In the traditional narrative of venture capital (VC), the "boutique" model is often touted, with the belief that scaling leads to a loss of soul. However, Erik Torenberg, a partner at a16z, offers a counterargument in this article: with software becoming a pillar of the US economy and the advent of the AI era, startups' needs for capital and services have undergone a qualitative change. He argues that the VC industry is in the process of shifting from a "judgment-driven" to a "deal-winning capability-driven" paradigm. Only "mega-institutions" like a16z, with scalable platforms and comprehensive support for founders, can succeed in the trillion-dollar game. This is not merely an evolution of the model, but a self-evolution of the VC industry in the face of the "software eating the world" wave. In classical Greek literature, there is a meta-narrative that transcends everything: respect for the gods versus disrespect for them. Icarus's burning by the sun was not essentially due to his excessive ambition, but rather his disrespect for the divine order. A more recent example is professional wrestling. You can tell who the face and the heel are simply by asking, "Who respects wrestling, and who disrespects wrestling?" All good stories take one form or another. Venture capital (VC) has its own version of this story. It goes like this: "VC has always been, and is a boutique business. The big firms have become too big and too ambitious. Their demise was inevitable because their approach was tantamount to disrespect for the game." I understand why people hope this story holds true. But the reality is, the world has changed, and so has venture capital. There's more software, leverage, and opportunities now. There are more founders building larger companies. Companies stay private longer. And founders demand more from VCs. Today, founders building the best companies need partners who can truly roll up their sleeves and help them win, not just write checks and wait for results. Therefore, the primary goal of VCs now is to create the best interface to help founders win. Everything else—how to staff, how to deploy capital, how large a fund to raise, how to facilitate deals, and how to allocate power to founders—derives from this. Mike Maples famously said, "The size of your fund is your strategy." Equally true is that the size of your fund is your belief in the future. It's your bet on the scale of your startup's output.Raising massive amounts of capital over the past decade might be seen as "arrogance," but the belief is fundamentally sound. Therefore, when top firms continue to raise huge sums to deploy for the next decade, they are betting on the future and delivering on their promises with real money. Scaled venture capital isn't a corruption of the venture capital model: it's the model finally maturing and adopting the characteristics of the companies it supports. Yes, venture capital is an asset class. In a recent podcast, legendary Sequoia investor Roelof Botha raised three points. First, despite the expansion of venture capital, the number of companies that "win" each year is fixed. Second, scaling the venture capital industry means too much money is chasing too few good companies—therefore, venture capital cannot scale; it's not an asset class. Third, the venture capital industry should shrink to correspond to the actual number of winning companies. Roelof is one of the greatest investors of all time, and a great guy. But I disagree with his points here. (Of course, it's worth noting that Sequoia Capital has also scaled up: it's one of the world's largest VC firms.) His first point—that the number of winners is fixed—is easily disproven. In the past, about 15 companies reached $100 million in revenue each year; now, about 150. Not only are there more winners than before, but the winners are also larger. While entry prices are higher, the output is far greater. The growth ceiling for startups has risen from $1 billion to $10 billion, and now to $1 trillion or even higher. In the 2000s and early 2010s, YouTube and Instagram were considered massive acquisitions worth $1 billion: such valuations were so rare then that we called companies valued at $1 billion or more "unicorns." Now, we implicitly assume that OpenAI and SpaceX will become trillion-dollar companies, with several more to follow. Software is no longer a fringe sector of the American economy comprised of oddballs and mavericks. Software is now the American economy. Our largest companies, our national champions, are no longer General Electric and ExxonMobil: they are Google, Amazon, and Nvidia. Private tech companies make up 22% of the S&P 500. Software hasn't finished eating the world yet—in fact, it's only just beginning, accelerated by AI—and it's more important than it was fifteen, ten, or five years ago.Therefore, the scale a successful software company can reach is much larger than ever before. The definition of a "software company" has also changed. Capital expenditures have increased dramatically—large AI labs are becoming infrastructure companies, with their own data centers, power generation facilities, and chip supply chains. Just as every company became a software company, now every company is becoming an AI company, and perhaps also an infrastructure company. More and more companies are entering a world of atoms. Boundaries are blurring. Companies are aggressively verticalizing, and the market potential of these vertically integrated tech giants is far greater than anyone imagined for a pure software company. This leads to why the second point—too much money chasing too few companies—is wrong. Output is much greater than before, the software world is much more competitive, and companies go public much later than before. All of this means that great companies only need to raise far more money than before. Venture capital exists to invest in new markets. What we learn time and time again is that, in the long run, new markets are always much larger than we anticipate. The private equity market is mature enough to support top companies at unprecedented scale—just look at the liquidity available to top private firms today—and investors in both private and public markets now believe the output of venture capital will be staggering. We have been misjudging how large VC as an asset class can and should be, and venture capital is scaling up to catch up with this reality and the set of opportunities. The new world needs flying cars, a global satellite grid, abundant energy, and intelligence so cheap it's beyond measurement. The reality is that many of today's best companies are capital-intensive. OpenAI needs to spend billions of dollars on GPUs—more computing infrastructure than anyone could imagine. Periodic Labs needs to build automated labs on an unprecedented scale for scientific innovation. Anduril needs to build a defensive future. And all of these companies need to recruit and retain the world's best talent in the most competitive talent market in history. The new generation of big winners—OpenAI, Anthropic, xAI, Anduril, Waymo, etc.—are all capital-intensive and have completed massive initial funding rounds at high valuations. Modern tech companies typically need hundreds of millions of dollars because the infrastructure required to build world-changing cutting-edge technologies is simply too expensive. During the dot-com bubble, a "startup" enters an empty field, anticipating the needs of consumers who are still waiting for dial-up connections.Today, startups are entering an economy shaped by three decades of tech giants. Supporting "Little Tech" means you have to be prepared to arm David against a few Goliaths. Companies in 2021 did receive excessive funding, with a large portion going to sales and marketing to sell products that weren't 10 times better. But today, money is flowing to R&D or capital expenditures. Therefore, the winners are far larger than ever before, and require significantly more funding, often from the outset. So, the venture capital industry naturally has to become much larger to meet this demand. Given the size of the opportunity set, this scaling is justified. If VCs were too large for the opportunities they invest in, we should have seen the largest institutions underperform. But we haven't seen that at all. While expanding, top VCs have repeatedly achieved extremely high multiples of returns—as have the LPs (limited partners) who can access these firms. As one prominent venture capitalist famously said, a $1 billion fund can never achieve a 3x return: it's too big. Since then, some firms have outperformed a $1 billion fund by more than 10 times. Some blame the asset class on underperforming firms, but any industry that follows a power-law distribution has huge winners and long-tail losers. The ability to win deals without relying on price is what allows firms to maintain consistent returns. In other major asset classes, people sell products to or borrow from the highest bidder. But VC is a classic example of an asset class that competes on dimensions other than price. VC is the only asset class with significant consistency among the top 10% of firms. The last point—that the venture capital industry should shrink—is also wrong. Or at least, it's bad for the tech ecosystem, for the goal of creating more generations of tech companies, and ultimately for the world. Some complain about the second-order effects of increased venture capital funding (and there are some!), but it's also accompanied by a massive increase in startup valuations. Advocating for a smaller venture capital ecosystem could very well mean advocating for smaller startup valuations, and the result could be slower economic growth. This might explain why Garry Tan said in a recent podcast, "Venture capital can and should be 10 times bigger than it is now." Admittedly, if there is no longer any competition and a particular LP or GP is the "only player," that could be beneficial for them.But having more venture capital than we have today would obviously be better for founders and for the world. To illustrate this further, let's consider a thought experiment. First, do you think there should be far more founders in the world than there are today? Second, if we suddenly had far more founders, what kind of institutions would best serve them? We're not going to spend too much time on the first question, because if you're reading this, you probably know we think the answer is obviously yes. We don't need to tell you too much about why founders are so good and so important. Great founders create great companies. Great companies create new products that improve the world, organize and direct our collective energy and risk appetite toward productive goals, and create disproportionate new enterprise value and interesting jobs in the world. And we could never have reached an equilibrium where everyone capable of starting a great company has already started one. That's why more venture capital helps unlock more growth in the startup ecosystem. But the second question is more interesting. If we woke up tomorrow with 10 times or 100 times more entrepreneurs than we have today (spoiler alert, this is happening), what would the startup institutions in the world look like? How should venture capital firms evolve in a more competitive world? Marc Andreessen likes to tell a story about a famous venture capitalist who said the VC game is like a conveyor belt sushi restaurant: "A thousand startups come and go, you meet them, and then occasionally you reach out, pick a startup off the conveyor belt, and invest in it." The kind of VC Marc describes—well, that's how almost every VC has been for most of the last few decades. Back in the 1990s or 2000s, winning deals was that easy. Because of that, the only truly important skill for a great VC is judgment: the ability to distinguish between good and bad companies. Many VCs still operate this way—basically the same way VCs operated in 1995. But the world has changed dramatically. Winning deals used to be easy—as easy as picking sushi off a conveyor belt. Now it's incredibly difficult. People sometimes describe VC as poker: knowing when to pick companies, knowing at what price to enter, and so on. But that may obscure the all-out war you have to wage to get the right to invest in the best companies. Old-school VCs miss the days when they were the "only players" and could give orders to the founders.But with thousands of VC firms now, founders have an easier time getting term sheets than ever before. As a result, more and more of the best deals involve extremely fierce competition. The paradigm shift is that the ability to win deals is becoming just as important—or even more important—as picking the right companies. What's the point of picking the right deal if you can't get in? Several things have contributed to this change. First, the proliferation of venture capital firms means they need to compete with each other to win deals. With more companies competing for talent, customers, and market share than ever before, the best founders need strong institutional partners to help them win. They need institutions with resources, networks, and infrastructure to give their portfolio companies an edge. Second, because companies stay private for longer, investors can invest at later stages—when the companies are more validated and therefore more competitive—and still reap venture-style returns. Finally, and perhaps least obviously, the selection process has become slightly easier. The VC market has become more efficient. On one hand, there are more serial entrepreneurs constantly creating iconic companies. If Musk, Sam Altman, Palmer Luckey, or a brilliant serial entrepreneur starts a company, VCs will quickly line up to try and invest. On the other hand, companies are reaching insane scale much faster (and have more room to grow due to longer periods of private ownership), thus reducing the risk of product-market fit (PMF) compared to the past. Finally, with so many great institutions available now, and founders finding it much easier to connect with investors, it's harder to find deals that other institutions aren't pursuing. Picking remains central to the game—picking the right evergreen companies at the right price—but it's no longer the most crucial element. Ben Horowitz hypothesizes that consistently winning automatically makes you a top institution: because if you win, the best deals will come your way. You only have the right to pick when you can win any deal. You might not pick the right one, but at least you have the opportunity. Of course, if your institution consistently wins the best deals, you'll attract the best pickers to work for you because they want to work for the best companies. (As Martin Casado said when recruiting Matt Bornstein to a16z: "Come here to win deals, not lose deals.") Therefore, the ability to win creates a virtuous cycle that enhances your picking ability. For these reasons, the rules of the game have changed.My partner, David Haber, described the shift venture capital needs to make to address this change in his article: "Firm > Fund." In my definition, a fund has only one objective function: "How can I generate the most carry (performance fees) with the fewest people and in the shortest amount of time?" A firm, in my definition, has two objectives. One is to deliver superior returns, but the second is equally interesting: "How can I build a source of compounded competitive advantage?" The best firms will be able to invest their management fees in strengthening their moats. I entered the venture capital space a decade ago, and I quickly noticed that Y Combinator played a different game among all venture capital firms. YC was able to acquire great deals from excellent companies on a massive scale, and also seemed able to serve them on a massive scale. Many other VCs, compared to YC, played a commoditized game. I would go to Demo Day and think: I'm at the table, and YC is the casino. We were all happy there, but YC was the happiest one. I quickly realized that YC had a moat. It had positive network effects. It had several structural advantages. People used to say that venture capital firms couldn't have moats or unfair advantages—after all, you're just providing capital. But YC clearly had one. That's why YC remained so strong even after scaling up. Some critics didn't like YC scaling up; they thought YC would eventually die because they felt it lacked soul. There have been predictions of YC's demise for the past 10 years. But it didn't happen. During that time, they changed their entire partner team, and the death still didn't happen. A moat is a moat. Like the companies they invest in, a scaled venture capital firm's moat is more than just a brand. Then I realized I didn't want to play the same old venture capital game, so I co-founded my own firm, along with other strategic assets. These assets were very valuable and generated a strong deal flow, so I tasted the game of differentiation. Around the same time, I started watching another firm build its own moat: a16z. Therefore, when the opportunity to join a16z a few years later a few years later arose, I knew I had to seize it. If you believe in venture capital as an industry, you—almost by definition—believe in power-law distributions. But if you truly believe the venture capital game is governed by power laws, then you should believe that venture capital itself will also follow power laws.The best founders will flock to the firms that can most decisively help them win. The best returns will concentrate in these firms. Capital will follow. For founders trying to build the next iconic company, scalable venture capital firms offer an incredibly attractive product. They provide expertise and a full range of services for everything a rapidly expanding company needs—recruiting, market entry strategy (GTM), legal, financial, PR, government relations. They provide enough funding to get you to your destination, rather than forcing you to be frugal and struggle against well-funded competitors. They offer tremendous reach—access to everyone you need in the business and government sectors, introducing you to every major Fortune 500 CEO and every major world leader. They offer access to 100 times more talent, with a network of tens of thousands of top engineers, executives, and operators worldwide, ready to join your company whenever needed. And they are everywhere—which, for the most ambitious founders, means anywhere. At the same time, for LPs, scalable venture capital firms are also an incredibly attractive product on the most important and simple question: Are the companies driving the highest returns choosing them? The answer is simple—yes. All the big companies are partnering with scale platforms, usually at the earliest stages. Scale venture capital firms have more opportunities to swoop in on the big companies and more ammunition to persuade them to accept their investments. This is reflected in the returns. (Excerpt from Packy's work: https://www.a16z.news/p/the-power-brokers) Think about where we are right now. Eight of the world's ten largest companies are West Coast-based, venture-backed firms. These firms have provided the majority of new enterprise value growth globally over the past few years. Meanwhile, the world's fastest-growing private companies are also predominantly West Coast-based venture-backed firms: those that were founded just a few years ago are rapidly heading towards trillion-dollar valuations and the largest IPOs in history. The best companies are winning more than ever before, and they all have the backing of scale firms. Of course, not every scale firm performs well—I can think of some epic crashes—but almost every great tech company has a scale firm behind it. I don't think the future is solely about scale venture capital firms.Like every sector the internet has touched, venture capital will become a "barbell": at one end are a few mega-players, and at the other end are many small, specialized firms, each operating in a specific sector and network, often partnering with larger venture capital firms. What's happening with venture capital is exactly what usually happens when software eats up the services industry. At one end are four or five large, powerful players, often vertically integrated service firms; at the other end is a long tail of highly differentiated small vendors, built on the back of industry disruption. Both ends of the dumbbell will thrive: their strategies are complementary and mutually empowering. We also support hundreds of boutique fund managers outside of institutional investors and will continue to support and work closely with them. Both large-scale and boutique firms will do well; the ones in the middle will struggle: these funds are too big to afford missing out on the mega-winners, but too small to compete with the larger firms that can structurally offer better products for founders. a16z is unique in that it sits at both ends of the dumbbell—it's both a group of specialized boutique firms and benefits from a large platform team. The firm that best partners with the founders will win. This could mean massive reserve funds, unprecedented reach, or a huge, complementary service platform. Or it could mean unreplicable expertise, excellent consulting services, or simply an incredible risk tolerance. There's an old joke in the venture capital world: VCs think every product can be improved, every great technology can be scaled, and every industry can be disrupted—except their own. In fact, many VCs don't like the existence of scaled venture capital firms at all. They believe scaling sacrifices some soul. Some say Silicon Valley is now too commercialized to be a haven for misfits. (Anyone who claims there aren't enough misfits in the tech world has probably never been to a San Francisco tech party or listened to the MOTS podcast.) Others appeal to a self-serving narrative—that change is "disrespectful to the game"—while ignoring that the game has always served the founders, and always has. Of course, they'll never express the same concerns about the companies they support, companies whose very existence is built on achieving massive scale and changing the game in their respective industries. To say that large-scale venture capital firms are not "real venture capital" is like saying that NBA teams shooting more three-pointers are not playing "real basketball".You might not think so, but the old rules of the game are no longer dominant. The world has changed, and a new model has emerged. Ironically, the way the rules of the game are changing here is exactly the same way VC-backed startups are changing the rules of their industries. When technology disrupts an industry and a new batch of players scales up, there are always things lost in the process. But more is gained as well. Venture capitalists know this trade-off firsthand—they've always been supporting it. The disruptive process that venture capitalists hope to see in startups applies equally to venture capital itself. Software has devoured the world, and it certainly won't stop with VCs. [Deep Tide TechFlow]