Under the wave of AI, Silicon Valley venture capital is undergoing a transformation. Top VCs have moved closer to PE, expanding their investment scope and deeply participating in corporate operations. For example, Lightspeed has obtained a RIA license, and General Catalyst has acquired physical enterprises and incubated AI startups. This transformation stems from the challenges of the traditional VC model and the demand for funds in the field of AI, making investment institutions more flexible and larger in capital pools, and intensifying industry differentiation.
Today, as AI reshapes the global industrial structure with unprecedented power, a profound identity shift is quietly unfolding in the overseas venture capital (VC) industry. To put it simply, VCs used to be more like “talent scouts”, discovering and investing in potential startups early, expecting them to exit through listing or mergers and acquisitions after their blockbuster. But now, some of the top VC giants don’t seem to be satisfied with that, and they are starting to move closer to the role of private equity (PE).
This means that they are no longer limited to early-stage minority investments, but seek a wider range of investments, more flexible capital operations, and may even personally participate in the in-depth operation and integration of enterprises, pursuing longer-term value and greater control.This is not only an adjustment of investment strategy, but also a rethinking of the entire industry ecology and future opportunities.
According to a recent report by Bloomberg, Lightspeed, an established VC giant with assets under management of up to $31 billion, is the latest member of this change. Recently, Lightspeed changed its regulatory status and officially expanded its investment scope, taking a solid step towards the PE giant model.
01 VC giants are no longer satisfied with “small and beautiful”
Lightspeed recently completed the process of becoming a Registered Investment Advisor (RIA) in accordance with SEC filings. This RIA license is not simple, it is jointly regulated by the SEC and the state Securities and Exchange Commission. In the United States, only institutions or individuals who have obtained this license are eligible to provide investors with investment advice on securities products, manage assets and charge management fees. The scope of this “securities investment advice” is very wide, covering almost the asset management and wealth management services of the entire securities market. To obtain a RIA license, institutions must pass the SEC’s strict qualification review, so it is rare to obtain this license, especially among investment institutions at home and abroad.
At present, most of the “big guys” holding RIA licenses are “big guys”, such as large multinational investment banks, multinational securities, futures, funds and foreign exchange trading institutions. With RIA qualifications, VC institutions are no longer constrained and can invest more funds in asset classes other than startup equity. You know, without this qualification, venture capital firms can only allocate up to 20% of their funds outside of the equity of traditional startups.
Lightspeed is one of the latest top venture capital firms to complete RIA registration. Before that, General Catalyst and more recently Thrive Capital have also entered the market. Earlier in 2019, Silicon Valley’s famous Andreessen Horowitz Fund (a16z) became the first batch of VCs to eat crabs. With the addition of Lightspeed, the top players in the U.S. VC industry, often referred to as the “Big Four VCs”, can be said to have all deviated from the traditional venture capital track and become the vanguard of this transformation, and began to align with top PE giants such as Blackstone and KKR in a more diversified and long-term market.
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General Catalyst, which has already obtained a RIA license, bluntly stated in a blog post: “The traditional VC model does not put entrepreneurs in the best position to change the industry. “The VC even acquired Summa Health, a non-profit medical system, last year to directly operate brick-and-mortar businesses (such as hospitals), which is undoubtedly a major breakthrough for Silicon Valley companies that are accustomed to asset-light models. Not only that, General Catalyst also learned from PE’s style of play, increasing its stake in startups, incubating AI-native startups internally, and recently even setting up a wealth management department.
Several others are not far behind. Since becoming a RIA in 2019, a16z has been engaged in wealth management on the one hand, and on the other hand, it has actively participated in the restructuring of established companies, and it has been frequently seen in Musk’s privatization of Twitter (now X).
Why do these VCs, who used to be labeled as “early investment, high risk, and high return”, choose to “evolve”?
First, the traditional VC model faces challenges. In recent years, the liquidity of the primary market in the United States has been insufficient, and the structural changes in the technology industry have made the Silicon Valley venture capital circle also feel the “midlife crisis”. Since 2022, the IPO market has cooled, and the median valuation of technology companies in the later stage has plunged sharply, resulting in an overall cooling of VC investment activity. Although 2024 has picked up, it is still at a historical low.
Secondly, and crucially, the popularity of AI has brought unprecedented opportunities and capital needs.
AI, especially generative AI, is seen as another huge technological wave after the mobile internet. However, unlike in the past, the competition in the AI field is extremely fierce, technology iterations are fast, and the demand for computing power, data and talent is extremely large, which means that AI startups often require huge and continuous capital investment. The scale and investment cycle of traditional VC funds may be difficult to meet the needs of these “gold-swallowing behemoths”. After the transformation, VCs have a larger capital pool and more flexible investment tools, and can participate more deeply in the feast of AI, not only in the early stage, but also in the later stage, and even lead the integration of mergers and acquisitions, in order to obtain greater returns and industry influence.
Compared with traditional VC architectures, transformed VCs have greater freedom in operation. They can invest in secondary market stocks, buy the founder’s old shares (secondary shares), directly make controlling acquisitions, and even play with the “roll-up” strategy commonly used by PE to integrate multiple small companies to become bigger. This is basically equivalent to unlocking the core capabilities of PE.
This allows them to have more diverse exit paths, instead of relying solely on the traditional two traditional paths of IPO or being acquired by large companies, and can use longer-term, freer secondary market or private equity strategies to exit. This means that the startups they invest in may be less eager to go public; At the same time, the capital structure is also more flexible – it can change from the traditional fund structure that relies on LP (limited partner) contribution to CVC (corporate venture capital) or asset management structure, getting rid of the restrictions of the fund cycle and moving to a more long-term “evergreen” perpetual capital pool. Sequoia Capital has led by example in this regard; In addition, their investment targets can be broader. RIA VCs have fewer restrictions on choosing investment targets and have the freedom to choose more types of assets. They may prefer to acquire some potential old companies for transformation, or hold shares of some high-quality companies for a long time, thereby helping them transform from managing a bunch of “project portfolios” to building a “platform asset”.
02 Industry differentiation has intensified, and high returns are the “confidence” of transformation
The collective “transformation” of top VCs has also polarized the venture capital industry: on the one hand, there are small seed funds that stick to tradition and focus on early discovery, which “look at the sky and eat” and patiently wait for the birth of unicorns; On the other end are the transformed platform RIA large institutions, which have stronger profitability and resilience to economic cycles.
But behind this is the gradual failure of the traditional venture capital model to a certain extent. Silicon Valley’s “midlife crisis” caused by technological structural changes is spreading in the venture capital world. Although AI is popular, the specific ecosystem that can truly continue the dividends of mobile Internet commercially is still a bit vague. Under the contagious effect of capital market sentiment, VC transformation seems to be imperative.
However, in order to successfully “reborn” in the wave of the times, VC institutions also need to be supported by a solid high rate of return. A partner of a venture capital institution admitted to Silicon Star that this model change requires extremely high fundraising capabilities of institutions. At present, the American VCs that have completed the transformation are all players with top fundraising capabilities. “The return of the Sequoia Fund in 2024 will be as high as 20.79%, and LPs are willing to continue to spend money to support.”
Other data also supports this: The New York Times reported that Thrive Capital is raising an AI-themed fund of about $1 billion; Bloomberg revealed that Lightspeed will also launch a series of new funds totaling up to $7 billion. In March this year, Lightspeed took the lead in investing $3.5 billion in Anthropic, OpenAI’s main competitor. In order to better lay out the secondary market, they also invited Jack Fowler, former managing director of Goldman Sachs, to operate. In addition, these institutions are also actively buying back equity in high-quality companies in the private market, with the intention of seizing opportunities before the IPO.
The venture capital industry in Silicon Valley has resolutely turned around and sought new ways to survive and develop. In contrast, there seems to be no large-scale similar movement in the domestic VC circle at present, and it is more like “watching the fire from the other side” as a whole, maintaining a cautious wait-and-see attitude.
Behind this, there are not only differences in market development stages, but also considerations of local characteristics. For example, the structure of the domestic capital market, exit channels (such as IPO review pace, M&A market activity), and the composition and demands of LPs (limited partners) are significantly different from those of the US market. In addition, the management and definition of licenses such as “registered investment consultants” in China, as well as the division of VC and PE business boundaries, also have their own regulatory logic, which makes it difficult for the “transformation path” of Silicon Valley VCs to be simply replicated.
However, as an “imported” VC, Silicon Valley’s actions will definitely affect the thinking of domestic peers. Although the large-scale “VC-to-PE” transformation has not yet become mainstream, some leading institutions and investors with a keen sense of smell have begun to innovate and try on a small scale. For example, as early as the end of 2021, in the context of changes in the LP capital contribution environment, Xu Xin’s Today’s Capital, the “queen of investment”, began to extend its tentacles to the secondary market; According to people familiar with the matter, institutions such as Lisi Capital, founded by Cao Xi, are also making similar innovation attempts.
In the face of the new requirements put forward by AI on capital scale, investment cycle and industry understanding, VCs must innovate themselves, and the traditional style of play seems to be unsustainable one day, and how to find a more flexible and powerful posture and actively evolve is already a topic that VCs who still have ambitions must think about today.
