The venture capital world has changed a lot in the last year or two. The good times when money was free flowing are no more. To better understand what’s happening, I decided to zoom out a bit. I’ve been reading about cycles in the investing world across various asset classes.

I’m not an expert on this. I’m still learning, but from what I’ve read so far, a simple concept describes what happens. When a strategy generates outsize profits, it attracts attention. Investors take notice. More capital is invested in the strategy. As more capital is invested into the strategy, it becomes institutionalized and has more capital to deploy than there are good investment opportunities. When that happens, returns (risk-adjusted) go down. As things perform poorly, attractive investment opportunities that generate high returns (risk-adjusted) can be found.

The public markets were hot in 2020 and 2021. Lots of venture funds saw their portfolio companies IPO (or do a SPAC) or get acquired, which allowed funds to return cash to their limited partners. Those returns didn’t go unnoticed. Over the last two-and-a-half years, venture funds raised larger funds—just before public markets began declining. It’s much harder for funds to raise today, but the capital already committed to those funds likely hasn’t been fully deployed (for a variety of reasons).

Sentiment in venture isn’t as hot as it was in 2020 or 2021. But it isn’t negative. Many funds probably have ample undeployed capital. Fund managers still have enough cash flow from management fees on committed capital to fund their lifestyles and firm expenses, and they can stay busy trying to deploy their uninvested capital. Limited partners likely haven’t seen markdowns on venture fund investments yet because many portfolio companies have been putting off raising.

I’m wondering when we’ll move into the next part of the cycle, when sentiment in venture will be negative. I’d imagine a few things will have to happen first. Limited partners will have to see their venture fund investments performing poorly (i.e., funds marking down their investments). Fund managers will have to run out of capital to invest, see their cash flow from management fees reduced or close to running out, and face difficulty raising new capital from limited partners. When (if) this happens, I think venture sentiment will be negative and closer to a low point. This will make people rethink careers in venture and limited partners rethink investments in venture.

We’re not there, but I’d imagine we’re headed that way if the current macro trajectory continues. Again, I’m still learning, so these thoughts may (and likely will) change. But that’s my thinking as of today.