These stars will emerge.”

Industry stalwarts like Vinod Khosla of Khosla Ventures, Marc Andreessen of Andreessen Horowitz and Peter Thiel of Founders Fund continue to write checks and wield influence. (All three firms have backed OpenAI.)

But many others are stepping down as a 15-year winning streak that reaped billions in profit for the industry has recently curdled into a downturn. Venture capital firms typically invest over 10-year fund cycles, and some aren’t eager to sign up for another decade.

“There’s a bull market element to it,” said Mike Volpi, 57, an investor at Index Ventures who recently said he would step down from the firm’s next fund. Mr. Volpi’s decision was earlier reported by the newsletter Newcomer.

Mr. Wink of EisnerAmper said that in some cases, the investors that back venture capital funds are eager for fresh blood. The message, he said: Get out at the top.

“Don’t be like a lot of professional athletes that sign that last contract and your performance on the field was nowhere near where it was in your glory days,” he added.

For years, venture capital could only grow, propelled by low interest rates that lured investors everywhere to take more risk. Cheap cash, as well as the proliferation of smartphones and plentiful cloud storage, allowed many tech start-ups to flourish, producing bumper returns for investors who bet on those companies over the last 15 years.

Investments in U.S. start-ups soared eightfold to $344 billion between 2012 and 2022, according to PitchBook, which tracks start-ups. Venture capital firms grew from tiny partnerships into enormous asset managers.

The largest venture firms, including Sequoia Capital and Andreessen Horowitz, now manage tens of billions of dollars of investments. They have expanded into more specialized funds focusing on assets like cryptocurrencies, opened offices in Europe and Asia and dabbled in new areas such as wealth management and public stocks.

Andreessen Horowitz, Sequoia Capital, Bessemer Venture Partners, General Catalyst and others also became registered investment advisers, which meant they could invest in more than just private companies. Venture capital was briefly the hot job for ambitious young people in finance.

The expansions have contributed to decisions by some investors to step back. Mr. Volpi, who joined Index Ventures in 2009 after 14 years at Cisco, said he got into venture capital for a change of pace from the corporate world. He backed start-ups including the work messaging company Slack and the A.I. start-up Cohere.

But over the years, Index — and the overall venture industry — became bigger and more professionalized.

“Maybe it’s for someone else to go fight that battle,” Mr. Volpi said.

Many venture funds have also grown so large that owning a stake in a “unicorn,” or a start-up valued at $1 billion or more, is no longer enough to reap the same profits as before.

“If you want to return three times your fund, then a unicorn isn’t sufficient,” said Renata Quintini, an investor at Renegade Partners, a venture capital firm. “You need a decacorn,” she added, referring to a start-up worth $10 billion or more.

The largest firms have migrated from providing their investors with profits from the traditional definition of venture capital — very young, high risk companies with potential for outsize growth — to a more general idea of “tech exposure,” Ms. Quintini said.

Manu Kumar, a founder of the venture firm K9 Ventures, has felt the shift. Since 2009, he has written checks of $500,000 or less to invest in very young companies. Some of those investments, including Lyft and Twilio, went public, while others sold to bigger tech companies like LinkedIn, Meta, Google and Twitter.

But starting last year, he said, the venture capital investors who would have provided the next round of funding to the start-ups he backed began demanding to see more progress before investing. (Start-ups typically raise a series of increasingly large financings until they go public or sell.) And potential buyers were laying off employees and cutting costs, not acquiring start-ups.

“Companies today only have one option,” Mr. Kumar said. “They have to build a real business.”

In October, Mr. Kumar told investors that the math on his investment strategy no longer worked and that he would not raise a new venture fund. He plans to watch the market and revisit the option in a year.

“I want to have conviction in what my strategy is going to be,” he said. “I don’t have that conviction at the moment.”