Perhaps aggressive, multi-stage investing was a quirk of low interest rates

Amid the Silicon Valley Bank-led chaos of the last few days, Y Combinator made an intriguing announcement: It’s pivoting away from late-stage investing. It won’t be the last venture group to pull back from an expansion of its traditional investing remit.

During the COVID-19 pandemic’s first years, the pace at which venture capital firms could raise money expanded. PitchBook data indicates that U.S. venture capitalists saw their capital inflows more than double from $23.5 billion in 2012 to $51.4 billion in 2016. But investing cohort was just getting started: It further bolstered its fundraising from $60.5 billion in 2018 to $154.1 billion in 2021 and $162.6 billion in 2022.

Data visualization by Miranda Halpern, created with Flourish

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This dramatic rise in capital available to venture investors had a number of interesting impacts on the startup market. First, startups were able to raise more, more quickly, more frequently. Some startups raised two or even three times in a year. This led to dramatic markups and paper valuations that today no longer align with reality.

Another result of the boom in venture fundraising was the ability of firms to expand their investing footprint. One trend that lasted for years during the final stage of the last startup boom was late-stage investors going early-stage. The logic here was that if large venture funds could invest a round or two earlier, they could get far greater ownership of great companies at a lower average per-share cost. This, in time, would lead to simply nasty returns.

To pick some examples of this effort, recall that Andreessen Horowitz, a firm that has raised 12 funds with more than $1 billion in them during its life, per Crunchbase data, announced a seed effort in 2021 and a pre-seed endeavor in 2022.