Equidam's Dan Gray: venture capital is in stagflation — most mid-market firms are stuck in the dead zone

Summary

Dan Gray, head of insights at Equidam, a startup valuation platform, argues that venture capital is in stagflation: less overall activity, but prices in concentrated areas running much higher than before. The winners — Founders Fund, a16z, Sequoia — are doing fine. Everyone else is increasingly stuck.

The dead zone

Gray endorses a framework where the VC market has bifurcated into what he calls "venture banks" (a16z, Thrive, and peers operating at scale with high velocity and lower IRR targets) and traditional, more contrarian funds (Benchmark, Founders Fund) that maintain discipline and generate strong signaling value for founders. Mid-market firms that haven't picked a lane — Series A investors still trying to compete in AI without the scale or the brand — are the ones under the most pressure. The analogy that captures it: Tiffany at the top, Walmart at the bottom, and JC Penney in the dead zone.

Liquidity makes the problem concrete. Venture banks are generating returns through secondaries on their biggest winners. Traditional managers rely on IPOs and M&A, both of which have been slow. Mid-market firms caught between those two models have no clear path to liquidity.

The fee structure question

Gray is less certain whether some of this reclassification into "venture capital" is fee-driven — public markets managers capturing 2-and-20 instead of 1-and-10 by labeling themselves VCs — but the incentive is clearly there. He suggests LPs should be scrutinizing this more than they apparently are.

Angel market contraction

Angel activity is down roughly a third compared to 2021–22 levels, Gray says, largely because attention has concentrated so heavily on AI that many angels have simply concluded they can't compete for those deals and have stepped back.

Risk management and portfolio construction

Only 10% of venture firms make it to Fund IV. Gray argues the core problem is under-diversification at the portfolio level. Most emerging managers run ~25 companies per fund; Gray cites Dave McClure's argument that a seed fund should hold closer to 100 companies, given how few startups ever become unicorns or decacorns — and that you fundamentally cannot identify the winners at the time of initial investment. Over-concentration means a bad first fund ends the firm; there is no Fund II to learn from. A 2.5–3x return on Fund I, while less exciting, is enough to earn a second fund and improve over time.

He pushes back on the idea that the power law symmetry between startups and VC firms is somehow elegant or appropriate. VCs don't need to be boom-or-bust to be effective — more stable managers would produce better outcomes for founders, LPs, and the broader ecosystem.