If you're wondering why a lot of VC activity feels divorced from reality, it might be because there's far more capital than there is bandwidth to deploy it appropriately.

What does the next 20 years look like for venture capital? One thing is for sure — the world needs many new Palo Altos. Each focused on delivering what people need, not just what's easiest to sell. Innovation should be global, and inclusive. The "winner takes all" model of Silicon Valley has become increasingly zero-sum and extractive. It also needs to be more patient. "Move fast and break things" is great, but it might miss some of the longer-horizon innovation which drives real progress. In Episode 2 of our interview with Saul Klein, @ry_paddy and @cape cover: The real story behind backing @taavet Pattern matching and building Nazare Why fund size is the whole strategy What Sumitomo's 450 years taught Saul about patience Most investors don’t understand contracts The emerging managers Saul rates Advice for solo GPs just starting out What venture looks like in twenty years

Inside Phoenix Court with Saul Klein - Ep. 1. Saul Klein is co-founder of @phxcrt, which runs @localglobevc, Latitude and Solar and has backed @Wise, @monzo, @MistralAI and @Figma. Before venture he co-founded LoveFilm and spent time at @Skype in its early years. In part one, @ry_paddy and @cape cover: 0:00 Founding Video Island and the road to LoveFilm 5:31 The Screen Select merger and joining Skype 12:18 Learning when to let go 16:33 Why Phoenix Court became a limited company 21:06 Shared ownership, the foundation and long-term thinking 29:37 The power law hiding inside public markets 31:14 Applying that power law to venture 39:24 Back surfers, not waves 43:09 Why seed investing is like 20,000 hairdressers

Inside Phoenix Court with Saul Klein - Ep. 1. Saul Klein is co-founder of @phxcrt, which runs @localglobevc, Latitude and Solar and has backed @Wise, @monzo, @MistralAI and @Figma. Before venture he co-founded LoveFilm and spent time at @Skype in its early years. In part one, @ry_paddy and @cape cover: 0:00 Founding Video Island and the road to LoveFilm 5:31 The Screen Select merger and joining Skype 12:18 Learning when to let go 16:33 Why Phoenix Court became a limited company 21:06 Shared ownership, the foundation and long-term thinking 29:37 The power law hiding inside public markets 31:14 Applying that power law to venture 39:24 Back surfers, not waves 43:09 Why seed investing is like 20,000 hairdressers

Venture capital has outgrown its ability to competently manage capital. The magic of VC is the interface between GP and entrepreneur; making judgements about ideas and people that stretch into the future. The desire to scale VC into an asset class has undermined that discipline, as the structures that enable scale have obscured idiosyncrasy. This has observable, measurable consequences. Slower innovation, weaker companies, and slipping returns. A growing desperation expressed in trying to extract more from less. I sympathise with the honest techno-optimists who believe that more capital means greater acceleration. But that bullish sentiment is being exploited by rent seekers, enabling misallocation and technological stagnation. In truth, venture capital can scale, but to remain productive it must be scaled proportionally along the right dimensions, without compromising the fundamental mechanics of capital coordination and liquidity. 1) Venture capital must not become as top-heavy as it is today. First-check firms provide the discovery of new opportunities. If the downstream market grows out of proportion with that discovery layer, everything begins to crumble. 2) Exits must not be delayed in order to absorb more capital. Going public is extremely beneficial for innovative companies, and has positive externalities for innovation generally. Private capital feels easier, but it is poison in the long-run. With this in mind, I propose four pillars of scaling venture capital toward greater productivity, in the context of national capitalism — how states can wield capital for industrial growth: The first pillar is to remember that venture capital is an exit business, not an endlessly printing markups business. Companies should be oriented towards an exit once they reach an appropriate scale and are sufficiently derisked. Historically, that has been somewhere between 6–8 years. It may be longer for others that require it (see: SpaceX), which is fine. In practice, that means not wilfully shovelling growth capital into businesses that would otherwise be public. Which means finding a more productive purpose for that capital, which may be challenging for large, lazy allocators. (Building on themes explored in a large body of research, cited in Hitting Escape Velocity.) The second pillar is to ensure that the foundation of small and emerging managers is robust, producing a healthy stream of opportunity. This runs contrary to larger VC incentives and LP bias toward brand power, but the alternative is concentration that rots returns and consensus that rots innovation. (Building on work by Martin Aragoneses of INSEAD and Harvard University’s Department of Economics, and Sagar Saxena of the University of Pennsylvania.) The third is to ensure R&D intensive technologies have access to patient early capital that can carry them through to commercialisation. This helps prevent VC simply flowing down the path of least resistance to scalable software slop. Where venture capitalists do not quite have the courage to back novel “HALO” technologies from inception, they may need outside support. (Building on research by Kyle Briggs of the University of Ottawa Department of Physics.) The fourth is to provide access to well-structured mezzanine financing for companies with extreme setup costs, from nuclear plants to clinical trials. This gives early VCs the confidence to invest in these categories knowing there is downstream capital and liquidity when an IPO may be too distant and too risky. (Building on work by Andrew Lo, of MIT’s Department of Financial Engineering.) So, in the spirit of Kyle Harrison’s techno-solutionist commitment, here is how we may address those pillars…

It makes a lot of sense to me that @localglobevc build one company per fund. @cape's thinking here: "One of the things I'd noticed over the years is the tools, infrastructure or methods you use to start a business kept changing, and so the half-life of being a useful advisor to a founder was quite short." There are numerous studies indicating VCs risk losing their edge over time. This practice, at least intuitively, seems like a good way to stay grounded in the reality of entrepreneurship - close to the coal face, or "on the beach, with the surfers", instead of in your mansion in Pacific Heights, to borrow Saul's own analogy. Makes very obvious sense during major platform shifts like AI. Venture building is something of an art, though. Few do it well. It is not for the faint of heart. In the full convo with Saul (see quote tweet), we also touched on the story behind starting LoveFilm, which was acquired by Amazon for $320m in 2011, advice for emerging managers, how to value contracts, fund size as strategy (and why @phxcrt keep their funds small), and much more. It was a fascinating convo with one of the giants of early-stage VC.

Inside Phoenix Court with Saul Klein - Ep. 1. Saul Klein is co-founder of @phxcrt, which runs @localglobevc, Latitude and Solar and has backed @Wise, @monzo, @MistralAI and @Figma. Before venture he co-founded LoveFilm and spent time at @Skype in its early years. In part one, @ry_paddy and @cape cover: 0:00 Founding Video Island and the road to LoveFilm 5:31 The Screen Select merger and joining Skype 12:18 Learning when to let go 16:33 Why Phoenix Court became a limited company 21:06 Shared ownership, the foundation and long-term thinking 29:37 The power law hiding inside public markets 31:14 Applying that power law to venture 39:24 Back surfers, not waves 43:09 Why seed investing is like 20,000 hairdressers

Inside Phoenix Court with Saul Klein - Ep. 1. Saul Klein is co-founder of @phxcrt, which runs @localglobevc, Latitude and Solar and has backed @Wise, @monzo, @MistralAI and @Figma. Before venture he co-founded LoveFilm and spent time at @Skype in its early years. In part one, @ry_paddy and @cape cover: 0:00 Founding Video Island and the road to LoveFilm 5:31 The Screen Select merger and joining Skype 12:18 Learning when to let go 16:33 Why Phoenix Court became a limited company 21:06 Shared ownership, the foundation and long-term thinking 29:37 The power law hiding inside public markets 31:14 Applying that power law to venture 39:24 Back surfers, not waves 43:09 Why seed investing is like 20,000 hairdressers

Outsized returns are the product of risk, and consistent returns are the product of competently managed risk.

Inside Phoenix Court with Saul Klein - Ep. 1. Saul Klein is co-founder of @phxcrt, which runs @localglobevc, Latitude and Solar and has backed @Wise, @monzo, @MistralAI and @Figma. Before venture he co-founded LoveFilm and spent time at @Skype in its early years. In part one, @ry_paddy and @cape cover: 0:00 Founding Video Island and the road to LoveFilm 5:31 The Screen Select merger and joining Skype 12:18 Learning when to let go 16:33 Why Phoenix Court became a limited company 21:06 Shared ownership, the foundation and long-term thinking 29:37 The power law hiding inside public markets 31:14 Applying that power law to venture 39:24 Back surfers, not waves 43:09 Why seed investing is like 20,000 hairdressers