Venture Capital Enters Its Third Act

May 2025 

The Age of Intelligence

Every technological era has its metaphor. The mainframe defined one age, the personal computer another, and the cloud yet another. Today, it is the language model that symbolises our time. Artificial intelligence has broken out of the lab and the realm of science fiction. Like the web in the 1990s and mobile in the 2000s, AI has opened a new cycle, and venture capital is remaking itself to fit.

This is no longer about sprinkling “AI-powered” into pitch decks. Startups now build with AI at the core. Harvey is reshaping legal services, OpenEvidence is rewriting medical research, Day.ai is reinventing customer relations. Even incumbents, Notion, Attentive, and others, are layering generative tools onto legacy platforms. The distinction between AI-native and AI-enhanced is collapsing.

For founders, AI drops the marginal cost of experimentation. For investors, it accelerates returns. Across engineering, customer support, and operations, the processes of company-building are lighter, faster, and more formidable than ever.

The Three Epochs of Venture Capital

Venture capital, like the technology it fuels, reinvents itself in generational cycles. AI marks the dawn of what we might call VC 3.0.

VC 1.0: Silicon Dreams (1948–1994). The industry began as an intimate cottage trade. A few hundred partners on Sand Hill Road wrote modest cheques for massive stakes. Don Valentine and Arthur Rock made bets with the discretion of private bankers and the instincts of gamblers. Publicity was scarce; capital scarcer still.

VC 2.0: The Age of Software and Spectacle (1994–2023). The internet broke the doors open. Browsers begot broadband, and broadband begot billions. Software’s seductive economics, low fixed costs, infinite scalability, global reach, rewired venture itself. Accelerators emerged, founders were profiled before they had profits, and the number of active funds exploded. Sequoia, Benchmark, Andreessen Horowitz became global brands. A startup industrial complex was born.

VC 3.0: Capital Meets Cognition (2023– ). Now comes the pivot. Generative AI is not just the object of investment; it is changing how venture works. Deal sourcing, diligence, portfolio support, once reliant on intuition and networks, are being augmented, even automated, by probabilistic scoring and large language models.

And the canvas is expanding. AI is carrying venture beyond software and mobile apps into defence, climate, synthetic biology, and space, domains once reserved for state funding or corporate labs. Software ate the world. AI is chewing through its hardest problems.

Venture Capital’s Growing Pains

In 1990, venture capital was a quirky corner of finance. A handful of firms on Sand Hill Road in Silicon Valley dispensed money and mentorship to unproven founders with improbable ideas. Today, venture capital is a $200 billion-a-year business with more than 32,000 professionals scattered across São Paulo, Bangalore, Berlin, and beyond. And yet, for all its growth, it remains small, less than 1% of global investable assets. That, too, looks set to change.

The ingredients are in place. In a world hungry for returns, venture capital continues to deliver, though unevenly. The market remains inefficient, driven as much by judgment and access as by scale. Institutional investors with long horizons see in it what few other asset classes can offer: a rare blend of outperformance, narrative, and optionality.

More importantly, the market itself is widening. Once synonymous with software, venture capital now sprawls into deep tech, defence, climate, and biosciences. Governments, especially in emerging economies, have discovered that it is not merely a source of growth but a tool of policy. From Riyadh to Jakarta, venture capital is being harnessed as a lever of economic diversification, job creation, and even soft power.

A Shift in Character

This expansion is reshaping the industry. Limited partners (LPs) are fragmenting into specialist niches, climate, AI, healthcare, while the LP base itself is diversifying. Sovereign funds, family offices, and corporate arms are flooding in. Meanwhile, technology has lowered the barriers to entry: angel syndicates, rolling funds, and operator-led vehicles have drawn in thousands of part-time allocators, blurring the line between professional and amateur investor.

But as the industry scales, its culture is shifting. Venture capital was once proud of its eccentric streak, its reverence for founders, its appetite for risk, its willingness to back the improbable. Today, the gravitational pull of large deals has pushed much of the business into later-stage territory, where returns are steadier, due diligence tougher, and terms more aggressive. In this zone, venture capital begins to look and sound like private equity.

That shift is not without merit. Discipline has its place, and sharper governance can help founders. But the consequences are cultural. Where the industry once thrilled at garage startups and moonshot visions, it now courts metrics, margins, and mezzanine debt. The danger is not excess, but drift. Venture risks becoming just another flavour of finance: professionalised, institutionalised, and risk-averse. That would be a loss, not just for founders, but for economies that depend on genuine innovation.

The Convexity Game

Venture capital has always thrived on asymmetry. A typical fund might back 20 companies knowing most will fail, some will muddle along, and one might return the entire fund. It is not a model of balance but of convexity, high risk, rare rewards, fortunes made on outliers.

This structure is what makes venture so alluring, and so exclusionary. Retail investors cannot replicate it. Without capital, deal access, or rights to follow-on rounds (where most of the value is captured), they remain locked out. Even early exposure offers little reward if subsequent rounds are closed. The gates to venture remain firmly guarded.

And yet, the model is not broken. If anything, its inefficiencies, opaque pricing, fragmented access, inconsistent standards, are what keep it fertile. For those with conviction, the rewards remain outsized.

Lessons From the Frenzy

The boom years of 2020 and 2021 now look less like a golden age and more like a distortion. Capital was abundant, diligence cursory, valuations euphoric. Mega-funds like SoftBank and Tiger Global sprayed money with abandon, creating an illusion of perpetual growth. Rising rates have since brought sobriety. Liquidity has tightened, follow-on financing has dried up, and the herd is being thinned.

Those who scaled recklessly are retreating. Smaller teams with sharper theses are rediscovering an old truth: in a business built on the improbable, discipline is not optional, it is survival. Constraint, once seen as a handicap, is emerging as a competitive edge.

Rebuilding the Machine

Venture capital is being reinvented, again. Each cycle brings new tools, new players, and new rules, but one truth holds steady: everything still begins with the founder. Around that constant, however, almost everything else is shifting. Artificial intelligence, new funding models, emerging regional hubs, and evolving cultural norms are rewriting what it means to be a venture capitalist in the 2020s.

In an age overflowing with capital and ideas, the real scarcity lies elsewhere: in people. Pitch decks may overflow with talk of network effects and AI moats, but seasoned investors know better. Inspiration fades. Execution endures. As one veteran quipped, “Ideas are overrated. It’s the team that matters.”

This has turned venture capitalists into something more like talent scouts. What used to be “pattern recognition”, a polite way of saying bias, is being refined into a more disciplined search for rare qualities: resilience, obsession, the ability to thrive in ambiguity. Increasingly, funds are adopting “founder-forward” models, from income-sharing agreements to pooled equity vehicles, that treat entrepreneurs themselves as the core asset class. The logic is simple: the best founders are driven less by polished credentials than by a chip on their shoulder and something to prove.

Silicon Valley remains powerful, but it no longer monopolises innovation. The map of venture now stretches across Tel Aviv, London, Singapore, Nairobi, and Bangalore. Sovereign funds, local family offices, and regional LPs are pouring money into their own ecosystems. Governments, eager for jobs and prestige, are weaving venture capital into their national strategies.

Yet globalisation cuts both ways. Rising geopolitical risks, from U.S.-China decoupling to the splintering of the internet, are making cross-border deals harder to stitch together. Some warn of a new “re-balkanisation” of venture, with investors retreating behind regulatory barriers and syndicates splintering under political pressure. The irony is striking: just as capital becomes more global, trust is becoming more local.

Financial innovation is also reshaping the industry. “Venture staking,” for example, gives ordinary investors the right to buy into future funding rounds, potentially unlocking billions in sidelined capital. Founder guilds, pools of capital that back entrepreneurs across multiple ventures, are spreading too, cushioning the all-or-nothing nature of startup life.

On the supply side, general partners are experimenting with their own structures. Some firms now assign a “devil’s advocate” to stress-test every deal. Others keep track of their “anti-portfolio”, the companies they rejected that went on to thrive, as an exercise in humility. A few even allow lone dissenters to override consensus, reviving the essence of venture capital: conviction over conformity.

The boom years of 2020–21, when mega-funds raised billions on little more than vibes and velocity, are fading fast. Many of those large platforms, bloated by staff and distracted by scale, now struggle to keep meaningful relationships with founders. By contrast, smaller, thesis-driven partnerships, leaner in headcount but sharper in judgment, are outperforming. Constraint, once seen as a weakness, has become a competitive edge.

But the pressures are not only structural, they are personal. Many investors face what one GP calls “the money trap”: the drift toward asset gathering at the expense of focus. Curiosity, the lifeblood of venture, can also prove dangerous; a wide array of interests may spark imagination, but it can just as easily scatter attention. In a craft that rewards obsession, dilution of focus is a liability.

At its core, venture capital remains a business of radical uncertainty. That is both its burden and its edge. The best investors thrive not by eliminating the unknown, but by leaning into it. Yet the challenges are mounting. Legal frameworks for new models like staking and income-sharing remain untested. Regulators are circling. Limited partners, chastened by recent corrections, are less forgiving and more demanding.

The next chapter will not be written by the largest platforms or the deepest pockets. It will be shaped by those who keep their craft small, disciplined, and global. The best firms will recognise that their raw material is not spreadsheets, sectors, or slogans, but people: character, context, and conviction. In the end, the machine is being rebuilt, but the spark that powers it remains the same.

The Road Ahead

The future of venture will be larger, more global, and more diverse. Sovereign funds in the Gulf, family offices in Asia, and solo capitalists armed with syndicates and AI-driven tools are reshaping who gets to invest. Governments in Africa, Latin America, and Southeast Asia are using venture as industrial policy. The geography of innovation is shifting.

But expansion comes with risk. As venture drifts closer to private equity, its ethos is at stake. It must resist the temptation to professionalise into blandness. The magic of venture lies not in scale or process, but in judgment, the willingness to see possibility where others see absurdity.

The firms that thrive in the coming decade will not be the largest, the loudest, or the most diversified. They will be the clearest in purpose and the sharpest in conviction. In a noisy, crowded market, the rarest asset may once again be the courage to believe early and risk boldly.