In the world of finance and investment, certain terms become gospel. “Asset class” is one of them. We talk about stocks, bonds, real estate, and private equity as distinct asset classes, each with its own risk profile and return characteristics, forming the bedrock of diversified portfolios. For years, venture capital has confidently carved out its niche within this elite club, often seen as the high-octane, high-risk, high-reward alternative.
So, imagine the quiet ripple of surprise—perhaps even a jolt—when Roelof Botha, the managing partner of Sequoia, one of the most iconic and successful venture firms on the planet, declared, “Venture capital is not an asset class.” Coming from the very heart of the VC world, this isn’t just a contrarian view; it’s a profound re-evaluation of what venture capital truly is, and what it’s becoming.
Botha’s statement isn’t a dismissal of venture capital’s importance, but rather an incisive commentary on its evolution. It’s an observation that delves deep into the changing landscape of startup funding and the very nature of value creation in the tech ecosystem. So, if VC isn’t an asset class, what is it, and why does this distinction matter for founders, investors, and the future of innovation?
Beyond the Label: What Defines an Asset Class?
To understand Botha’s argument, we first need to quickly revisit what “asset class” implies. Typically, an asset class is a group of investments that exhibit similar characteristics and behave similarly in the marketplace. Think about how government bonds tend to move differently from growth stocks, for example. They offer distinct ways to diversify a portfolio, manage risk, and target specific returns.
Venture capital, on the surface, seemed to fit this mold. It provided exposure to early-stage, high-growth technology companies, offering the promise of exponential returns not found in traditional markets. Limited partners (LPs) — pension funds, endowments, family offices — began allocating a percentage of their portfolios to VC funds, treating it as a distinct bucket for diversification and alpha generation.
But Botha’s point suggests that this categorization might be overly simplistic, or perhaps, no longer accurate. He’s hinting that the underlying dynamics of venture investing have shifted so dramatically that its traditional “asset class” characteristics are eroding, making the label itself misleading.
The Crowded Field: From Scarcity to Saturation
One of the most compelling pieces of context for Botha’s statement lies in the sheer proliferation of venture firms. When he joined Sequoia two decades ago, there were roughly 1,000 venture firms in the United States. Today, that number has tripled to approximately 3,000. This isn’t just a minor increase; it’s an explosion of capital and competition.
Imagine a bustling marketplace where, overnight, the number of buyers triples, all chasing roughly the same number of premium goods. What happens? Prices go up, quality control can become strained, and the advantage of being a discerning buyer diminishes. This analogy rings true for venture capital.
The Challenge of Abundant Capital
The influx of new VC firms and the massive amounts of capital raised have fundamentally altered the landscape:
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Soaring Valuations: More capital chasing fewer truly exceptional deals inevitably leads to inflated valuations. Startups can command higher prices earlier, sometimes before they’ve achieved significant product-market fit or revenue milestones. This eats into potential returns for investors.
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Dilution of “Venture”: With so many firms, differentiation becomes harder. Some “venture” funds now resemble growth equity or even late-stage private equity, investing in more mature companies at lower risk-adjusted returns, blurring the lines of true early-stage venture building.
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Pressure on Returns: While headline-grabbing exits still occur, the median returns for venture capital as a whole have come under pressure. When capital becomes a commodity, the unique advantage of simply *having* capital diminishes. LPs might find that their “VC allocation” isn’t delivering the outlier alpha they once expected.
Botha’s observation isn’t just about market saturation; it’s about the implications of that saturation. If the unique risk-return profile that once defined venture capital is being eroded by competition and inflated valuations, then treating it as a distinct, predictable asset class becomes problematic. It suggests that merely allocating 5% to “VC” isn’t enough; the *quality* and *strategy* of that allocation matter more than ever.
What Venture Capital Truly Is (or Should Be)
If not an asset class, then what is venture capital? Botha’s statement implies a deeper truth: venture capital, at its core, is a *craft*, a *strategy*, and a *highly specialized service*. It’s not just about deploying capital; it’s about:
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Company Building: The best VCs aren’t just financiers; they’re partners in building. They offer strategic guidance, operational expertise, talent acquisition support, and access to networks that can accelerate a startup’s growth exponentially.
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Deep Domain Expertise: Identifying the next big thing requires profound understanding of technological shifts, market trends, and consumer behavior. This isn’t a passive investment; it’s an active hunt for paradigm-shifting innovation.
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Talent Identification: Picking the right founders and teams is arguably the most critical component of successful venture investing. It requires intuition, pattern recognition, and the ability to assess leadership potential under immense pressure.
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Long-Term Vision: True venture capital is patient capital, willing to wait many years for a breakthrough, navigating multiple market cycles and unforeseen challenges. It’s not about quick flips but about nurturing foundational companies.
In this context, venture capital isn’t a “set of assets” but a “set of skills applied to a specific market opportunity.” The returns aren’t guaranteed simply by being in the market; they are generated by superior execution, insight, and partnership.
The Implications for Founders and LPs
For founders, this insight is a powerful reminder: capital is no longer the sole differentiator. While necessary, it’s the *smart* capital, the truly value-add investors, who will make the biggest difference. Founders should scrutinize their potential partners not just for the check size, but for the depth of their expertise, their network, and their commitment to company building.
For LPs, Botha’s statement is a crucial call to action. It suggests that a passive allocation to “venture capital” as a broad asset class is increasingly insufficient. Success in this environment hinges on identifying the truly exceptional managers, those who possess the unique skills and strategies to navigate the crowded market, find the outliers, and drive outsized returns. It’s about manager selection and deep diligence, not just asset allocation.
The Future of Venture: A Return to Craft?
Roelof Botha’s perspective is a vital one for the venture ecosystem. It’s a wake-up call to move beyond labels and recognize the true nature of what makes venture capital exceptional. In a world awash with capital, the advantage will increasingly shift back to those who treat venture investing as a highly skilled craft – prioritizing deep partnership, strategic insight, and relentless company building over simply deploying funds.
Perhaps this re-evaluation will lead to a more discerning market, where both founders and LPs demand more than just capital. It might signify a return to the roots of venture, where the focus is less on the “asset class” bucket and more on the alchemy of turning bold ideas into world-changing companies. And that, ultimately, benefits everyone.
