The VC landscape has split into two extremes. A few elite firms and sovereign wealth funds are funding mega-rounds for about 20-30 top AI companies, while the broader ecosystem of seed funds, Series A specialists, and new managers is getting crushed by a lack of capital and liquidity.

Oren Zeev observes that it's much harder for funds to raise capital today. Not only is there less money flowing into venture, but a larger portion is going to established platform funds. He predicts that at least 50% of current VC funds will be unable to raise their next fund and will slowly die.

Many sub-$500M venture funds are over-invested and under-reserved. While venture capitalists like Josh Wolfe predict a 50% failure rate for these "minnows," the Limited Partners (LPs) who fund them are even more bearish, believing the involuntary extinction rate will be closer to 90%.

LPs are concentrating capital into a few trusted mega-firms, leading to oversubscribed rounds for top players. Simultaneously, a decline in deal formation and liquidity is causing a potential 30-50% "extinction rate" for smaller, emerging managers who are unable to raise subsequent funds.

The inability to return capital to LPs constrains new fundraising, creating an environment that cannot support the thousands of PE funds operating today. This will trigger a shakeout of weaker GPs, while the top 10 funds, already capturing 36% of capital, further consolidate their dominance.

The unprecedented 3-4 year drought in private equity liquidity has fundamentally broken traditional Limited Partner models. LPs, who historically planned on a 4-year cash flow cycle for receiving distributions, are now facing an 8-9 year cycle, creating immense pressure on their allocation and return models.

The difficult 2020-21 venture vintages are causing newer, less-committed LPs to exit the market. This shakeout is seen as a positive development by long-term investors, as it reduces market noise and undisciplined capital, which is healthy for the ecosystem.

Total private asset fundraising was flat, but this masks a crisis in buyouts, where fundraising fell 16%. The cause is an unprecedented four-year stretch of low distributions to LPs (below 15% of NAV), straining their ability to recommit capital and doubling capital recycling timelines from four to eight years.

The AI boom is masking a broader trend: venture fundraising is at its lowest in 10 years. The 2021-22 period created an unsustainable number of new, small funds. Now, both LPs and founders are favoring established, long-term firms, causing capital to re-concentrate and the total number of funds to shrink.