The Great VC Reset: VCs and LPs Begin to Awaken
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The Great VC Reset: VCs and LPs Begin to Awaken
Venture capital is undergoing a brutal transformation.
Navigating Web3 tides with focused insightsAuthor: fintechjunkie
Translation: Block unicorn
Over the past few years, the venture capital landscape has undergone a brutal transformation. Darwin’s law reigns once again—the boom years of 2018–2021 for startup ecosystems have faded. Zero Interest Rate Policy (ZIRP) drove valuations skyward, with venture firms pouring money into any promising startup. Founders rapidly deployed this capital, many chasing flashy goals and undisciplined growth, fueled by overflowing bank accounts.
Yet as we entered a new high-interest-rate economic cycle in early 2022, harsh realities began to emerge: The vast majority of high-flying ZIRP-era startups are unlikely to deliver substantial financial returns to their investors and employees.
In the early stages of the adjustment phase, founders, VCs, and limited partners (LPs) were largely in denial—but that denial has mostly subsided. For many startups, it's now clear that achieving previous valuation levels will be extremely challenging, if not impossible. Many investors now explicitly acknowledge they're playing for return of capital (i.e., prioritization) rather than aiming for "fund-returning" outcomes. And for many LPs, it's become evident this is an industry-wide phenomenon, as every active fund manager participated in the same game.
This shift can be termed the "Great Reset," where everyone in the ecosystem is seeking the clearest path toward a "fresh start."
Venture capitalists know one or two of their funds may underperform, but they remain optimistic about future opportunities. Their "new deal" with LPs is to recover what they can as quickly as possible, maximize value from existing portfolios, and commit to greater prudence going forward.
LPs understand that more investments than ever before will fail, and they accept that absorbing these losses will drag down fund performance. They recognize that venture capital as an asset class is cyclical—and once the ecosystem clears out mistakes born during periods of capital abundance, skilled fund managers can still produce outstanding vintages. Their "new deal" with VCs is simple: If venture firms honestly disclose the true value of their current portfolios, exercise greater caution in the future, and do everything possible to return cash promptly—even partially—LPs are willing to forgive a bad year.
Many founders have come to realize that the ZIRP-era funding environment harmed their startups in multiple ways. First, their common shares are likely subordinated to preferred shares held by other investors. Second, excessive capital led them to hire too many people and invest in too many initiatives—reversing these decisions is difficult. Third, raising funds when the company is in "contraction mode" rather than "growth mode" is extremely hard, making re-igniting growth highly risky. Finally, the opportunity cost of trying to fix a broken business is far higher than starting fresh, making persistence increasingly "expensive."
The ultimate outcome of this "Great Reset" is that no one has any incentive to sustain the illusion of guiding mediocre companies toward billion-dollar IPOs—because that won’t happen. Rather than chasing hypergrowth, the focus has shifted toward helping the 90% of companies that cannot achieve explosive growth find viable exit paths. This often means guiding struggling companies toward acquihires and helping "good but not great" portfolio companies find exits via acquisitions or mergers—even if it means selling at a fraction of their peak valuations.
This shift may feel harsh for founders dreaming of successful public listings, but for many, it serves as a wake-up call. The former pressure to grow "at all costs" has eased, replaced by a renewed emphasis on building sustainable businesses with real revenue models and clear paths to profitability.
The Great Reset doesn't just mean selling overvalued companies—it means resetting expectations across the board. Venture firms are re-evaluating their investment theses, focusing on strong unit economics and capital efficiency. Founders are forced to build disciplined, durable businesses capable of surviving without endless VC funding. Meanwhile, LPs seek to continue backing only those funds with proven track records before 2018 and genuine competitive advantages in today’s new normal.
This new reality also comes with downsides. The ease of access to liquidity has diminished, making it harder for promising early-stage startups to secure funding. But there are upsides too. A renewed focus on fundamentals could give rise to a new generation of startups built on sustainable growth rather than hype.
The Great Reset marks a significant shift in the startup ecosystem. It's a painful process, but ultimately could lead to a healthier, more sustainable future for both VCs and startups. As the dust settles, one thing is clear: the era of easy money is over. The startups that emerge from this reset will be those capable of demonstrating real value and building strong businesses for long-term success.
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