Nicholas Chirls: Why Big VCs Ruin Startups, VC is a Ponzi Scheme Today & Most VCs are Bankers |E1198

New Venture Launch and Strategic Shift

• Nick launches "Asylum," a new venture firm independent of his previous firm, Notation, after a decade of operation.
• The new fund is sized at $55 million, targeting check sizes between $500,000 and $2 million.
• Asylum's mission is to serve as a direct alternative to large "venture banks" that Nick characterizes as lacking creativity and prioritizing capital deployment over returns.
• Nick adopts a personal funding model where he pays himself nothing, reinvesting all capital into hiring talent and firm building, supported by the strong historical returns of Notation.
• The firm charges a standard 20% carry and requires a meaningful GP commitment of 1%.

Critique of Industry Incentive Structures

• Nick characterizes the venture capital industry as operating on a "Ponzi scheme" model driven by guaranteed 2% management fees over 10 years, regardless of fund performance.
• He argues that junior partners at large firms are promoted based on "money velocity" (deployment speed) rather than capital returns, incentivizing them to raise and spend capital rapidly.
• The prevailing market trend has shifted from a "boutique, high-margin" business to a "commoditized, low-margin" industry dominated by large firms.
• Nick contends that the only sustainable competitive advantage in modern venture is "standing for something meaningful" or painful, rather than competing on stage, sector, or geography which are easily arbitraged.
• He predicts that large, multi-stage funds will degrade returns for early-stage investors by flooding the market with capital, driving up pre-seed/seed valuations to unsustainable levels (e.g., $25M posts).

Investment Philosophy and Market Dynamics

• Asylum's core strategy focuses on identifying companies where "no one else cares yet," often investing when market valuations are low (e.g., $5M-$10M posts) before a trend becomes consensus.
• Nick asserts that true alpha in early-stage venture comes from backing founders who are "obsessed" with a problem the market has not yet recognized, rather than chasing momentum in crowded sectors.
• He cites Bison Trails (sold to Coinbase) as a primary example of a fund-returning investment where the market initially viewed the Total Addressable Market as negligible (~$200k ARR) before a massive shift in the blockchain landscape.
• Nick argues that legal structures (preferred vs. common stock) matter less than the quality of trust and communication between founders and investors, as agreements often fail to protect against bad actors.
• He dismisses the traditional "VC value-add" narrative regarding business development and recruiting, arguing these services are often overrated and used by large firms to justify high fees; instead, the primary value is "trust" and having a partner who tells the truth.

Market Reality and LP Dynamics

• Data cited from Cambridge Associates indicates that the top quartile of 2015 vintage venture funds has not yet returned capital to Limited Partners (LPs) nine years in.
• Nick suggests that 70-75% of funds raised in the 2020-2021 cycle will likely fail to return capital, driven by inflated valuations and a "permanent loss of capital" issue.
• He observes a misalignment where many institutional LPs (public pensions, endowments) allocate capital based on the fear of getting fired rather than financial performance, supporting the existence of large, underperforming funds.
• Large venture banks are incentivized to fund "capital inefficiency" (e.g., defense tech, AI foundation models) because these capital-intensive models allow them to deploy billions quickly to facilitate the next fundraise, even if returns merely match the NASDAQ beta.
• Nick warns that the "grow at all costs" mentality among founders, fueled by easy capital, often leads to slower growth, lost customer proximity, and eventual failure.

Personal Context and Reflections

• Nick reveals his deep skepticism of banking institutions stems from a personal history involving his mother working at an investment bank and his own negative experience at Lehman Brothers in 2007.
• He identifies his two biggest mistakes as getting "antsy" during long periods without deals and being overly fixated on minor valuation differences (e.g., $5M vs. $5.5M) rather than the magnitude of the opportunity.
• In a quick-fire round, Nick names Hugging Face and Runway as his most significant missed pre-seed investments.
• He expresses a strong preference for investing in founders who are "obsessed" rather than merely "passionate," viewing obsession as the only sustainable driver for the grueling startup journey.
• Nick concludes that the ideal VC-founder relationship is built on honest, transparent communication that allows for difficult conversations without destroying trust, even when financial outcomes are imperfect.