Building the future investment firm (part I)

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Good morning 👋

At Outlaw, we’re literally building our firm for the future. We invest in innovation, partner with high-slope (typically younger) founders, and plant seeds for a tree that will produce shade for the next several decades.

Over the past two weeks, I have written ~8k words on the blueprint for the firm that unpacks my thoughts on building an investment firm designed for the future.

It is a rolling collection of covers the history of venture, useful predictions on the future of the asset class, a study on firms that expanded AUM by expanding investment products, investment firm flywheels, the scalable investment team org chart, the firm compensation model, and building the CAA for investment talent.

I am a believer in future rhyming with the past, and I think that in order to understand where venture is heading, you first need to understand how we got here.

I owe Kyle Harrison (Contrary), Koko Xs (Nova), and a handful of other people for the help organizing thoughts. If you have any thoughts on anything laid out here, I would love to hear them.

Let’s get into it.

Institutionalization: 1975-2000

When the VC industry first got started it was 20 people, all connected to Arthur Rock, a lot of whom were related. The ‘70s are the start date for firms like Sequoia, Kleiner Perkins, and Bessemer (post-restructuring) along with its defining founders like Steve Jobs and Bill Gates.

Investors were gatekeepers, all were monolithic brands, and the power dynamic favored them. One of Sequoia’s principles for investment was, “If we can’t ride a bicycle to [the company], we won’t invest.”

This was a world where seed rounds typically dilute 50%, companies went public within five years of company formation, and founders were regularly fired or pushed out for “professional” CEOs.

Pension funds began to touch the asset class, and the ‘70s were the first decade in which venture capital raised more than $1 billion. David Swensen took over the Yale Endowment in 1985 and pioneered a new form of portfolio management which encouraged an emphasis on alternatives.

Reaganomics created a golden era for private equity. Firms began staffing up and expanding focus and geography. The cottage industry of venture was quickly disappearing and being replaced by something much larger and more complex.

This era was dominated by titans like John Doerr, Mike Moritz, Vinod Khosla, Jim Breyer, and Bruce Dunlevie and responsible for the birth of companies like Apple, Amazon, Microsoft, Google, Yahoo, and Nvidia.

Industrialization: 2000-2025

The dot-com bubble let the genie out of the bottle and created more good than bad for the industry. The gold rush of younger talent minted the next era of founders like Zuck, Elon, and TK.

Globalization swept the world and created an infinite stream governance-insensitive growth checks that delay the need for going public. The ‘99 repeal of Glass-Steagall eliminated the Four Horsemen investment banks which made it much harder for young companies to IPO.

Paul Graham and the YC mafia gives rise to our latest cast of emerging elite: the Collison brothers, Chesky, Sam Altman, and a roster of new Millennial founders.

Marc Benioff introduces the world to software-as-a-service, recurring revenue becomes the North star, and the factory model of venture capital solidifies. Cookie-cutter founders built cookie-cutter vertical SaaS companies with cookie-cutter playbooks as software ate the world.

The venture factory sprawled and specialized every which way: upstream to venture growth to growth equity to cross-over; downward from seed to preseed to accelerators to incubators to fellowships; horizontally across Europe, India, China, LatAm, and the rest of the world.

Capital abundance brings changes to power dynamics. Founders no longer come to you; you come to them.

The monolithic brands of the previous era begin to acknowledge their own inability to be everything so they start to appoint nodes. Neil Shen for Sequoia China. Chris Dixon for a16z Crypto. Dan Rose for Coatue Ventures. Some firms start to decentralize decision making to further acknowledge the importance of these nodes.

VC renegades emerged from different backgrounds, whether from traditional celebrity (Serena Williams, Ashton Kutcher), new media (Harry Stebbings, Packy McCormick, Mario Gabriele), operating roles (Elad Gil, Josh Buckley, Lachy Groom) or spin-offs from traditional funds (Lee Fixel, Katie Haun, Dave Yuan).

With capital abundance came governance leverage. Dual-class share structures gave in-demand founders absolute control, and even blue-chip investors like Bill Gurley had to retire in shame after a high-profile founder firing. This was the era of venture abundance as the industry matured into the engine of the innovation economy.

PE-fication: 2025-2050

Venture capital today is where private equity was twenty years ago: the industry has institutionalized and industrialized through a few cycles, a handful of market leaders are on the cusp of going public, and the asset class has entered the post-abundance regime.

So what happens from now?

The 2030s will be the first decade that sees the slowdown of the historic logarithmic growth in venture-backed outcomes.

While we’ll see hundred-billion IPOs become table stakes, it is highly unlikely we see a flock of $10t+ companies (1/3 size of US GDP) going public over the next decade. However, capital will continue to flood the venture asset class, underwriting baselines will grow to hundred-billion-dollar outcomes, and IRR compression will accelerate as inflowing capital outpaces exit scale growth. This will naturally incentivize venture franchises to seek new ways to deploy capital.

The industry structure will consolidate to a few incumbent institutions and a long tail of boutiques. The former will adopt a multi-asset model to escape the local return crunch. Surplus venture capital will flow into tangent asset classes that traditionally belonged to LBO, credit, or public equities specialists as large-cap venture firms seek to diversify their revenue base by launching venture-relevant financial products.

Financialization: 2050-2075

Over a long enough time horizon, all asset classes converge toward the same internal rate of return. When one corner of the capital markets consistently outperforms, capital rushes in, competition intensifies, and excess returns fall until the advantage disappears.

The boundaries between asset classes will deteriorate and become arbitrary to alternative asset managers. Venture capital's rise to mainstream will bring long-overdue innovations to the innovation economy itself.

As retail capital floods in, clever financial engineers will invent the startup derivative and originate the options market for venture-backed privates. Secondaries, continuation vehicles, and permanent capital structures will contribute to a more liquid private market where investors manage long/short positions daily. Venture index funds will provide low-fee beta exposure to small-to-midsized allocators and degenerate retail gamblers alike. Leverage will be introduced and popularized in every venture strategy. Legacy corporations will utilize custom venture indexes to hedge against disruption, while startups and venture firms use the same instruments to juice returns.

As the innovation economy swells to match or even surpass the real economy in size, the venture capital industry will become the financial superstore that sells capital to those building the future, while offering capital products to those looking to own exposure to that future.

Venture in 2075

Three hypotheses define what this era produces.

The venture capital industry's existential problem is that it keeps chasing the finite game of increasingly competitive equity financing at the expense of the grand opportunity in front of it: becoming the main provider of financial products in the innovation economy.

The industry in which we operate today is unrecognizable from where it was 50 years years ago. The industry will be predictably unrecognizable 50 years from today.

The dominant venture franchise of 2075 is a financial superstore - selling capital to those building the future, while offering capital products to everyone who wants exposure to that future. Asset class boundaries have dissolved. The most successful firms look like the best alternative asset managers of today: platforms that started in one product and methodically expanded into every adjacent financial need of their customer base.

The deepest competitive advantage in that future state is investor talent, and the single best indicator of where venture returns will concentrate in any given decade is where the top 1% of young principals and junior partners want to work.

The firm that attracts, develops, and retains the best investors at the earliest stage (not by paying them the most, but by giving them ownership, autonomy, and a platform to run their own book) compounds talent the way the best funds compound capital.

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