Venture Capital's Identity Crisis: Return to "Country" over "Consumer"
The Start of a New Innovation Frontier
Venture capital has an identity crisis, and things are about to change, big time.
Every generation, innovation cycles through a home. Starting in the basement and ending in the bedroom—inventions evolve from things we need to things we want.
In 2023, we seem to be nearing the end of an innovation cycle that began in 1946, the birth of venture capital (VC). Pioneering firms like the American Research Development Company (ARDC) invested in the foundation of transformative technology, serving as the hidden but essential support for advancements in computing, telecommunications, and the tech revolution.
Over the past 77 years, innovation has progressed to other rooms: the bathroom (pharma and biotech), the couch (apps), the garage (mobility and ride-sharing), the kitchen (foodtech), the backyard (sports and leisure tech), the closet (beauty tech), the mailbox (marketplace, e-commerce, and direct-to-consumer), the bedroom (dating), and beyond. These are familiar investment theses for my venture capital peers.
The cycle is apparent in iconic VC investments.
In the 1960s, capital fueled semiconductor firms like Fairchild, laying innovation’s ground floor. Sequoia transformed the "home office" by backing Apple in the 1970s, while Kleiner Perkins revolutionized pharmaceuticals behind the "bathroom" mirror with Genentech in the 1980s. Accel Partners brought the "living room" or “library” online by supporting Netscape in the 1990s. In the late 1990s and 2000s, firms like Madrona backed Amazon, changing how we think of the “mailbox.” In 2010s, Benchmark redefined “garage” usage through Uber, Khosla reimagined the kitchen via Doordash, and Andreessen Horowitz (a16z) entirely reshaped our perception of home living with Airbnb.
Here is one way to visualize that cycle:
However, we are now in the late stages of this cycle. Technology has permeated every aspect of life.
A generational reset—a teardown rather than a rebuild—seems inevitable. Why?
First, the economics have changed. With near-zero interest rates in recent decades, startup boards sought high-growth alumni who "know Product," such as former Uber, Airbnb, and Stripe executives, to execute established playbooks for Product-Market Fit, scaling, and profitability. But in a new economic landscape with higher interest rates and shifting risk preferences, a new star recruit has emerged: the Corporate Finance expert, specializing in treasury management and M&A.
This transition from "build-mode" to "sell-mode" is a notable shift, signaling the need for a fresh approach.
Second, the political landscape has shifted. Global insecurity in Europe, the Middle East, and competition with China have forced established funds to discuss investing in previously restricted categories like defense and security, seeking innovation or facing obsolescence.
Lastly, the social context matters. It's challenging for VCs to justify investments in super-fast food delivery and vanity apps when we stand on the doorstep of World War III.
In this return to a 1946-style venture capital environment, Deep Tech, often considered the black sheep of venture capital, is about to become its golden child.
Deep tech, and dual use, encompasses "country" rather than "consumer" technologies that quietly power our lives, often hidden in the basement, walls, and infrastructure.
Five key areas stand out:
Protection (healthcare and security),
Power (especially nuclear energy),Productivity (AI, semiconductors, Quantum),
Transportation (spacetech and marinetech), and
Building (hard and soft infrastructure).
For major powers like the United States, Germany, Russia, and China, these areas are critical.
Building competencies in these "mega themes" will result in either invigoration or desolation. This was very true in 1946: the decision to build “basement tech” consequential to country— like semiconductors— was situated in great power competition.
In the United States, we have already seen an initial rollout of "mission-oriented" venture capital funds collaborating with centers of American bureaucracy. There is America's Frontier Fund, a16z's American Dynamism, General Catalyst's Global Resilience for starters. And there are emerging, tastemaking funds like Construct Capital, Decisive Point, Squadra, Caffeinated Capital, Shield Capital, Marque Ventures, and many more.
Roll outs of similar funds in Europe, especially Germany, are already underway. These funds focus more on “country” than “consumer.”
This is only the beginning. Remember that venture capital is a valuable ally for innovation-loving governments, stepping in when there are market failures and providing capital when traditional institutions and financiers won't due to risk profiles—precisely how venture capital originated.
As innovation returns to the basement, pay attention, as it will shape the future of the home for the next generation.
Thanks for reading. I would love your reactions and thoughts - Pete