The dominant incentive in institutional VC right now isn’t building durable companies. It’s generating markups fast enough to raise the next fund. That’s not a hot take. It’s a structural outcome.
In 2024, nine firms captured nearly half of all US venture capital raised. The top 30 captured 75%. LP capital: pension funds, sovereign wealth funds, and endowments has concentrated into platforms with the scale to absorb it. One LP described the reality plainly: some state pension systems have as much as $5B in net new capital to deploy each year. That gravity pulls capital toward mega-funds, which then inherit enormous deployment mandates.
Those mandates create the first distortion. Investors at some of these large platforms are benchmarked on pace of investing rather than outcomes. And when you’re deploying out of a multi-billion dollar fund, valuation sensitivity matters less. Power law math justifies it: if one investment returns the fund, the price paid on the others is noise. That logic isn’t wrong in isolation. But it creates a herd dynamic where winning the deal — not underwriting it — becomes the job. Conviction gets replaced by social proof. The question shifts from “is this a durable business?” to “will the right people co-sign this round?”
The second distortion compounds the first. Funds need markups to raise their next fund. Markups require portfolio companies to show blistering growth, because that’s what attracts the next institutional check. With the exit market largely closed and distributions depressed, TVPI (aka paper gains) becomes the primary story a GP can tell. The companies that get elevated inside portfolios are the ones generating the narrative, not necessarily the margin.
The cycle is self-reinforcing. Deployment pace produces price insensitivity. Price insensitivity demands growth stories to justify valuations. Growth pressure ripples into companies that abandon quality for velocity. Velocity generates markups. Markups support the next fundraise.
Somewhere in that loop, the original question — can this business survive a cycle? — stops getting asked.
Venture was always about backing high-growth companies. But growth used to be evaluated alongside revenue quality, capital efficiency, and the probability that the business would still be standing when we enter a softening business cycle. Capital is abundant. The understanding of what makes a business durable is not.