How the VC Markup Industrial Complex Eats Its Own Young
- Aki Kakko
- 5 minutes ago
- 4 min read
There is a dirty secret at the heart of the Venture Capital industry, one that is rarely whispered at LP annual meetings but is screamed in the silence of shut-down startups:
Most VCs are not in the business of generating returns. They are in the business of generating fees.
In the last decade, the asset class has drifted away from the craft of company building and into a financial engineering game defined by a simple, toxic loop: Markup, Markup, AUM, AUM. This cycle enriches the General Partner, confuses the Limited Partner, and ultimately, destroys the Founder. To understand why Meritocratic.Capital is necessary, we must first dissect the mechanics of the "Markup Industrial Complex"—and why it is mathematically impossible for this model to serve the best interests of the founders.
In honest investing, success is measured by DPI (Distributions to Paid-In Capital)—cash money returned to investors. In modern VC, success is measured by TVPI (Total Value to Paid-In Capital)—the theoretical value of the portfolio on paper. The game works like this:
Deploy Fast: A VC firm raises Fund I ($100M). They deploy it rapidly into "hot" sectors.
Markup Early: They lead a Series A, then encourage a friendly peer fund to lead the Series B at a 3x markup 18 months later.
The Paper Win: The VC can now tell their LPs, "Look! Fund I is up 3x on paper (TVPI) in two years!"
The AUM Jump: Based on this "success," the VC raises Fund II. But they don't raise another $100M. They raise $500M.
The Fee Annuity: Management fees are usually 2% of Assets Under Management (AUM).
The GP has effectively exited via fees before a single company has sold a single product. They have traded Performance Carry (risky, long-term) for Shadow Carry (guaranteed, immediate fees).
The Founder as Collateral Damage
If this was just LPs transferring wealth to GPs, it would be a victimless crime of the wealthy. But the primary victim is the Founder. When a VC is playing the Markup Game, they need the portfolio companies to raise capital at ever-higher valuations to justify the fund's TVPI metrics. This creates a misalignment of catastrophic proportions.
The VC encourages the founder to raise at a $100M valuation when the business metrics support $40M. The founder celebrates the headline. But they have just put on a golden handcuff. To exit, they now need to sell for $300M+ to clear liquidation preferences. A life-changing $80M exit—which would have made the founder wealthy—is now a failure. The founder is trapped in a "Unicorn or Bust" binary.
The Burn Rate Trap
To justify that inflated valuation, the company must grow into it. The VC pushes for "Blitzscaling"—hiring hundreds of salespeople, burning cash to buy revenue. The organic, compounding growth that actually builds sturdy businesses (the Industrial Slope) is sacrificed for the sugar high of top-line growth.
The Cramdown Crisis
When the music stops—as it did in 2023/2024—and the "friendly markups" disappear, the company is left with a valuation it cannot support. The result is a down-round, a cramdown, or a recapitalization where the founder is washed out of their own cap table.
The VC, having already collected years of management fees on the inflated AUM, moves on to the next vintage. The founder is left with nothing.
The Meritocratic Correction: Ending the Markup Game
Meritocratic.Capital is not just a different strategy; it is a different physics. It rejects the AUM accumulation model in favor of the Compounding Yield model. Here is how we dismantle the Markup Industrial Complex:
Automated Discovery vs. "Access" Premiums
Traditional VCs pay a premium for "access" to hot deals, which forces them to seek markups to justify the entry price. Meritocratic.Capital uses systematic, data-driven discovery (see: Inside the Machine) to find high-quality assets before they are priced for perfection. By entering at a rational cost basis, we don't need artificial markups to show returns.
Solvency Over Vanity
We do not push founders to raise at the highest possible valuation. We push for the optimal valuation that preserves optionality. We encourage Net Income and Free Cash Flow over "Gross Burn." A company that controls its own destiny does not need to beg for a Series C; it can choose to go public (see: The Liquidity Inversion) or compound privately.
Permanent Alignment
The 10-year fund lifecycle forces VCs to pump-and-dump companies to show velocity to LPs. Meritocratic.Capital operates on Permanent Capital structures. We are not forced to sell a great company just because our fund is expiring, nor are we forced to markup a mediocre company just to raise the next fund.
The Return to Reality
The era of "Markup, Markup, AUM, AUM" was an aberration fueled by zero-interest rates and LP negligence. It turned VCs into asset gatherers and founders into fuel for the fee machine. True venture capital is not about the markup of the next round; it is about the cash flow of the final exit. It is about alignment.
Meritocratic.Capital measures success in one metric: Does the Founder win? Because if the Founder wins, the returns—real, cash returns—take care of themselves.
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