There was a really interesting discussion on the “state of venture capital” on the BG2 podcast this week. It's definitely worth listening to the entire episode, but here are three key insights for founders that I thought were worth highlighting, along with some brief commentary:

1/ $100M+ exits are incredibly rare but can be life-changing for founders. Taking 15% of a $100M exit is $15M—not bad at all. But if you've raised $100M in venture capital, a $100M exit is off the table due to the preference stack where VCs get paid first. If you've raised $500M, a $500M exit is off the table. $1bn, etc. Raising more money than you need makes great exits harder and harder to achieve. This is also true of valuations: a high valuation sets a new benchmark for success. There's an important trade-off between driving up valuation (so investors take a smaller portion of your company per dollar invested) and setting expectations so high that even a strong exit may not satisfy investors. I wrote a post a while back about how employees should think about this topic when joining a startup.

2/ Raising too much can lead to a loss of focus, spreading talent too thinly across initiatives. Companies often say they won’t use all the capital they raise, but that’s tough to avoid in practice. If you’re an entrepreneur with a bank full of funds and a head full of ideas, you’re likely going to pursue those ideas. The discipline to keep the money in the bank is inconsistent with the mindset of a creative, ambitious, high-growth leader. And early on, focus is everything, and it’s one of the major advantages a startup has. You only have a small team of top performers that can create outsized value, so spreading them too thin can significantly reduce their impact.

3/ The incentive structure in venture capital has shifted a bit, impacting the alignment between VCs and founders. The venture model, traditionally known as "2 and 20," means firms typically charge a 2% management fee and take a 20% carry (their share of profits when a portfolio company exits). In the past, venture capital was sort of a boutique asset class, with a few players managing smaller funds and relying heavily on that 20% carry to make a profit. Today, due to companies going public later and seeing more value creation in the private markets and the fact that starting a company has become much easier, venture capital has become a far larger asset class with more capital, more investments, and lower margins. As a result, that 2% management fee can become a substantial source of income — 2% of a $1 billion fund is $20 million per year. This structure incentivizes VCs to deploy capital more quickly as they don’t earn that management fee until the money is deployed. It's not a huge deal, but this can lead to some incentive misalignment between a VC and founder, so it’s worth being aware of.