The End of The Era of Indifferent Capital

By Eric Paley

The next year will be challenging for startups. Promising companies will struggle. Many will fail. The only consolation is that the “era of indifferent capital” is coming to a close — may it never return.

What do I mean by “indifferent capital?”

Historically, VC was a boutique business where investors viewed themselves as mentors to their entrepreneur protégés. VCs were financially driven, but they also put considerable relationship capital to work in each startup.

In the old model, failures we also painful for the VC. They had their ego *and* cash tied up in a startup’s success. VCs weren’t always paragons of virtue. There were plenty of bad actors. But there was a sense of responsibility to truly support their startups.

Attitudes have changed over the last half-decade. Indifferent VCs got comfortable writing checks, sometimes quite large ones, with no desire for a board seat, no meaningful oversight rights or real involvement at all. They believe startups are born great, not built over time.

Indifferent VCs are speculators and see each startup as part of a portfolio of lottery tickets.

What’s the value of a single lottery ticket?

If it’s a winner, you’ll guard it with your life.

But if not a winner, it’s tossed in the trash without a second thought.

Investments are almost entirely transactional — pro-rata rights and liquidation preferences are important, but little else. Indifferent VCs will pay premium prices, but they’re thinking in bets. A failed company is a lost wager in a broader portfolio, and that’s all.

Indifferent VCs aren’t out to get you. They aren’t the stereotypical predatory “vulture capitalists.” They’re not hostile. Indifferent VCs just don’t care about anything except startups that show traction toward becoming a home run. They are happy to trash the rest.

The bull market hid the weaknesses of this model, and indifferent investors became popular with founders. But with the macro downturn, I think the weakness of this kind of capricious capital is about to become apparent.

Indifferent investors were stingy with support for startups that lacked massive markups in very short order. In the days ahead, I don’t see many of them writing support checks to struggling or even solid startups. Certainly, they won’t invest time to engineer soft landings.

Outsider VCs will have little appetite for salvaging startups with messy cap tables and sky-high valuations. Outside-led “Down rounds” won’t happen that often — a startup needs to be producing considerable revenue for new investors to be motivated to come in and clean up.

As a result, many startups are going to struggle to find capital inside or outside. I expect to receive a lot of calls from founders whose indifferent later-stage investors have stopped responding to emails or calls. We’re going to do everything we can to help them.

If you’re still in the early stages of your startup, pay close attention to how firms act over the next 6–12 months. Avoid VCs who will treat startups like a toss of the dice. Prioritize those who will put in the work and stick with you even when you roll snake eyes.

While this will be a difficult period, I believe it will also be a real period of strength for committed VCs and hopefully the end of the era of indifferent capital as we move toward a healthier VC model ahead.