a16z Partner's Self-Introduction: Boutique VC is Dead; Going Large-Scale is the Ultimate Goal for VC

a16z Partner Erik Torenberg presents a disruptive perspective: as software becomes the backbone of the U.S. economy and the AI era arrives, the venture capital industry is shifting from “judgment-driven” to “transaction-winning capability-driven,” where only scaled platforms can succeed in trillion-dollar-level battles. This article is based on a piece by Erik Torenberg, organized, translated, and written by Deep潮.

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(Additional background: What is a16z’s New Media? The ongoing power shift in new media)

Table of Contents

• Yes, venture capital firms are an asset class
• To win big, not to lose everything
• How can we help?
• Either grow big or refine

Deep潮 Editorial:

In the traditional narrative of venture capital (VC), the “boutique” model is often praised, with the belief that scaling would dilute the soul. However, Erik Torenberg of a16z offers a counterpoint: as software becomes the pillar of the U.S. economy and AI ushers in a new era, startups’ demands for capital and services have fundamentally changed.

He argues that the VC industry is transitioning from a “judgment-driven” paradigm to a “transaction-winning capability-driven” one. Only large-scale platforms—like a16z, capable of providing comprehensive support to founders—can win in trillion-dollar battles.

This is not just a mode evolution but a self-innovation of the VC industry amid the wave of “software devouring the world.”

Full text below:

In ancient Greek literature, there is a meta-narrative above all: respect for the divine and disrespect for the divine. Icarus was burned by the sun, not primarily because of his ambition, but because he disrespected the sacred order. A closer example is professional wrestling. Asking “Who respects wrestling, and who disrespects wrestling?” can distinguish the hero (Face) from the villain (Heel). All good stories take this or that form.

Venture capital (VC) also has its version of this story. It goes like this: “VC has always been, and still is, a boutique business. The large institutions have become too big, too ambitious. Their downfall is inevitable because their approach is essentially disrespectful to the game.”

I understand why people want this story to hold. But the reality is, the world has changed, and so has venture capital.

Today, there are more opportunities, more leverage, and more startups than before. The number of founders building larger companies has increased. Companies stay private longer than ever. And founders now demand more from VCs. Today’s top founders need partners who can truly roll up their sleeves and help them win, not just write checks and wait.

Therefore, the primary goal of modern VC firms is to create the best interfaces to help founders succeed. Everything else—how to staff, deploy capital, raise funds, close deals, and allocate power—is derived from this.

Mike Maples once said: “Your fund size is your strategy.” Equally true is that your fund size reflects your belief in the future. It’s a bet on the scale of startup output. Over the past decade, raising huge funds might have been seen as arrogance, but fundamentally, this belief is correct. So when top institutions continue raising massive amounts to deploy over the next decade, they are betting on the future and backing their commitments with real money. Scaled venture capital isn’t a corruption of the model; it’s the model maturing and adopting the characteristics of the companies it supports.

Yes, venture capital firms are an asset class

In a recent podcast, Sequoia’s legendary investor Roelof Botha offered three points. First, despite the growth in VC size, the number of “winners” each year remains fixed. Second, the scaling of the VC industry means too much capital chasing too few great companies—thus, VC cannot truly scale; it’s not an asset class. Third, the industry should shrink to match the actual number of winning companies.

Roelof is one of the greatest investors ever and a good person. But I disagree with him here. (Of course, it’s worth noting that Sequoia itself has scaled: it’s one of the largest VC firms globally.)

His first point—that the number of winners is fixed—is easily falsifiable. In the past, about 15 companies each year reached $100 million in revenue; now, it’s roughly 150. Not only are there more winners, but their scale is larger. Although entry prices are higher, the output is much greater. The growth ceiling for startups has risen from $1 billion to $10 billion, then to $100 billion, and now to a trillion dollars or more. In the 2000s and early 2010s, companies like YouTube and Instagram were considered billion-dollar acquisitions—valued at $1 billion or more, we called them “unicorns.” Today, we directly expect OpenAI and SpaceX to become trillion-dollar companies, with several more to follow.

Software is no longer a fringe sector of the U.S. economy composed of oddballs. Software now is the economy. Our biggest companies and national champions are no longer General Electric or ExxonMobil but Google, Amazon, and Nvidia. Private tech companies account for about 22% of the S&P 500. Software has not finished devouring the world—in fact, accelerated by AI, it’s just beginning—and it’s more important than 15, 10, or 5 years ago. Therefore, the scale of a successful software company can now be even larger.

The definition of “software company” has also changed. Capital expenditures have surged—large AI labs are becoming infrastructure companies, with their own data centers, power plants, and chip supply chains. Just as every company is becoming a software company, now every company is becoming an AI company—or perhaps an infrastructure company. More and more companies are entering the atomic age. Boundaries are blurring. Companies are aggressively verticalizing, and these vertically integrated tech giants have market potential far beyond that of any pure software firm.

This leads to why the second point—excess capital chasing too few companies—is wrong. Output is much larger than before, competition in the software world is fiercer, and companies go public much later. All these mean that great companies need to raise far more capital than before. The purpose of VC is to invest in new markets. Time and again, we learn that in the long run, the scale of new markets is always much larger than expected. The private markets are mature enough to support top companies reaching unprecedented scale—just look at the liquidity top private firms now enjoy—and both private and public investors now believe that VC output will be enormous. We’ve been misjudging how big VC as an asset class can and should be. VC is scaling to catch up with this reality and the opportunity set. The new world needs flying cars, global satellite grids, abundant energy, and cheap, immeasurable intelligence.

The reality is, many of today’s best companies are capital-intensive. OpenAI spends billions on GPUs—more than anyone imagined for computational infrastructure. Periodic Labs needs to build automated labs at unprecedented scale for scientific innovation. Anduril must build the future of defense. All these companies need to recruit and retain the world’s top talent in the most competitive labor markets in history. The new wave of big winners—OpenAI, Anthropic, xAI, Waymo, and others—are capital-intensive and have raised huge initial rounds at high valuations.

Modern tech companies often require hundreds of millions of dollars because building world-changing frontier tech is prohibitively expensive. During the dot-com bubble, a startup entered an empty field, imagining the needs of consumers still waiting for dial-up connections. Today, startups enter an economy shaped by three decades of tech giants. Supporting “Little Tech” means preparing to arm David against Goliath. In 2021, companies were overfunded, much of the capital flowing into sales and marketing to sell products that didn’t deliver tenfold returns. Today, capital flows into R&D or capital expenditures.

Thus, winners are now much larger and need to raise far more capital from the outset. Naturally, the VC industry must grow bigger to meet this demand. Given the scale of opportunities, this scaling makes sense. If VC size were too large for the opportunities, we’d see poor returns from the biggest institutions. But we don’t. In fact, top-tier VC firms repeatedly deliver high multiples—those who can access these firms do so too. A famous VC once said that a $1 billion fund can never achieve a 3x return because it’s too big. Since then, some funds over $1 billion have achieved over ten times returns. Some point to underperforming firms to criticize the asset class, but any industry governed by a power-law distribution will have huge winners and long-tail losers. The ability to win deals without relying solely on price is what allows these firms to sustain consistent returns. Unlike other asset classes, where products are sold to or borrowed from the highest bidder, VC is a unique asset class that competes on multiple dimensions beyond price. It’s the only asset class with significant sustained performance among the top 10% of firms.

The last point—that the VC industry should shrink—is also wrong. Or at least, it would be detrimental to the tech ecosystem, to creating more generational tech companies, and ultimately to the world. Some complain about the secondary effects of increased VC funding (and there are some!), but it has also led to a significant increase in startup valuations. Advocating for a smaller VC ecosystem likely means advocating for smaller startup valuations, which could slow economic growth. That may explain why Garry Tan recently said in a podcast: “Venture capital can and should be ten times bigger than it is now.” Certainly, if there were no more competition and a single LP or GP was the “only player,” that might benefit them. But more VC investment overall would clearly be better for founders and the world.

To illustrate further, consider a thought experiment. First, do you think there should be many more founders in the world than today?

Second, if we suddenly had many more founders, what kind of institutions would serve them best?

We won’t dwell on the first question—because if you’re reading this, you probably agree the answer is obviously yes. We don’t need to tell you why founders are so talented and important. Great founders create great companies. Great companies produce innovative products that improve the world, organize our collective energy and risk appetite toward productive goals, and generate disproportionate enterprise value and interesting jobs. And we’ve certainly not reached a balance where every capable person has already founded a company. That’s why more VC helps unlock more growth in the startup ecosystem.

But the second question is more interesting. If tomorrow, the number of entrepreneurs is ten or a hundred times today (spoiler: this is happening), what should the startup ecosystem look like? How should VC evolve in a more competitive world?

To win big, not to lose everything

Marc Andreessen likes to tell a story about a famous VC who said the VC game is like a conveyor belt sushi restaurant: “A thousand startups come by, you meet with them. Occasionally, you reach out and pick one off the conveyor belt to invest.”

That’s how VC—especially in the past few decades—has often worked. In the 1990s and early 2000s, winning deals was almost trivial. For a great VC, the only real skill was judgment: distinguishing good companies from bad.

Many VC firms still operate this way—pretty much like VC in 1995. But the world has changed dramatically beneath their feet.

Winning deals used to be easy—like grabbing sushi off a conveyor belt. Now, it’s extremely hard. Some describe VC as poker: knowing when to pick a company, at what price, and so on. But that may obscure the full war you must wage to secure the best deals. Old-school VCs nostalgic for the days when they were “the only player” and could dictate terms to founders. But today, thousands of VC firms compete for the same deals, and founders are more accessible than ever with term sheets. As a result, the most competitive deals involve fierce bidding wars.

The paradigm shift is that the ability to win deals is becoming as important as selecting the right companies—perhaps even more so. If you can’t get in, what’s the point of choosing the right deal? Several factors drive this change. First, the explosion of VC firms means fierce competition to win deals. With more companies competing for talent, customers, and market share, founders need strong institutional partners to help them succeed. They need resource-rich, networked, infrastructure-backed firms to give their portfolio companies an edge.

Second, since companies stay private longer, investors can participate in later-stage rounds—when companies are more validated—leading to even fiercer deal competition, yet still delivering VC-style returns.

Third, and less obvious, is that deal selection has become somewhat easier. The VC market has become more efficient. On one hand, more serial entrepreneurs are creating iconic companies. If Elon Musk, Sam Altman, Palmer Luckey, or a talented repeat founder starts a company, VCs will quickly line up to invest. On the other hand, the speed at which companies reach massive scale has increased (due to longer private phases and larger upside), reducing the risk of product-market fit (PMF). Finally, with so many top-tier institutions, founders find it easier to connect with investors, making it harder for any one firm to be the sole pursuer. Deal selection remains core—choosing the right enduring companies at the right price—but it’s no longer the most critical factor.

Ben Horowitz hypothesizes that if you can repeatedly win, you automatically become a top firm: because if you can win, the best deals will come to you. Only when you can win any deal do you earn the right to choose. You might not always pick the perfect one, but at least you have the opportunity. If your firm can repeatedly win the best deals, you attract top pickers—those who want to get into the best companies (as Martin Casado told Matt Bornstein when recruiting him to a16z: “Come here to win deals, not lose deals”). So, the ability to win creates a virtuous cycle, enhancing your deal selection.

For these reasons, the rules of the game have changed. My partner David Haber describes the necessary shift in VC as “Firm > Fund.”

In my view, a fund has a single objective: “How can I generate the most carry with the fewest people and in the shortest time?” A firm, however, has two goals. One is to deliver outstanding returns; the other, equally important, is “How can I build a source of compound competitive advantage?”

The best firms will invest their management fees into strengthening their moat.

How can we help?

I entered venture capital ten years ago and quickly noticed that Y Combinator plays a different game. YC can secure favorable terms at scale and also seem to serve its startups at scale. Compared to YC, many other VCs play a commoditized game. I would attend Demo Day and think: I’m at a poker table, and YC is the casino owner. We’re both happy to be there, but YC is the happiest.

I soon realized YC has a moat. It has positive network effects. It has structural advantages. People once said VC firms can’t have moats or unfair advantages—after all, they’re just providing capital. But YC clearly does.

That’s why YC remains powerful even as it scales. Some critics dislike YC’s growth; they believe it will lose its soul. For over a decade, people have predicted YC’s demise. But it hasn’t happened. During that time, they replaced the entire partner team, and the firm still thrives. The moat is the moat. Like their portfolio companies, scaled VC firms’ moats are not just brand.

Then I realized I didn’t want to play the commoditized VC game, so I co-founded my own firm and other strategic assets. These assets are highly valuable and generate strong deal flow, giving me a taste of the differentiated game. Around the same time, I started observing another firm building its own moat: a16z. So, years later, when the opportunity to join a16z arose, I knew I had to seize it.

If you believe in venture capital as an industry, you—almost by definition—believe in a power-law distribution. But if you truly believe that the VC game is governed by a power law, then you should believe that venture capital itself will also follow a power law. The best founders will cluster around those institutions that most decisively help them win. The best returns will concentrate there. Capital will flow accordingly.

For founders trying to build the next iconic company, scaled VC offers an extremely attractive product. They provide expertise and comprehensive support for every aspect of rapid growth—recruiting, go-to-market strategies, legal, finance, PR, government relations. They provide enough capital to truly reach the destination, rather than forcing founders to penny-pinch and struggle against well-funded competitors. They offer enormous reach—access to every key person in business and government, introductions to every Fortune 500 CEO and world leader. They offer access to talent 100 times better, with a network of tens of thousands of top engineers, executives, and operators worldwide, ready to join when needed. And they are everywhere—for the most ambitious founders, that means anywhere.

At the same time, for LPs, scaled VC is an extremely attractive product on the simplest question: are the most valuable companies choosing them? The answer is straightforward—yes. All large firms partner with scaled platforms, often at the earliest stages. Scaled VC firms have more opportunities to seize key companies and more ammunition to persuade them to accept their investment. This is reflected in their returns.

Excerpt from Packy’s work: https://www.a16z.news/p/the-power-brokers

Consider where we are now. Eight of the top ten companies in the world are headquartered on the West Coast and backed by VC. Over the past few years, these companies have generated most of the new enterprise value globally. Meanwhile, the fastest-growing private companies are also mainly VC-backed firms based on the West Coast: those founded just a few years ago are rapidly approaching trillion-dollar valuations and historic IPOs. The best companies are winning more than ever, and they are supported by scaled institutions. Of course, not every scaled firm performs well—I can think of some epic collapses—but almost every great tech company has backing from scaled institutions.

Either grow big or refine

I don’t believe the future is just scaled VC firms. Like all areas touched by the internet, VC will become a “barbell”: one end with a few super-large players, and the other with many small, specialized firms operating in specific niches and networks, often collaborating with scaled firms.

What’s happening in VC is similar to what occurs when software devours the service industry. On one end are four or five large, vertically integrated service giants; on the other, highly differentiated small niche providers—built precisely because the industry is being “disrupted.” Both ends of the barbell will thrive: their strategies are complementary and mutually empowering. We also support hundreds of boutique fund managers outside of institutions and will continue to do so, working closely with them.

Both scaled and boutique firms will do well; the trouble lies in the middle—funds that are too big to afford missing out on huge winners but too small to compete with larger institutions offering better products to founders. a16z’s uniqueness lies in being at both ends of the barbell—it’s a specialized boutique firm and benefits from a scaled platform team.

The firms that best partner with founders will win. This might mean enormous reserve capital, unprecedented reach, or a vast complementary service platform. Or it could mean unmatched expertise, top-tier consulting, or simply incredible risk appetite.

There’s an old joke in VC: they think every product can be improved, every great technology can be scaled, every industry can be disrupted—except their own.

In fact, many VCs dislike scaled VC firms. They believe scaling sacrifices some of the soul. Some say Silicon Valley has become too commercialized, no longer a haven for misfits. (Anyone claiming there aren’t enough misfits in tech has never attended a San Francisco tech party or listened to MOTS podcasts.) Others appeal to a self-serving narrative—that change is “disrespectful to the game”—ignoring that the game has always served founders and always will. Of course, they never express similar concerns about the companies they back, which are built on achieving massive scale and transforming their industries.

Saying scaled VC isn’t “real venture” is like claiming NBA teams shooting more threes aren’t playing “real basketball.” Maybe you disagree, but the old rules no longer dominate. The world has changed, and a new model has emerged. Ironically, the way the rules are changing here mirrors how startups supported by VC change their industries. When technology disrupts an industry and new scaled players emerge, some things are lost—but many more are gained. VCs understand this trade-off firsthand—they’ve been backing it all along. The disruption they seek in startups applies equally to themselves. Software is devouring the world, and it’s certainly not stopping at VC.