How AI is forcing VCs to rethink their timelines

Joyce Wang co-authored this article.

There’s a lot of talk about how much generative AI has changed the startup game, but what’s less discussed is the extent of the sector’s impact on venture capital itself.

The speed with which AI-driven companies can create value is forcing VC fund managers to rethink long-standing frameworks for early-stage investment. But genAI is also capable of rapidly destroying value, and this is driving VCs to experiment with new fund structures and strategies.

Image credit: Timmy Loen

This breakneck pace is revising VC playbooks. Here’s why rigid timelines no longer work and what flexible alternatives are emerging.

On the clock

Historically, VC funds have operated on a 10-year term model. The first three to five years are spent deploying capital, while the next ones are focused on scaling a firm’s portfolio companies before seeking exits in the second half of the fund’s life.

However, AI is compressing this timeline.

While an ecommerce business or software-as-a-service company may need years to reach immense scale, an AI-native firm can do this in a matter of months.

This is partly due to the hype behind the AI gold rush, which has been pumping investment into firms. But there’s another factor at work: AI products can be deployed globally at near-zero marginal cost, improve with data, and spread virally through developer and user networks.

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For example, Mistral AI reached a valuation of US$2 billion just seven months after it was founded in April 2023. Thinking Machines Lab, meanwhile, secured a monster seed round of US$2 billion this July at a US$10 billion valuation.

While a huge valuation may seem like a positive for an investor, the speed at which AI firms reach these dizzying heights puts intense pressure on the 10-year fund cycle.

These sizable valuations can delay IPOs as they set such high expectations for public market performance. After all, why would a founder or investor risk going public at an inflated valuation and see the value of the company drop?

Flexibility at a premium

What this means for VCs and founders