Every other conversation I’m having these days is about whether or not we are in an AI bubble. Coatue has argued we’re in a durable AI supercycle, not a bubble, while Derek Thompson has laid out plausible paths for an AI bubble to burst. I’m not interested in sharing yet another take on Bubble Watch 2025, but I want to offer some observations on market cycles in early-stage venture markets.

Venture capital is unusually but structurally bubble-prone. In public markets, by contrast, every trade nets a buyer and a seller with (roughly) opposite beliefs. The optimist goes long; the pessimist sells or shorts. In early-stage venture, the “seller” is typically a founder issuing new primary shares, who remains massively long the company, since they often are the majority owner and the company is their livelihood. Of course, the “buyer” is a VC who is also long.

There’s no natural short, and skepticism can’t easily be expressed in price. Classical finance predicts that when disagreement is high, yet short-selling is constrained, prices reflect the optimists’ views, not a balanced consensus. While in the long run every market is a weighing machine, early-stage venture in the short run is a voting machine with only one button.

The result is a market with a unique capacity for bubbles: belief meets belief, capital is plentiful, and price discovery is slow. When fund inflows accelerate and “money chases deals,” they raise deal prices as Gompers & Lerner documented two decades ago. But we don’t need to go that far back: we saw a modern replay in 2021 as step-ups and median valuations hit records. When the tide turned, down rounds and valuation resets followed as nearly one in five priced rounds were down rounds by late 2023.

This market structure changes the craft of investing. The game is usually framed as “find the winning needle in the needlestack”, and selection matters because venture returns are power-law distributed. But that is only a partial truth. The lesson of the power law isn’t that “selection is all that matters,” or that being in the right names alone is enough. Instead, it’s that selection along with sizing (the amount of exposure taken) and timing (the terms and moment selected) are the only reliable tools an investor has to make the power law work for the fund and its LPs rather than just for the company. Yes, a single investment will often return the fund and more, but that is exactly why overpaying for even the right company, or owning too little of it, sinks fund-level outcomes.

In euphoric periods, investors tend to neglect the less glamorous half of the job. They stretch on price (timing), accept thinner ownership (sizing), or front-load enormous initial checks (also sizing) because “this is the one.” Deals get papered in lightning-fast processes that prioritize speed over price discovery.

For my founder friends reading, it’s worth noting that this is all founder-friendly and great for getting capital raised, but it can make it hard to know who the true believers are since it can be easy to misread speed as conviction rather than FOMO. But it comes to light when the company inevitably finds itself in a different market environment and those tourist investors find themselves with thin ownership in an overvalued company. What ensues usually isn’t pretty.

At the ecosystem level, funding many at-bats from many founders is good, especially when less euphoric times might not have funded those startups. It’s a key part of our innovation-driven economy. But at the fund level, paying any price for those at-bats is not good. An investor’s job is to fund innovation and deliver returns — in other words, survive.

The paradox is that when everyone focuses on picking, the marginal edge often lives in sizing and timing. The best compound an entry edge into a fund-level edge through discipline. They demand adequate ownership for the risk taken and cautiously allow price to affect their appetite even for beloved and most obvious companies. They also use pacing, reserves, and pro-rata selectively. This can feel like moving against the cycle instead of with it, but it forces real conviction.

None of this, though, is an argument for stinginess or market-timing heroics. Meeting founders where the market is will still be required. Not doing a great deal or sitting out a super-cycle because of price is a risk unto itself.

But this is a reminder that venture’s structure of optimists transacting with optimists, little shorting, and capital that arrives in bursts makes it unusually vulnerable to narrative overshoots. When belief is abundant, selection converges (most people agree on the same handful of names), so sizing and timing become the scarce behaviors that actually differentiate returns.

Put differently: in cold markets you win by being willing to believe and in hot markets you win by being willing to budget and pace that belief.