Cracks in the Firmament
The other day we heard about someone raising a second round for a social media network where people could talk about crypto. This is a good example of how venture capital sometimes goes wrong, in that it confuses futurism with extrapolation, and gets caught up in the currents of the present. Because both crypto and social media have changed, perhaps unalterably, the former a week ago, and the latter, most resoundingly, this past week.
Why are we thinking about this? After all, we don't invest in social media, and are very careful around crypto and web3. We, however, think a lot about pacing and about the nature of venture markets. In particular, we are fans of the idea that venture does best when there is a platform upon which to innovate and invest, like the PC decades ago, the Internet in the 90s, cheap storage and bandwidth after that, then mobile, and then … social media and crypto/web3? These platforms have cracked—we think of it as cracks in the firmament—and many investors are caught by surprise, and they shouldn’t be.
We have the luxury of thinking in this way, because our pacing gives us the space to be more thoughtful. When we started our first fund, we decided to do one capital call per year. The one capital call structure caused us to stumble into pacing; the idea that we only had 4-7 investments per year. As it turned out, that was a good idea: it forced us to chase less and think more.
The current crack is yawning across social media: not just Elon Musk’s purchase of Twitter, but also Meta’s immolation of hundreds of billions of dollars in market capitalization, and subsequent large-scale layoffs, as it pivots violently and expensively away from what it once did—and toward something that, so far, is expensively not paying off. Other social media networks are having their own, no less substantial, problems.
Something larger is happening, even if it is only being felt and not fully seen. Monolithic services have saturated their markets and become big-footed giants, clumsily stomping from one problem to the next, creating new problems as they do so, unable to get out of their own way. At the same time, they have lost any sense of the intimacy they once had, and are just streaming inflammation. To make things worse, while this has had consequences for growth, they are now also on the wrong side of changes in the advertising market, where marketers are pulling back spending in the face of a weakening economy. Granted, the latter is more cyclical than secular, but the entire morass has helped expose the rocks upon which the sector is foundering.
Because, make no mistake, the era of giant social media networks is over. When you see a company pivot expensively away from their core market, and yet another be acquired in a leveraged buyout that was once reserved for mattress or packaged goods companies, you have left the realm of growth technology. You have entered the world of financial engineering, even if most investors have been slow to notice. This point cannot be stated strongly enough: huge swaths of late stage growth tech no longer exhibit the characteristics that made them growth tech.
At the same time, crypto/web3 represented a new kind of questing for the next platform. And while it may be that in some form, it unleashed a wave of speciation that, given its proximity to financial markets, attracted ridiculous amounts of speculation. It short-circuited the usual path from entrepreneurship to wealth, letting people sidle right up to stacks of money, and get a piece for themselves. This is dangerous in early-stage investing, where failures are legion, and successes are usually hard won. Reversing that created a toxic ecology in large sections of the crypto/web3 firmament, and that is now unwinding messily.
There will be immense speciation now, as people try to articulate what they want, and entrepreneurs try to offer services to them. In social media, these will be smaller, more compartmentalized, segmented, and less monolithic than the services of the past. In the same way that the body politic has become structurally divided, the online world will as well. In crypto/web3, this will bring a wave of regulation, with all that that entails. It’s overdue, however, and largely welcome.
This is normally the point at which we would somberly explain that everything is going, you know, to shit. But, at the risk of sounding faintly optimistic, this is a welcome change. Many current tech platforms are at the point of exhaustion, having strip-mined themes to oblivion, and, in casting about for what’s next, have discovered there isn’t a next, or the externalities of what they are doing at scale are immense.
This has led some to invest in non-venture markets, hoping to apply the venture model and get venture returns—and this may work. Our view is that this collapse and re-speciation will create its own opportunities across the old landscape. Because everything remains too hard. For all our talk of no-code, containerized, cloud-based, blah blah blah, precious little can still be done by the average person. The next revolution will take everything out of the hands of the expensive software priesthood and hand it all to individuals. The barbarians are at the gates, and nothing will be the same—and with careful pacing and minimal glances to the past, investors can participate.
This is why we like the pace at which we invest. Rather than getting sucked up in the noise of what’s going on day to day, we can stand back and say, “What does this mean?” What does this really mean? And not just in a horse-racing sense—who wins, who loses—but in the sense of what forces are losing potency, and what new forces are rising. Pacing forces you to slow down in a bull market and to stay consistent in a bear market. Pacing is an investing differentiator – especially at the seed stage. It really is all about the pacing.