Six frameworks that explain the structural dynamics shaping venture capital.
Mental Models for Understanding 2025
1. Barbell Distribution
Capital concentrates at extremes: AI (65%) and Defense ($48B+). Middle sectors squeezed out.
Model: Power law within a power law—AI dominates overall, then a handful dominate within AI.
2. Liquidity Cascade
LP stress (12-13% late calls) → GP pressure → Fast cycle priority → Structural AI advantage.
Model: Market repricing time itself.
3. Trust Arbitrage
53% of capital to repeat founders. Pedigree substitutes for PMF. Track record is tradeable asset.
Model: PMF is no longer the gating factor at seed. Credibility is.
4. Fundamentals Filter
Non-AI must prove economics. Revenue, margins now required. Two-tier evaluation system.
Model: The public market is the ultimate anti-hype mechanism.
5. Vertical Wins
Horizontal AI commoditizing. Vertical captures value. Healthcare, Legal, Code lead.
Model: Domain expertise = moat. Value accrues to the interface and workflow.
6. Consolidation Countdown
Many → Few winners per segment. 2026-2027 M&A window opens. Position for acqui-hire or scale.
Model: The window is closing.
How to Apply These Models
For Founders
- Pick a vertical, not horizontal
- Build for 2-3 year exit windows
- Leverage pedigree or prove fundamentals
- No middle path exists anymore
For Investors
- Monitor AI concentration risk
- Plan for consolidation plays
- Use trust arbitrage for deal flow
- Barbell your portfolio
For Operators
- Evaluate vendor consolidation risk
- Build for vertical AI integration
- Distinguish durable vs. transient
- Prepare for M&A disruption
Key Numbers: 65% AI share | 53% to repeat founders | 12-13% late capital calls | 70% time compression | 2-3 winners per segment
This is part of a comprehensive analysis. Read the full analysis on The Business Engineer.
More Resources
