Epistula #11: Unpopular (and Unspoken) Truths
The creeping erosion of value creation in venture capital.
At Deciens, we’ve been tracking a growing danger: capital flow risk. It is a silent killer of startups that distorts behavior across the ecosystem. It's not a headline-grabbing catastrophe like a market crash. But it’s quieter and more insidious – capital that pours into start-ups too easily and then vanishes just as fast, leaving carnage in its wake.
And it’s getting worse. This is how we see it.
A Cycle of Cash & Chaos
Internally, we half-joke that a typical startup’s financing journey goes like this:
Sell equity in highly dilutive financings to raise cash.
Burn that cash over the next two to three years (often acting like drunken sailors in the process).
Hope and pray there’s enough “progress” to convince the next set of investors to keep the party going.
This stylized view is cynical, but it’s not far off from reality.
Financing Risk: Always Present, Often Ignored
As we wrote about in Beyond the Hamster Wheel, the internal logic and the incentive structures of venture-backed companies AND venture capital firms mutually reinforce this behavior – the relentless push to raise, burn, and raise again.
We believe these incentives create a set of norms generally at odds with building generational companies, producing substantive returns for limited partners, and creating real wealth for founders and employees. These norms encourage venture investors and founders to play a high-stakes game of chicken with their companies, with everyone else holding the bag. They also push VCs to behave more like short-term traders than long-term, buy-and-hold investors, which is what LPs (notionally) say they want.
Financing risk is a constant for companies that depend on capital markets to fund their operations. With their tradition of consuming cash to fund research, development, and growth, venture-backed companies epitomize financing risk. As long-term financiers and partners to early-stage companies, we strongly advocate for ruthlessly eliminating existential financing risk as early as possible in a company’s lifecycle. Doing so removes a major risk factor while simultaneously creating enterprise value in the form of optionality.
Understanding Capital Flow Risk
Founders of venture-backed companies face two distinct risks when they burn capital, beyond the obvious question of their companies’ performance.
Whether VCs will be attracted to the category founders are operating in at the time they are seeking to raise (i.e., is the category hot or not?).
Perhaps more implicitly, whether VCs will have capital to deploy at that time (i.e., is venture capital hot or not?).
These risks – what we call capital flow risk – weren’t a major concern during the era of easy money. But both are starting to make their presence known.
In a well-functioning venture market, capital flow risk should not be problematic. With a diverse set of LPs and venture investors looking to fund the future, founders and early investors have reasonably assumed that future capital partners will emerge for any given category. If we build it, we can finance it. And most – if not all – high-quality projects could get sufficiently funded.
The Rise of Herd Behavior in Venture
For most of my career, while FOMO was real, it wasn’t the overall driving factor in the marketplace. That was the case, as I recall, when I started working in and around venture-backed companies circa 2006, and it remained largely true for a decade. Then the market structure changed. The dominant behavior of most VCs evolved into pure herd dynamics.
Every year – and sometimes every quarter – a new hype cycle seems to dominate the narrative. Instead of exploring diverse and novel ideas, investors begin swarming the same fleeting themes. Recent examples include:
The Metaverse
ICOs
Creator tools
Blockchain
NFTs
LLMs
Audio social networks (e.g., Clubhouse)
Amazon aggregators (e.g., Thrasio)
SPACs
The list goes on. As we write this letter, the 2025 iteration seems to be humanoid robotics, defense tech, and AI, with everyone clamoring for a piece of OpenAI and Anduril, professing their ability to find the next SpaceX.
With even modest hindsight, a lot of these were obviously silly. But at the time, they attracted very real investors deploying very real dollars, at the expense of other categories.
The Gravity Well of Hype
The VC herd mentality is getting worse. Much worse. In Q1 2025, per PitchBook, 72% of all North American venture dollars went to one category – AI and machine learning. Anything else was fighting for table scraps. We would not be surprised to see the en vogue categories start to capture 80%+ of overall venture dollars in future quarters, a function of both fewer dollars being deployed in VC overall and the lion’s share going to very few companies – those anointed seemingly from on high, the ivory towers of Sand Hill Road.
The largest venture funds may be engineering this behavior to attract and justify larger and larger pools of LP capital. That would explain their obsession with becoming media personalities and, in many cases, owners of the means of message creation and distribution. They have psychological and business imperatives that require placing themselves, their institutions, their capital, and their portfolio companies at the center of the narrative. They want to increase the pace and magnitude of the hype, becoming both creators and chasers of “momentum,” real or imagined. And they come armed with war chests to perpetuate said momentum, all the while hoping to sell the “dream” to the next greater fool.
Survival of the Trendiest
For founders, the consequences are severe. In our experience, founders building in a cycle's favored category were flooded with term sheets. Those outside it, even if they were building the greatest business in the world, often faced a capital drought.
The most cynical founders find ways to constantly pivot to whatever is on trend, rather than engage in the hard work of building enduring businesses. They invert the usual order: building financing machines with businesses attached, rather than businesses that could be financed. This is the epitome of confusing the cart for the horse.
Unfortunately, in early 2025, cart-horse confusion seems to be the norm rather than the exception.
The Deeper Layer: LP Liquidity
There’s also an entire meta-layer of capital flow risk. Venture GPs raise funds in cycles, with typical funds having 3-5-year investment periods. As such, founders taking capital today aren’t just betting that future VCs will think their work is investable. They’re also betting that LPs will fund tomorrow’s VCs today (the capital founders need in 2-3 years depends on VC fundraising happening right now). LPs are not immune to the psychology underpinning herd behavior. If, as we are experiencing in markets outside of AI, enthusiasm for VC, growth equity, and innovation financing continues to decline, fewer dollars will flow into VC funds – and by simple math, fewer dollars will reach founders when they are ready for their next rounds.
To address this risk, founders need to raise more capital when they can, reduce capital consumption, and prepare for a potentially harsher capital environment in the future. Even though they’re not immune to today’s shifting investment allocations and the overall lack of LP liquidity, most VCs today are investing out of funds raised when LPs had loose purse strings. In 2-3 years, founders will be coming to market after many VCs could not raise new funds or had to settle for smaller funds than planned. Those founders who can’t or won’t adapt may not survive. Always remember – if someone else’s money is your lifeline, your future hinges on the strength of their business model. Make sure you fully understand it.
Two Strategies for Navigating Capital Flow Risk
If you think the current status quo is likely to persist for some time, then, as we see it, there are only two options.
The first is to pick venture firms and GPs who can anticipate what other VCs will want to fund on a rolling 2-3 year forward basis – and then have these investors invest in companies that will align with that future capital flow when they need to raise again. Some VCs seem certain they can pull off this kind of market timing, which we find extremely impressive because we definitely cannot.
Investors who position themselves in this way must possess the gift of true prophecy, the ability to bend the herd to their preferences, or the scale required to create their own gravitational pull, which draws the herd to them. Alas, we have none of these. Having the timing line up perfectly across multiple market cycles feels implausible if not downright impossible. And for those able to distort time and space with their own gravity well, the scale is simply so large as to require heroic assumptions to deliver venture-style outcomes. Either way, if this is how a GP chooses to position themselves, their firm, and their portfolio relative to current market dynamics – and that’s what LPs and founders are seeking – then, candidly, Deciens is not the right partner.
The second option, which we wholeheartedly embrace and which should come as no surprise to those who know us, is to opt out of this dynamic entirely.
Our Approach: The Goldilocks Zone
We look for businesses in the “Goldilocks Zone” – neither too cold (not growing fast enough to be interesting) nor too hot (growing so fast they consume substantive capital or introduce other existential risk into their business model). When we find “just right” companies, we work closely with their founders to help them stay in this temperate zone as long as possible. In doing so, we believe that these businesses have the greatest potential to create value for stakeholders – compounding for long periods without the risks associated with extreme growth or the dilution that comes from raising many rounds of equity capital.
If the herd suddenly becomes enamored with the category that one of our companies happens to be in, then we are well-positioned to accept capital at advantageous valuations and terms. But we do not need to do so and are just as happy – often happier – for the herd to be off chasing whatever it is chasing.
There are real downsides to our approach. Most obvious is that it does not easily comport with the model of validation that exists in venture-backed ecosystems, including with LPs and the organizations they work for. Having other investors invest in a fund’s companies at increasingly high prices connotes status. Companies can trade on that validation in numerous ways, including recruiting and retaining talent, and VC firms do trade on it to raise subsequent funds.
But our approach provides a more effective, risk-adjusted strategy for venture investing. A company and its backers must be prepared to operate without external validation for long periods – and maybe indefinitely. Many of the best companies (and financiers) can and do move in stealthy silence for years.
Staying the Course: Endurance Over Hype
As long as FOMO-driven investing and herding behavior remain the norm in traditional venture capital circles, we will continue to operate as outsiders. Why? Because, to borrow from Bill Gurley, the only way to be great at venture capital is to be non-consensus and correct. The herd, by definition, is the consensus. And their historical returns have been as expected: mediocre at best. We see no reason to believe that will change.
We are thrilled to be as far from the herd as possible – both literally and metaphorically. Whatever it is that they’re doing, it does not seem to be venture capital. At least as far as we understand it. But we wish them well in their endeavors, if only because their hype cycles poison the well, exhausting LPs, disenchanting founders and reinforcing the value of steady, principled strategies like ours.
So, we’ll keep doing what we’ve always done – being compounders rather than traders. We have worked tirelessly to raise the long-term capital that is now entrusted to us to grow for a decade or more. We don’t need to chase the ephemeral – it’s our privilege and responsibility to stay disciplined, taking the time to deeply understand the founders we choose to partner with and the markets they’re working to transform.
