What's the Deal with VCs Becoming RIAs?

Before we begin, let's define a few terms:

VC (Venture Capital): Money that investors give to early-stage startups in exchange for ownership, hoping those companies grow fast and become very valuable.

PE (Private Equity): Money used to buy and improve companies, often more established ones, with the goal of selling them later for a profit.

RIA (Registered Investment Advisor): A person or firm that gives financial advice and manages investments for clients like individuals, families, or institutions. Unlike traditional VCs, RIAs have greater investment flexibility; they can invest in secondaries, public stocks, tokens, and late-stage deals. They are also not bound by fixed fund timelines and can operate evergreen or open-ended structures.

While these entities have largely stayed in their own investment lanes, sticking to their charters, the lines started to blur in 2019 when Andreessen Horowitz (a16z) became the first major VC firm to register as an RIA. This move turned heads and caused many others to follow suit—or at least question their own investment strategies. Maybe a16z knew something about the future of VC investing that others didn’t yet see. Maybe they made a fortuitous move that now seems astute given today's volatile economic environment. Or maybe, because of their size, they were able to impose their will on the industry and reshape the landscape. Either way, it seems VCs are no longer content with just investing in startups, and many pundits are wondering if the industry as we know it is starting to disappear.

a16z aside, why are some VCs becoming RIAs? Here are a few reasons:

• M&A activity is volatile

This is a tough one to assess because, on one hand, U.S. tech companies are shelling out big bucks for strategic acquisitions. Meta famously acquired Scale AI to remain competitive in the high-stakes AI race, paying $14.8 billion for a 49% stake in the startup and "acquiring" Alexandr Wang, Scale’s now-former CEO and AI wunderkind. Google's recent acquisition of Israeli startup Wiz made headlines for being one of the largest (and fastest) in recent years at $32 billion.

On the other hand, M&A activity among VC-backed deals has slowed down significantly over the past few years. Total tech deal volume dropped 29% in 2024 compared to 2023, and in 2024, Big Tech only acquired 17 VC-backed startups—their lowest in a decade.

The big acquisitions are exciting, but startups and the VCs who back them can't bank on these headline deals to plan their exits. When M&A activity is down, VCs have to hang on to companies longer than they’d like, delaying LP returns and their ability to cash out. Becoming an RIA allows for a more diverse investment portfolio so that the acquisition activities of Big Tech aren't as impactful.

• The IPO market is weak

Similarly, U.S. tech companies are taking significantly longer to go public than they did a decade ago. Today, the median age of a tech company at IPO is 11 years, compared to 4 years in 1999. This shift is happening for several reasons, including increased access to private capital. But it's undeniable that the bar to go public is much higher than it once was. Companies are now expected to have mature financials, typically around $100 million in revenue, achieve profitability, and continue demonstrating meaningful growth before IPOing. For VCs, this again means longer wait times for liquidity, which is a tough pill to swallow even for the largest of funds.

• Bootstrapping is cool now

This next point might be biased by what the LinkedIn algorithm has been feeding me, but I've noticed a significant increase in posts shunning VC investment in favor of old-school bootstrapping. Raising VC capital isn’t the flex it once was, as founders realize that capital comes at a pretty high cost. If this theory holds true, then it stands to reason that there will be fewer early-stage deals to invest in, which means the percentage ownership that VCs can take by the time the startup is ready for VC investment is lower. This, in turn, means that deals have to exit at a higher multiple for returns to remain consistent, or that VCs must now play the role of PEs: shepherding a late-stage company toward success rather than making many bets and watching natural selection play out. As the fundraising needs of startups begin to change, so too does the funding structures built to support them.

• Fundraising is difficult

It seems that in VC, the biggest buzzword next to "AI" is "family office." Every fund manager, whether actively fundraising or not, is keeping an eye open for potential LPs to either raise funds or raise street cred. And that's because capital, now more than it has been in a while, is hard to come by.

LPs are weary of tying up their money into VC funds because there are fewer liquidity events among portfolio companies. And that would be more acceptable if the returns on VC investing were significantly better than the returns on other asset classes, but save for a few top funds, that isn't the case. For context, the median net internal rate of return (IRR) for VC funds is 10-13%. The net IRR of other asset classes like the S&P 500 and real estate is 10% and 8-12% respectively. With these numbers, why should LPs bother with VC investing when it's no better than your average large cap market fund?

As a VC, this is not to say that VC as an asset class is dead. Far from it. There are many reasons, including high returns, that make VC a compelling investment. But by registering as RIAs, fund managers may have an easier time convincing weary LPs that they can be flexible in their investment charter, if needed.

So, what does this mean for a VC purist?

VC purists, of which I count myself, are those who still wholly believe in venture capital investing and its role in the startup ecosystem. It's a tenuous time to be a purist, but I am optimistic about the future. For one, AI is here to stay, and it will revolutionize all industries and verticals. But before it can do that, we will see many more AI-centric startups form. These startups, whether now or later, will need money to scale in order to keep up with the pace of innovation and competition. That’s where VCs come in. There remains a huge need for venture capital to seed these startups so they can grow to meet the demands of a changing world. Then, M&A activity among big and mid-sized tech companies will resume, because the influx of startups means it will be cheaper to acquire than to hire and build capabilities in-house. Some startups will inevitably break from the pack and become big enough to stand on their own by going public. These liquidity events will mint new millionaires and billionaires in the process among founders, VCs, and LPs alike, making venture capital investing attractive once again.

Second, while being an RIA gives fund managers more flexibility in the types of assets they can invest in, RIAs are highly regulated entities. They have a fiduciary responsibility to choose the best investment vehicles for their clients, which means they can’t freely make high-potential, high-risk bets. But that’s what VC investing is all about: taking big swings in hopes of hitting it out of the park. It’s about having strong conviction in a team or an idea, and investing even when conventional wisdom says not to. It’s about having deep understanding in a space, developing a thesis around it, and backing like-minded founders who can help bring that vision to life.

Venture capital was never for the faint of heart. It was never meant to be a safe or obvious investment. But for those bold enough to attempt it, it offers the chance to help shape the future in ways most people can’t. And I think there's always room (and great reward) for the bold.