Venture Capital’s Identity Crisis: Why More Money Doesn’t Mean Better Returns

According to TechCrunch, Sequoia managing partner Roelof Botha made a provocative statement at TechCrunch Disrupt 2025, arguing that venture capital isn’t actually an asset class and that “investing in venture is a return-free risk.” Botha revealed that the number of venture firms in the United States has tripled from 1,000 when he joined Sequoia in 2003 to 3,000 today, while noting that despite massive technological expansion from 300 million internet users to billions, the industry has produced roughly $380 billion+ in outcomes over the past 20 years. The veteran investor contended that throwing more money into Silicon Valley doesn’t yield more great companies but actually dilutes quality and makes it harder for exceptional startups to flourish. This fundamental challenge to conventional portfolio theory deserves deeper examination.

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The Asset Class Illusion

Botha’s statement strikes at the heart of modern portfolio theory, which treats venture capital as a distinct asset class deserving allocation. The reality is more nuanced. Venture capital returns follow a power law distribution where a tiny fraction of investments generate nearly all returns, while the majority either fail or deliver mediocre results. This isn’t like traditional asset classes where diversification reliably reduces risk. In venture, you can’t diversify your way to consistent returns – you either pick the rare winners or you lose. The industry’s historical returns have been heavily skewed by a handful of firms like Sequoia Capital itself, creating a misleading average that doesn’t reflect most participants’ experience.

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The Capital Glut Problem

Botha’s observation about 3,000 venture firms competing for deals reveals a structural problem that’s been building for years. The massive influx of capital has created several perverse incentives. Startups can now raise enormous rounds without proving product-market fit, delaying the discipline that comes from having to generate revenue. This leads to bloated valuations disconnected from fundamentals and creates a “tourist” problem where inexperienced investors chase hype rather than substance. The competition for deals has also compressed due diligence timelines, potentially missing critical red flags that would have been caught in a more measured investment environment.

The Founder Dynamics Shift

When capital becomes abundant, the power dynamic between investors and founders shifts dramatically. Founders can shop term sheets and optimize for valuation rather than partner quality, potentially aligning themselves with investors who lack the operational experience to help during difficult periods. This creates a misalignment where the incentives for quick fundraising rounds outweigh the benefits of finding truly supportive long-term partners. The result is often suboptimal governance and decision-making that can compromise a company’s long-term potential.

The Specialization Imperative

The future of venture capital likely lies in extreme specialization rather than generalist approaches. As Botha hinted, the days of throwing money at “Silicon Valley” as a monolith are ending. Successful firms will need deep domain expertise in specific sectors like climate tech, biotechnology, or enterprise software. They’ll need to offer more than capital – providing genuine operational support, technical expertise, and industry connections that generalist firms cannot match. This specialization creates natural barriers to entry that protect returns from the capital influx affecting the broader market.

The Emerging Markets Opportunity

While Botha focused on Silicon Valley, his comments have profound implications for global venture ecosystems. Emerging markets might actually benefit from this capital reallocation as investors seek opportunities beyond saturated Silicon Valley sectors. Regions with growing tech talent, favorable regulatory environments, and underserved markets could attract the “excess” capital that’s causing dilution in traditional hubs. However, these markets will need to develop their own specialized approaches rather than simply replicating the Silicon Valley model that Botha argues is broken.

The Institutional Reckoning

Botha’s comments should trigger serious reflection among institutional limited partners who’ve been allocating to venture as a standard portfolio component. Many pension funds and endowments have been chasing historical returns that may not be repeatable in today’s crowded landscape. The smart money will likely concentrate in fewer, more specialized firms with proven track records and differentiated approaches, while generalist funds without clear competitive advantages may struggle to raise subsequent funds. This could lead to a much-needed industry consolidation that benefits both entrepreneurs and limited partners.