Rethinking Theories of Value Creation
The venture capital ecosystem is one of the most sophisticated value creation architectures in modern economic history, generating trillions in value, enabling breakthrough innovations across every technology (and non-technology) sector, and providing the financial infrastructure that powers most contemporary technological advancement. From Google to Genentech, from Amazon to Airbnb, this model has proven its ability to catalyze extraordinary innovation.
Venture originated in the mid-twentieth century with a relatively simple objective function of providing capital to more speculative businesses whose upfront costs were prohibitive to the typical inventor but whose upside was immense. At this stage, there was no distinctive “theory of value creation” to which venture would define itself. This was, after all, an offshoot of private equity, and businesses were, in this day, cash flow generating vehicles.
As venture evolved, as startups grew in volume and scale, and as larger corporations came to view startups as catalysts for new innovations and faster entry into new markets, a formal theory of value creation emerged - one not focused on persistent cash flow generations but on exits. While “exit” technically includes IPOs, acquisitions outnumber public offerings 30 to 1, making them the primary mechanism through which venture capital creates and captures value. The $150 billion venture capital market exists precisely to fuel this architecture, providing increasingly large rounds of funding to systematically increase individual valuations of wholly independent startups as they compete, along with thousands of other ventures, for both funding dollars (from investors) and exit dollars (from acquirers).
This acquisition-focused evolution created the standard portfolios we’re all familiar with today - composed of 25-35 companies and with returns generated by power laws in which one or two massive successes (hopefully) compensate for systematic failures across the majority of investments. Limited partners invest in funds expecting returns through portfolio exits, general partners manage toward successful exits that generate carried interest, and entrepreneurs build businesses designed for acquisition by larger organizations. Every participant optimizes toward the same terminal events. Startups effectively function as value storage vehicles that transfer wealth from acquiring organizations to investors, founders, and employees. Though not perfect, the system largely operates as intentioned. The siloed structure, exit optimization, power law mathematics, and temporal constraints work together to create a coherent system that accomplishes mostly what it was designed to accomplish.
Businesses don’t have to be acquisition assets, of course, and reconceptualizing them allows us to cut to the heart of the traditional assumptions underlying the traditional venture-startup model. How might our relationship to both inflows and outflows change if we treated our startups not as assets to be sold but businesses to be permanently owned, grown, and evolved? And what of the “unprofitable permanence” that characterizes most startups today - as AI transforms linear algebra into large-scale efficiency turned operational leverage, does active cash flow generation really require a diminishment of ambition?
And what of the sharp independence between the 3000 newly funded startups each year and the rest of the marketplace? What compounding effects might emerge if businesses operated not as isolated islands competing for external capital, but as interconnected elements within a larger, interdependent capital tapestry, enabling the organic flow of technical breakthroughs, human expertise, and market insights between each business?
Systematic recombination of both ideas and talent, intellectual and human capital, allows us to transcend this standard model of independent acquisition assets and optimize for a different theory of value creation. One that returns us to venture’s origins, treating startups not as acquisition assets but as cash flow-generating businesses we intend to own forever. One that scales into an ecosystem in which continuous cash flows fund exponential business creation while preserving all intellectual and operations assets within an expanding network. This approach, empowered by emerging AI capabilities that enable unprecedented collaboration and efficient efficacy, transforms modest initial capital into a self-funding, self-growing, self-accelerating wealth creation engine that can exceed even top-tier venture returns in both absolute and risk-adjusted terms.
The venture-startup model's most essential design features - those that enable its tremendous success in exit optimization - are directly incompatible with these systematic recombination requirements:
- The siloed nature of startups prevents the organic flow of all forms of capital. Technical breakthroughs, human expertise, and market insights each must definitionally remain trapped within individual companies, largely unavailable to inform another's strategic decisions.
- Acquisition-focused value creation blocks the persistence of innovation environments. When successful businesses exit precisely at the moment their accumulated capabilities, customer relationships, and technical assets have reached maximum potential value, the intellectual and human capital that took years to develop gets absorbed into larger organizations or dispersed entirely.
The venture-startup architecture accomplishes exactly what it's designed to accomplish - creating valuable acquisition assets through independent business optimization - while systematically dismantling the persistent, collaborative environments that systematic recombination approaches demand. If we're to build an ecosystem (a future piece) we need to rethink the very theories of value creation we hold to be immutable in the traditional venture-startup landscape.