Why Current VCs Are Traders, Not Investors

Aki Kakko
11 hours ago
4 min read

Updated: 12 minutes ago

If you ask a General Partner at a top-tier VC firm what they do for a living, they will use noble words like "investing," "partnering," and "building." They will talk about "long-term alignment" and "journeying with the founder." This is a delusion.

Strictly speaking, currently Venture Capital is not the business of investing. It is the business of trading.

To understand the distinction, we look to the fundamental definition of the terms:

Investing: Buying an asset to hold it while it generates value (compounding) over an indefinite period. The value comes from the internal cash flow of the asset.
Trading: Buying an asset with the specific intent of selling it to someone else at a higher price in the short-to-medium term. The value comes from the transaction (the markup).

As we established in The 10-Year Trap, the structural mechanics of the modern VC fund—the deployment clock, the fee structure, and the pressure for DPI (cash returns)—force VCs to act as Swing Traders in 3-to-5 year cycles.

They are not looking for a business to own; they are looking for a "Bag Holder" for the next round.

The "Greater Fool" Relay Race

The entire VC ecosystem is designed as a high-stakes relay race of liquidity, where the baton is the startup and the goal is to pass it before the music stops. This works because of the "Access Alpha" monopoly. The cartel passes the hot ticket from one member to the next:

The Seed Fund (The Scalper): Buys equity at $10M. Their goal is not "profitability." Their goal is to package the narrative nicely so the Series A fund buys it at $30M.
The Series A Fund (The Momentum Trader): Buys it to pump the metrics just enough to sell the "growth story" to the Tier 1 firm.
The Growth Fund (The Flipper): Buys it at $100M. Their goal is to offload it to the Public Markets (IPO), Strategic Buyer or Private Equity.
The Public Market (The Bag Holder): Often the "Greater Fool" (Retail Investors/Pension Funds) who is left holding the asset when the hyper-growth slows down and the valuation crashes back to reality.

At every stage, the investor’s primary psychological question is not: "Will this company be around in 30 years?" It is: "Who will buy this from me in 24 months?"

The TVPI Illusion: Trading on Paper

Why do VCs trade? Because as we learned in The Theater of Innovation, they are in the marketing business. In the first 5 years of a fund, a VC cannot show cash returns (startups take time to exit). So, to raise their next fund and secure those guaranteed management fees, they need to show TVPI (Total Value to Paid-In Capital).

TVPI is a phantom metric. It is based on the Markup.

If I invest in a company at a $10M cap...
And I convince my friend at a Growth Fund to lead the next round at a $100M cap...
I can tell my LPs: "Look! I generated a 10x return!"

I haven't generated a single dollar of actual wealth. I have simply successfully executed a trade setup. I have marked up my book. This creates a perverse incentive to push founders into the "Burn Rate Trap".

VCs encourage founders to raise capital they don't need, at valuations they can't justify, simply to trigger the "Mark Up Event" that allows the VC to market their own fund.

The Psychology of the Trade: FOLS

This trading mentality is reinforced by the Fear of Looking Stupid (FOLS).

Investors are contrarian. They are willing to look stupid for a decade (like holding Amazon in 2001) because they believe in the fundamental truth of the asset.
Traders require consensus. You cannot trade an asset if there is no buyer. Therefore, Traders herd.

This explains why VCs all rush into the same "hot" sectors (Crypto, Generative AI, Scooters) at the same time. They aren't analyzing the technology; they are analyzing the Order Book. They are buying because they know the "Greater Fool" (Softbank, Meta or the Public Market) is just behind them, ready to buy at a higher price.

The Cost of Trading: Interrupting the Compounder

The tragedy of this model is that it destroys the most powerful force in finance: Compounding.

Charlie Munger famously said: "The first rule of compounding is: Never interrupt it unnecessarily."

Every time a VC forces a "Liquidity Event"—a secondary sale, a premature M&A, or a rushed IPO—they are interrupting the compounding to satisfy their own internal fund timeline.

Taxes and Fees are extracted.
Distraction creates operational drag.
Opportunity Cost is realized.

If you treated Amazon as a "Trade," you bought it in 1997 and sold it in 2003 for a 50x return to return capital to your LPs. You looked like a genius. If you treated Amazon as an "Investment," you held it until 2025. You didn't make 50x. You made 2,000x.

The "Trader VC" captures the volatility. The "Investor VC" captures the dynasty.

The Return to Ownership

This is why Self-Service VC (Dynamic Allocation) combined with Permanent Capital is the only way to return to true investing. By breaking the 10-year clock and removing the need to fundraise every 3 years, we remove the incentive to trade.

We do not need Markups: We don't have to impress LPs with paper gains. We can wait for real cash flow.
We do not need Exits: We are happy to hold a cash-flowing, high-growth company forever.
We buy the Asset, not the Round: Our Venture Operating System looks at the Ghost (the metrics), not the Signal (who else is investing). We aren't guessing who the next buyer is. We are comfortable being the final owner.

The stock market, as Buffett said, is a device for transferring money from the impatient to the patient. The current VC industry is a machine designed to be impatient. We are building the machine for patience.