Venture capital (VC) has always been about funding innovation, backing disruptive startups, and shaping the future economy. But is it really doing that? The reality is that most VC firms focus on short-term returns, not long-term progress.
As economist John Maynard Keynes famously said, “In the long run, we are all dead.” This mindset, deeply ingrained in the VC ecosystem, creates an urgent need for change. If we truly want to tackle climate change, industrial innovation, AI, and healthcare, we must rethink how venture capital operates.
The venture capital model, which dates back nearly 100 years, has barely evolved. Two fundamental aspects of VC—“two and twenty” and “10+2”—are creating systemic inefficiencies and limiting meaningful innovation.
1. The “Two and Twenty” Fee Structure
Most venture firms operate under a 2% management fee and 20% carry model:
- VCs earn 2% annually on assets under management (AUM), regardless of performance.
- They take 20% of the profits when investments succeed.
This model has led to the rise of mega-funds like a16z and Sequoia, which manage billions and collect hundreds of millions in fees each year. Since they make substantial money from fees alone, their financial success is no longer dependent on how well their investments perform.
The result? A lack of alignment between VCs and the startups they back. Many firms chase hyped, high-growth companies rather than investing in deep-tech and industrial transformations that require patience and long-term commitment.
2. The “10+2” Investment Cycle
The 10+2 model means VCs are typically required to invest and exit within 12 years—leaving little room for long-term, deep-tech innovation. Investors demand quick returns, which pressures startups to grow at unsustainable rates or exit prematurely.
But major challenges like climate change, energy transition, and AI infrastructure can’t be solved in 10 years. These sectors require long-term investment horizons that current VC models simply don’t allow.
Building a New Venture Capital Model
Despite these challenges, VC culture remains resistant to change. Only a handful of industry leaders—like Marie Ekeland at 2050—are actively pushing for reform. However, the real power to reshape the industry lies with asset owners and limited partners (LPs).
In Europe, state-backed funds, including economic development banks, contributed nearly 40% of all VC investments last year. These public institutions have a mandate to think long-term and can drive systemic change by shifting investment incentives toward longer, more flexible models.
To align VC with real-world challenges, we need to rethink investment structures. Some key changes include:
- Shifting away from management fees as the primary income source: Funds should rely more on carried interest, ensuring they only make money when startups succeed.
- Introducing evergreen VC models: Unlike traditional funds, evergreen funds reinvest profits rather than following a fixed exit timeline.
- Encouraging flexible investment horizons: Deep-tech and impact-driven startups need longer growth cycles, and LPs must adjust their expectations accordingly.
A Call to Action: Let’s Fund the Future, Not Just the Present
With rising pension fund investments and growing momentum for European-led innovation, now is the time to rethink VC. If we want to build a sustainable, future-proof economy, we must stop copying Silicon Valley and start designing investment models that support long-term innovation.
We have both the financial power and the progressive mindset to create a new venture capital ecosystem. Let’s make it happen.
