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Around this time last year, I was getting ready to re-enter the Venture world after a few years away. With a rare month of downtime, I ended up going deep down the rabbit hole on some of the archives of the industry.

One of the things that stood out while going through venture history was just how similar many of the stories were across cycles – with many of the same dynamics, news stories, and patterns emerging decade after decade.

Although the venture industry hadn’t seen a downturn in a long time – it is very much in the midst of one following the post-pandemic boom. Firms are shutting down and restructuring, marquee names are returning capital, and the industry is seeing layoffs left, right, and center. Limited Partner (LP) commitments to venture have been down over 60% in 2023 and 2024 compared to the 2 years prior.

And sure enough, with this downturn, many of the news stories that we’ve seen over the past year have looked eerily similar to those of cycles past. Swap out the venture firm or company names and many of the headlines in the news today could have been copy-pasted from those 16 years ago in 2009, 24 years ago in 2001, 35 years ago in the early 1990s, and so on.

Given the numerous parallels, I thought it’d be worthwhile to pull out some of the recurring patterns from previous downturns to shine a light on what might be coming if the downturn continues.

This post feels a bit delayed to share given that we’re a couple of years into the downturn. However, the intention here is not to make bold predictions of what is to come, but rather just highlight some of the recurring patterns through history to keep an eye out for and to strategize and plan around. We’ve started to see early signs of several of these patterns emerge over the past 18 months and could see these accelerate or others re-emerge if the downturn continues.

Mapping the previous cycles

Before diving into the themes, it's worth a quick look at the previous cycles. The timeline below shows new dollar commitments from Limited Partners to VC firms since 1969¹. Although there are several ways to look at the health of the venture industry over time, this metric can serve as a good proxy for our purposes.

The image shows 5 major periods of decline over the past 55 years. Although each downturn has had its own unique elements, there are a surprising number of parallels related to the impact on firms, the strategic shift we see from VCs and LPs, and the impact on portfolio companies and the broader tech ecosystem. I’ve pulled some of the most notable ones below.

What we may see in the coming years

1. Firms shut down and capital consolidates

Every downturn sees a mass shuttering of VC firms across the industry².

Not surprisingly, many underperforming firms shut down as they struggle to raise new funds or their GPs find other opportunities to pursue. Certain groups, such as Emerging Managers and smaller generalist funds, tend to be particularly impacted as LPs prioritize firms with proven track records³. As the market contracts, much of the capital consolidates around a few firms, with larger established firms taking a disproportionate share of LP dollars.

Given the 10-year life cycles of traditional funds, the shutdown is slow and many ‘zombie’ firms remain around for many years – appearing to be alive when they do not have dry powder to invest in new companies⁴.

However, in addition to the underperforming firms, downturns also impact some of the very successful firms as partnerships dissolve and individual GPs decide to go their separate ways.

Those that perished or disbanded in previous downturns included many leading firms of their respective generations, including TVI (early backers of Sun, Microsoft, and Compaq), Sevin Rosen (Lotus and Compaq), Shaw Venture Partners (Costco), Merrill Pickard (ancestor to Benchmark), and Adler & Co (ancestor to Accel) amongst many others.

We’re seeing early signs of this as an initial wave of firms shut down in 2024. Several investors are now predicting the ‘Extinction of Venture Capital’ as we know it⁵. We’ve also started to see massive capital consolidation – with just 10 firms accounting for over 56% of LP capital raised in 2024.

2. The downsizing of funds & fees (‘Right-Sizing’)

Venture firms tend to balloon in size during the good times. Many raise larger and more frequent funds.

This comes crashing down as the tide goes out and LP appetite cools. When this happens, many firms choose (or are forced) to raise smaller funds deemed to be more reasonable to invest in just the highest quality opportunities⁶⁷. In parallel, many firms that have been able to get away with premium fees are forced to revert to industry standards if they haven’t demonstrated excess returns.

Firms also have sometimes chosen to return capital they have already raised to invest in fewer, higher-quality opportunities. After the .com bubble of the late ‘90s, many of the top venture capital firms decided to return uninvested capital to LPs including Accel, Kleiner Perkins, Austin Ventures, and others – with returned capital accounting for more capital than new capital raised in 2002⁸.

Although we haven’t seen much publicly reported recently on this, CRV recently announced they’ll be returning some of its uninvested capital. Coatue, Tiger, and Sequoia are just a few of the firms that have reportedly cut fees on certain recent funds. Several others have reported targeting smaller funds going forward. As many venture firms come to market in the coming year or two to raise after their 2021/22 vintages, we may see many more choose to ‘right-size’ their funds.

3. A generational transition happens – by choice or force

With every downturn, many firms see a changing of the guard. Senior leaders retire, not wanting to sign up for another 10+ year fund. At the same time, many firms decide to transition out Partners that were unable to navigate the previous cycle⁹.

Firms that adequately navigate this transition see new leaders emerge. Those that don’t promote up see many younger partners or principals depart to start their own firms to capture better economics in advance of the next cycle¹⁰.

The first few years of the downturn often see a larger number of firm transitions, and the early signs of an upswing are when many people leave to start their own firms as LP appetite increases. This generation gap creates a great opportunity for younger investors to emerge as industry leaders and make a name for themselves over the coming decade. This changing of senior leaders often results in a tougher time for the industry at large as LPs and founders have to navigate these changes.

In the past 2 years, we’ve already started to see early signs of this, as dozens of legendary investors take a step back at their firms. We’re also seeing early signs of established investors at larger firms leaving to start their own firms, with some choosing to do so solo.

4. Firms shift to other asset classes

As venture firms increase their Assets Under Management (AUM) in the boom times, firms recognize writing larger checks is an easier way to deploy capital and generate fees. As the tide goes out in the venture market, many in history have chosen to look at other asset classes to continue to raise larger funds.

In the ‘70s, venture firms started to invest in growth firms and the public markets. In the late ‘80s, many firms decided to go the route of buyouts, with some leading venture firms permanently shifting to P.E. like Warburg Pincus, J.H. Whitney, and Brentwood Associates¹¹. Many others made it a part of their strategy at the time, including the likes of Sequoia, Adler & Co*, and Merrill Pickard*. Leveraged Buyouts (LBOs) went from accounting for 0% of VC dollars in 1980 to 20% by 1988¹². In parallel the amount of capital going to seed & early-stage rounds went from 25% in 1980 to 12.5% in 1988¹³.

Over the past 15 years, we’ve seen many firms choose to raise ever larger funds and in parallel build out large platform teams of ex-operators to support portfolio companies. If the pattern continues, we may see many of these firms look to expand into other assets, bringing a new definition to crossover funds¹⁴.

We’ve already seen some signs of this activity, many through the lens of leveraging acquisitions to transform operations with technology. General Catalyst recently signed an agreement to acquire Summa Health, an Ohio-based hospital system. Lightspeed announced they’re building a new team to do PE-style transactions and take minority buy-out positions. And firms like Accel, Sequoia, Andreessen Horowitz, and Lightspeed have all dabbled with crossover approaches to purchase public shares in recent years.

* denotes firms that are no longer around or investing

5. The rise of funding non-technical businesses

VCs tend to be less risk-seeking when times are tough. However, not all types of risks are equally impacted as firms still need to invest. During these times, investors often choose to take fewer tech or new market risks and are more willing to take on risks where market demand is proven.

One of the ways this plays out is firms backing more mainstream businesses, historically including retailers, quick-service restaurants, franchises, service companies, and more¹⁵¹⁶. Often this is with the intention of leveraging tech or better business processes to compete in well-established markets with proven business models.

FedEx (New Court Ventures*), Jamba Juice (Benchmark, TVI* & Trinity Ventures), Staples (Bain Capital, Adler & Co*, & Bessemer), Starbucks (Trinity Ventures), and Home Depot (Invemed*), are just some of the many businesses that were backed by top VCs in a downturn. Although many examples have gone on to become large corporations, they often aren’t able to scale with the same speed as pure tech businesses – with much of their growth coming after the first 10 years where VCs are involved.

Backing non-technical businesses isn’t limited to just downturns – Costco (Shaw Venture Partners*) is a historic grand slam and many notable companies of the past decade (Blank Street, Philz, Compass, Flexport, Newfront, etc) have been tech-enabled versions of legacy businesses. However, these sorts of opportunities often rise in interest during downturns.

6. Foreign investors swoop in

One of the headlines that tends to emerge in downturns is the increasing interest from foreign investors and corporations to invest in U.S. tech. In the ‘70s it was British groups¹⁷. In the ‘80s it was Japanese, Koreans, Germans, and the British¹⁸. Following the financial crisis, several Russian firms increased their exposure in the US (with firms like DST becoming especially notable)¹⁹.

Despite increased news coverage regarding interest during downturns in previous cycles, the limited data sources that exist don’t seem to show a large meaningful increase – at least in foreign groups investing as LPs²⁰.

However, given the inroads that many sovereign funds – especially from the Middle East and Asia – have made in the U.S. over the past decade, we may see these investors double down further if it remains difficult for startups or venture firms to fundraise. A great example of this is the Saudi Sovereign Fund, PIF, which has been reported to be an LP in over 50 U.S. VC firms and many of the most notable private tech companies.

7. Finding opportunities in the ruins

Valuations often get out of hand as capital becomes abundant in the boom times. When the tide goes out, many of these companies find themselves with high burn rates and valuations they can’t grow into in the near term.

Although many go out of business, there are companies within this subset that have developed worthwhile tech or traction but where the valuations are just not justified. Investors – including from other asset classes – have swooped in throughout history to find great opportunities in this set of companies, recapitalizing those they deem worthy and often washing out previous investors.

There are many stories of this happening in the ‘70s and ‘80s as investors looked for lower-risk and well-priced investment opportunities in the downturn. However, this was particularly big in the early 2000s as many PE and Secondary firms swooped in to find diamonds among the many venture-backed companies²¹²².

We’ve seen this trend emerge in recent years as more firms have stepped up their secondary activity and many have raised dedicated funds²³. With a record number of Unicorns currently in the U.S., many of which raised during the 2021-22 boom, we’re likely to see a lot more of this activity in the coming years.

8. The elbows come out – worse terms and less patience with management

Whenever returns compress in venture, we see an increase in investors adding in more legal structure and hands-on management to attempt to drive better outcomes.

This often takes the form of an increase in terms that limit future dilution, those that guarantee investors a certain minimum return (through interest or a liquidation preference), or more control over replacing founders or management if they are not adequately executing²⁴. News coverage from each of these downturns highlights numerous examples of investors significantly ramping up this activity²⁵.

Although hard to track, anecdotally, it seems this activity has picked up slightly in recent years. However, this may be one of the patterns that doesn’t make a full appearance in this downturn, as reputation in the venture industry matters more than ever before. These can be damaged quickly if investors are perceived to not be founder-friendly.

9. Disproportionate impact on CVCs

Corporate Venture Capital Firms (CVCs) have historically been disproportionately impacted during downturns as their parent companies scrutinize whether to continue investing in startups over other priorities. During each of the previous downturns, many CVC programs were reduced or shut down as companies paused these activities.

CVCs made up <3% of capital deployed in 1980 but the tech boom of the early ‘80s saw it peak at close to ~10% of capital deployed in 1985²⁶. This was back down to <3% by the early ‘90s. CVC activity rose again through the ‘90s, peaking at 25% of capital deployed in 2000 before quickly jumping back to single digits in the years to come.

Interestingly, we haven’t seen CVC activity get disproportionately impacted in this downturn based on market data from SVB and Bain in 2024. CVCs have participated in a steady 27-31% of deals for much of the past decade. As cited in many reports, CVCs have been boosted recently as corporates look to invest in and track the rise of Generative AI companies and make sense of how to play this tech wave. As a result, they may be better poised to survive this downturn relative to others.

10. A potential for geographic re-shuffling – especially in Tier 2 & 3 markets

Venture history has countless stories of thriving ecosystems and firms in states like Pennsylvania, Connecticut, New Hampshire, Michigan, and others. Fast forward to today, however, and none of these states break into the top 10 states by Venture dollars invested²⁷.

In the early 1980s, the Northeast was king with over 50% of Venture dollars invested in companies²⁸. The West Coast played second fiddle at just 25%. There were more venture firms at the time in the North-East (primarily New York and Massachusetts) than in California²⁹.

During downturns, investors often prioritize companies in their core geographies. The top 3 states for Venture have changed order but have remained the same through much of venture history. However, the list below them on the top 10 list has changed frequently through cycles as downturns starve many that are then unable to bounce back in the new upswing.

Looking Ahead

There is only so much we can infer on what could come by looking at past downturns. The market today is different from previous cycles – with the tech industry more important across the global economy and the extremely high penetration of the internet, mobile, and the cloud.

One of the clearest differences that could impact how the next few years play out is the opportunity being created by the emerging AI wave. Most previous venture downturns coincided with the maturation of a tech wave and were followed by a many year gap before another shift catalyzed a new generation of businesses forward. However, early signs are indicating that we may be starting on another tech super-cycle.

Regardless of whether this happens, we’re likely to see many of these patterns re-emerge if the downturn continues. If AI does kick-start a new wave, these themes may become more prevalent amongst the segments of the market that are less impacted by the new advancements.

At least personally, the opportunity in venture feels more exciting for an up-and-coming investor than it has at any time since I first entered the industry nearly a decade ago. We’re in the early innings of a transformative new tech wave, with companies scaling at unprecedented speed, and the industry’s broader challenges are creating a unique opportunity for early-career investors to rise through the ranks.

A huge thank you to Sophia Dodd and Rick Zullo for feedback on iterations of this post.