At first, venture capital was (may have been?) like any other investment strategy: the goal is to generate a portfolio that delivers a high return on investment.

The problem? Variance, mixed with a short-term/instant-gratification culture at all levels of society. The more variance, the more whale-driven the business. You end up with binary returns: no whale, and you lose (relative to your peers) and even if you did everything else right it fucks up your career; or you get a whale, and you win. The doubles (3x) and triples (10x) don't matter and it's all about the elusive home runs (1000x). Or, I believe the term of art these days is "unicorn", because chasing an animal that only exists in the mind of people under 10 just makes sense in this culture of neoteny.

The second-stage venture capital wasn't about portfolio returns. Even if you had a profitable array of doubles and triples, you could face redemptions or struggle to raise the next fund, because you wouldn't have a visible proof of competence. Sure, you did 20% per-year, but that guy over there who lucked into Facebook did 25% per-year (even though that one lucky call saved him).

Also, the career-making allure of access outgrew the original job of delivering the best returns possible. So it became about "having been in on" a Google or a Facebook, even if most of the portfolio withered on the vine. That's why you get the culture of note-sharing (often inappropriate and illegal) and co-funding and collusion. VCs aren't chasing returns, which is what their investors want; they're chasing the intangibles that come with the appearance of prescience and social access, and those only come with the whales. An added bonus for VCs, which helps them personally but not their portfolios, of the extremely-high-variance strategy is that it opens up executive positions for underachieving friends who need favors. "Lifestyle" businesses that grow at 30% per year don't, because those tend to need specialized skills at executive levels. But the neat thing about a company that is really just a pile of cash and young coders ready to "pivot" on a dime is that any idiot can be placed at an executive level.

In this third phase, the game isn't about finding big winners but creating them. The VCs have fully grown into their role of king-makers, injecting huge sums of cash to end the game for all competitors almost instantly, create a "natural monopoly", and exploit it for 5-15 years until the monopolistic advantage fades (as it will if the idea is any good). Your product doesn't matter if your competitor gets a 9-figure injection, because that'll pay poaching fees for your best people, generate a lot of press, and push you aside.

That's where we are, now. The VCs don't invest money into a market that then decides what succeeds or fails. They have so much money that they pick the winners, with not only their resources but their nearly absolute power over exit arrangements. ("Call Tom at Google. He owes me a favor. Let him acqui-hire this stinker at $4M per engineer so I don't have to think about it anymore.") Obviously, there are constraints upon them because they can't just fund anything-- they would run out of political capital if all they produced were stinkers-- but they have so much power at this point that almost all valuations are recursive.