VCs are willing to "hold their nose" and pay extremely high multiples for one or two exceptional companies they feel are essential to win. However, unlike in 2021, they are not applying this undisciplined, high-valuation strategy to their entire portfolio, demonstrating a more disciplined approach to portfolio construction.
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The 'classic' VC model hunts for unproven talent in niche areas. The now-dominant 'super compounder' model argues the biggest market inefficiency is underestimating the best companies. This justifies investing in obvious winners at any price, believing that outlier returns will cover the high entry cost.
Successful concentration isn't just about doubling down on winners. It's equally about avoiding the dispersion of capital and attention. This means resisting the industry bias to automatically do a pro-rata investment in a company just because another VC offered a higher valuation.
Top growth investors deliberately allocate more of their diligence effort to understanding and underwriting massive upside scenarios (10x+ returns) rather than concentrating on mitigating potential downside. The power-law nature of venture returns makes this a rational focus for generating exceptional performance.
Despite seeing 100x revenue multiples reminiscent of 2021, VCs are not accelerating their fund deployment or rushing back to fundraise. This more measured pace indicates a potential lesson learned from the last bubble, where rapid deployment led to poor vintage performance and pressure from LPs.
'Gifted TVPI' comes from consensus deals with pedigreed founders who easily raise follow-on capital. 'Earned TVPI' comes from non-consensus founders whose strong metrics eventually prove out the investment. A healthy early-stage portfolio requires a deliberate balance of both.
The increased volatility and shorter defensibility windows in the AI era challenge traditional VC portfolio construction. The logical response to this heightened risk is greater diversification. This implies that early-stage funds may need to be larger to support more investments or write smaller checks into more companies.
This provides a simple but powerful framework for venture investing. For companies in markets with demonstrably huge TAMs (e.g., AI coding), valuation is secondary to backing the winner. For markets with a more uncertain or constrained TAM (e.g., vertical SaaS), traditional valuation discipline and entry price matter significantly.
In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.
AI startups' explosive growth ($1M to $100M ARR in 2 years) will make venture's power law even more extreme. LPs may need a new evaluation model, underwriting VCs across "bundles of three funds" where they expect two modest performers (e.g., 1.5x) and one massive outlier (10x) to drive overall returns.
Contrary to the common VC advice to "play the game on the field" during hot markets, Founder Collective reduces its check size for high-valuation deals. This strategy allows them to maintain exposure to promising companies while intentionally keeping the fund's overall weighted average cost basis low.