Venture capital is at a branching point. The industry is splitting between large, risk-managed funds and smaller, taste-driven "wildcatters" who hunt for unconventional opportunities.
A couple of days ago Charles Hudson asked the question, "What does it mean to be a venture capitalist today?" I found his post provocative:
Maybe it's just me, but it feels like our industry is trending in a direction where everything feels the same - firms feel the same, the founders we back feel the same, and certain parts of the business feel like they've devolved into a cookie-cutter approach to finding and funding businesses. This is not a good direction for an industry focused on finding and backing outlier businesses.
Charles uses a wonderful word to talk about the art and skill of classic venture capital. He uses the word taste — and he worries aloud that we're losing taste as an industry.
The term "wildcatting" comes from oil exploration, where independent operators drill in unproven territories based on intuition, geological know-how, and a healthy appetite for risk. Similarly, early venture capitalists backed unusual founders with unconventional ideas, relying on their taste and insight rather than established patterns.
As industries mature, the focus tends to shift from risk-taking to risk management. This isn't unique to venture capital. You see it in film, where there's a clear trend toward relying on pre-existing intellectual property instead of creating entirely new stories. (It's a better deal to invest in a Star Wars sequel than to try to create the next original Star Wars). You see it in music, now driven by predictable algorithms and set expectations. Even in oil exploration, which used to be all about bold, risk-forward wildcatters in places like West Texas, the approach has become much more cautious and managed.
Of course, this evolution makes sense. When people realize that something like venture capital is a good way to get outsized returns, it becomes more popular. As it becomes more competitive, because more people have become venture capitalists, the market gets more efficient. And as the market becomes more efficient, it becomes less risky, but also perhaps less interesting.
Oil exploration is an interesting parallel for me because I have some family history in it. My grandfather worked in oil exploration back in the '60s, spending his time hunting for promising spots by studying geological maps and trying to figure out where oil might be underground. He'd round up a group of investors, put in his own money, and they'd go drill—sometimes they'd strike oil, and sometimes they wouldn't.
But as the industry matured, more of that opportunity got consolidated by big companies like Exxon. Eventually, most of the good risks were tied up in leases held by the major players. At that point, you either had to be extremely risk tolerant or know something no one else did to make it work as a small operator. But people still do this today, and every now and then people still find absurdly large oil fields that way.
There are plenty of reasons to see the parallels here. Big VCs like Andreessen Horowitz, NEA, or Thrive have become centers of gravity, holding a sort of option on nearly all the major, interesting opportunities in VC. But there's still a lot of unconventional opportunity out there—-opportunities that might not seem big enough to matter for the largest funds. Keep in mind, if you're running a $20 billion fund and you land a $2 billion outcome, you've still got a long way to go. And this is the heart of it.
Altimiter's Jamin Ball pointed this out in October when he advised founders to ask if they're working with a 2% or a 20% venture firm. This distinction highlights the fundamental difference in approach between large funds (the 2% firms) who mint millionaires by having large amounts of assets under management (AUM), and smaller "wildcatters" (the 20% firms) who must find success alongside founders by participating in meaningful exits, because the fees alone won't make them wealthy.
The good news for people like Charles and me, who enjoy taste-driven venture capital, is that part of what made VC exciting in the first place was its ability to deliver better returns than other kinds of financial investments. There will always be some capital chasing those higher returns, even if it means taking on more risk. So as most of the VC industry matures and starts to resemble other parts of private equity, there will still be room around the edges for people looking for higher variance, and investors who are eager to find it.
There may also be something about the parallel public market that's being created for late-stage private markets that changes the opportunity for Wildcat VCs, but that's a thought for a different post.
Just like film has split into big studios and indie houses, and oil into major exploration companies and wildcatters, VC is hitting a branching point. Today's VCs will have to choose whether they want to be fund managers or wildcatters. Both paths have their place, but they require different skills, different appetites for risk, and ultimately, different kinds of taste.
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