The Marlboro VC: Why the Venture Capital Industry Won’t Quit Its Addictions

In the mid-20th century, the tobacco industry operated on a "polite fiction." Behind closed doors, the science was clear: the product was harmful. But publicly, the marketing was about glamour, lifestyle, and "doctor-recommended" filters. The incentives—billions in predictable cash flow—were too powerful to allow for a pivot to a healthier alternative until the entire system was forced to change.

The venture capital industry is currently in its "Tobacco Era."

Ask any experienced General Partner or Limited Partner over a drink, and they will admit the truth: the 10-year closed-end VC fund is a "carcinogen" for innovation and compounding. They know that IRR is a manipulated metric, that "value-add" is mostly theater, and that forced exits destroy more value than they create. And yet, the industry continues to build new cigaret factories. They aren't doing it because they are blind; they are doing it because the incentives are designed to prevent them from quitting.

Management Fees: The Nicotine of the GP

In a 10-year fund, the management fee is the nicotine. It is a steady, addictive stream of cash flow that allows a firm to survive regardless of whether they actually generate alpha.

As we discussed in Too Much Capital, Too Few Deals, this creates a perverse incentive to maximize AUM (Assets Under Management) rather than MOIC (Multiple on Invested Capital). If you quit the 10-year cycle to move to a permanent capital model, you "lose the buzz" of the recurring fee on a multi-billion dollar fund. The GP isn't incentivized to fix the model; they are incentivized to raise a larger version of the broken one.

IRR: The "Filter" on the Cigarette

The industry uses Internal Rate of Return (IRR) the same way the cigarette industry used "filters"—to make a toxic reality look smoother.

IRR rewards speed over total return. It allows VCs to look successful by "flipping" companies quickly, even if it kills the multi-decade compounding engine. Everyone in the room knows that IRR can be "gamed", but LPs accept it because it’s the standard metric they use to justify their jobs to their boards. It’s a "safe" way to smoke.

Career Risk: Why LPs Can’t Quit

LPs (pension funds, endowments) are fully aware that small number of firms capture all the value. They know that the "brand-trading" they do at the mega-fund level is unlikely to beat a simple index fund. But for an allocator, the incentive is not to find the "next Meritocratic.Capital"—it is to avoid being wrong alone. If you invest in Sequoia and it fails, it’s a "market event." If you invest in a new, systematic permanent capital model and it fails, it’s a "firing offense."

The institutional incentive is to keep smoking the same brand, even as the cough gets worse.

The "Trader Mindset" as a Second-Hand Smoke

In Why VCs are Traders, Not Investors, we highlighted that the 10-year clock forces a "sale" mentality. This doesn't just hurt the investor; it’s "second-hand smoke" for the founder. The entrepreneur is forced to optimize for a "realization event" rather than building a multi-generational business.

The venture industry’s addiction to the "exit" creates a toxic environment where founders are pressured to sacrifice long-term moats for short-term markups.

The Inevitable Health Reform: Meritocratic.Capital

The cigarette industry didn't disappear, but it was disrupted by a "cleaner" delivery mechanism and generally healthier lifestyle. In the capital markets, that "cleaner" delivery mechanism is Permanent Capital. At Meritocratic.Capital, we have removed the carcinogens from the system:

• We removed the 10-year clock: Replacing forced exits with multi-decade compounding.

• We removed the realization tax: Creating liquidity via an IPO of the Holding Company, not the sale of the assets.

• We removed the "Consultancy Theater": Replacing expensive partners with Self-Service Infrastructure.

The Last Puff

The legacy VC industry won’t change because it can’t—it is structurally dependent on the current incentive trap. The GPs need the fees, and the LPs need the brand safety. But for those who recognize that the air is getting thinner, there is a different path. Meritocratic.Capital is not an "alternative fund." It is a new operating system. We are building the architecture for an era where capital is permanent, compounding is uninterrupted, and the only "addiction" is to actual value creation.

The industry knows it’s time to quit. We are the patch.