A moment of reckoning for VC
- Tor Martin Flesvik
- 2 days ago
- 5 min read
By: Tor Martin Flesvik
Partner & Head of Equity Research
Let’s not sugarcoat it: the venture capital market is going through an existential crisis. We’re not “approaching” a correction. We’re not in a cyclical blip. The Venture Capital reckoning isn’t coming, it’s already here. And like all real reckonings, it’s overdue, and necessary.
The seeds were planted during the capital gusher of 2020 and 2021. Everyone remembers the headlines: unicorns minted daily, growth rounds doubling overnight, venture firms raising multi-billion-dollar funds like it was nothing. But underneath the hype was a more dangerous truth, too many dollars were chasing too few exceptional companies.
This wasn’t a bubble, it was a distortion of venture’s core thesis. Venture capital only works when you back truly generational companies and accept that 90% of your portfolio won’t return the fund. That discipline went out the window. Hedge funds, mutual funds, tourist capital they all piled in. VCs, flush with commitments, had to deploy whether they liked the deals or not.
What did we get in return? A thousand unicorns and a portfolio full of fragile businesses propped up by cheap money and unrealistic expectations. The system was overfed and undernourished. When interest rates spiked, it was like someone hit the kill switch. Liquidity dried up, public market valuations collapsed, and the entire growth-at-all-costs playbook became radioactive.
Suddenly, the “just acquire your way into innovation” M&A model broke. Public companies stopped rewarding splashy acquisitions of unprofitable startups. Why buy a SaaS company burning $50M a year when your own multiple is compressing and investors want real profits? There’s no accretive story anymore.
And IPOs? The exit window didn’t just narrow, it vanished. Most of the so-called unicorns aren’t close to being public-ready. The revenue isn’t there, the margins are a mirage, and the comps have been cut in half. No exits, no returns. And in a business where outcomes are back-loaded and concentrated in a few liquidity events, that’s fatal.
Enter: The Zombie Era
This is the part nobody wants to say out loud: many of these venture-backed software startups are already dead. They just don’t know it yet. Call them zombies, or orphans, or whatever euphemism you like. The truth is they have no realistic path to IPO, no M&A appetite, and no investor willing to fund another round at even flat valuations. They’re stuck. Too small to scale, too big to wind down.
These companies raised at inflated 2021 valuations and built expense bases to match. Cutting burn doesn’t magically make you a viable business. You can slash your team in half and pivot all you want but if the core product never had market pull, it’s just a slow fade.
This isn’t a few bad bets. It’s systemic. There are hundreds, if not thousands, of software startups that were funded on hype cycles, TAM fantasies, and a zero-rate environment that no longer exists. The bill has arrived.
LPs are pulling back and they should, they know what’s going on. The distributions have stopped, the paper marks are falling, and their portfolios are overweight illiquids. So they’re doing what any rational allocator would do, they’re pulling back.
New fund commitments are drying up. Even the top-tier firms are downsizing. And forget about emerging managers. If you didn’t return capital during the boom, you’re not raising in this cycle. This isn’t just a rebalancing it’s a structural reassessment of venture as an asset class. The 2010s spoiled us. Funds returned multiples, and everyone wanted exposure. Now the reality is sinking in: venture is a long-duration, illiquid bet with binary outcomes, and in this macro environment, that doesn’t look as attractive as 5% risk-free in treasuries.
VC will still and should have a place in institutional portfolios, but the allocation is going down. The model has to shrink to fit reality. Here’s the thing: not all VCs are going to make it, and they shouldn’t. The industry overexpanded. Too many funds were built on the idea that capital alone could win deals. That if you wrote a big enough check, founders would pick you and you’d ride the growth curve to the moon. That worked when money was free and exits were easy. Now? Money isn’t enough.
The best firms will be fine. They always are. The Sequoias, the Benchmarks, the firms that actually do the work, earn access, and have relationships that go back decades will survive, probably even thrive in a leaner market. They’ll raise smaller funds, sure. But they’ll still get into the best deals, because the best founders will always have options.
Everyone else? It’s going to be rough. The tourists are already gone. The bloated growth funds are stuck with mark-downs and no path to DPI. Emerging managers with no track record? Good luck. This is a culling and a healthy, brutal return to fundamentals.
There’s no easy fix. No Fed pivot that will save zombie startups. No magical acquisition spree that will bail out stranded unicorns. What we’re witnessing is a reset of expectations, of valuations, of the venture model itself.
Here’s what’s likely:
1. Many VC firms will quietly shut down. They won’t announce it. They’ll just stop raising new funds, manage out the existing portfolio, and fade away.
2. Top firms will adapt and consolidate power. Smaller funds, tighter focus, but still access to the best founders.
3. LPs will reduce their exposure. Especially to late-stage and crossover funds. Venture will remain in portfolios, but with a smaller bite.
4. Founders will face a harsher world. No more $20M pre-seeds for ideas on a napkin. Capital will flow, but only to startups with real traction, clear economics, and a path to profitability.
5. Thousands of software companies will never exit. They’ll wind down, merge, or become lifestyle businesses. The myth of the inevitable billion-dollar outcome is dead.
It might sound like I'm predicting the end of venture capital, I'm not. And that is not the point at all, It’s the end of a distorted version of it. The version where capital was infinite, interest rate was zero, growth was everything, and outcomes didn’t need to be real. That version was unsustainable. What comes next is harder, but better. Smaller funds, fewer unicorns, real businesses and real exits. And for those who can stomach it, maybe even better returns.
But don’t call it a downturn. Call it what it is: a reckoning.
And frankly, it’s about time.
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