AI is Rewriting the 2/20 VC Capital Model

By Susan Lindeque, CEO, Avestix

I recently predicted that venture capital (VC) — the driving force behind most of the really important tech transformations of the last four decades — will soon be an endangered species. 

Going forward, it will be artificial intelligence (AI) and blockchain technology that power innovation.

Why? In the world of AI and blockchain, traditional VC investing models will be too slow and inefficient to keep pace with modern expectations.  

Similarly, the traditional fee model that VCs and hedge fund managers employed — the “two and twenty” (or 2/20) fee model — will also become obsolete. In that model, backers took 2 percent of assets under management (AUM) as an incentive and 20 percent of profits earned. 

AI, blockchain, and decentralized finance (DeFi) are now reshaping capital markets, making the old 2/20 model obsolete; it cannot survive in an era of instant, AI-driven capital allocation. Instead, automated, transparent, and tokenized investment models that prioritize efficiency, speed, and dynamic value creation will dominate the startup landscape. 

Why the 2/20 Model is Doomed

For starters, AI can make investment decisions faster and more efficiently when compared to traditional investing that relies on human decision-making, which can be slow, biased and expensive.

AI-powered funders can analyze markets in real-time, optimize asset allocation and execute trades autonomously, usually at near-zero costs.

Once this realization permeates the general financial services landscape, investors will no longer tolerate paying 2 percent management fees when AI-driven funds show themselves capable of delivering superior returns at fractional costs.

Tokenized Funds Can Help Reduce Fees

Blockchain-based investment vehicles can replace static management fees with dynamic, self-executing smart contracts propelled by performance.

Tokenized investment structures, meanwhile, can offer instant liquidity, automated rebalancing and transparent fee structures, eliminating the need for high fixed fees.

Taken together, these advancements will result in fees that will likely be more affordable.  

DeFi and Decentralized Capital Will Eliminate Middlemen

Traditional asset managers serve as intermediaries, charging fees for their services, but many of those services are becoming fully automated. Decentralized Finance (DeFi) protocols already allow investors to allocate capital into yield-generating strategies without intermediaries. As DeFi investment models scale, investors can move their capital to more cost-efficient, higher-return structures. 

Those firms adhering to legacy models will have to adapt or die.

Hyper-Speed Investment Cycles Will Become the Norm

Traditional VC models operate in 7-10 year investment cycles, while emerging AI-driven startups will launch, iterate, and exit in months, not years. Once investors embrace this reality, the thought of locking up capital for years at a time in VC portfolios will make no sense.

New Business Models Will Replace 2/20?

The future of investment management will be AI-driven, blockchain-powered, and fully transparent. Instead of the 2/20 model, expect to see performance-based, AI-managed pools of investments, which will be evaluated on outcomes only. Investors will pay fees based on true profits, not arbitrary percentages. Meanwhile, smart contracts will offer investors full transparency, eliminating hidden fees. 

Meanwhile, decentralized autonomous organizations (DAOs) will replace traditional hedge funds. They will use AI-driven quant strategies to execute trades across global markets, free of human error. Investors will stake capital directly into these AI-driven strategies, taking fund managers out of the picture entirely.

Instead of high-fixed fees, look for low-cost subscription models that invite investors to pay flat fees for access to AI-powered investment platforms. Think Netflix-Style investing, where investors choose which AI models they want to manage their portfolios, just like they select which shows they will stream.  

Newly empowered peer-to-peer investment communities will form and capital allocation decisions will be made collaboratively. They will use AI to curate investment ideas and assess risk, all in real time.

Investing Going Forward 

The 2/20 model was built to leverage human expertise, but the future of investing, like every industry, is now being reshaped by AI. 

AI-driven investing will be powered by efficiency, making it likely to outperform human-managed funds. Tokenization will create real-time, dynamic investment vehicles.

As a result, traditional VCs, hedge funds, and private equity firms will need to transform or face obsolescence. 

As I wrote previously, in five years, venture capital as we know it will be dead, replaced by AI-driven, decentralized and tokenized economies.  In that same period, legacy investment firms that rely on outdated investing models also face extinction. 

Meanwhile, those ready to unleash new strategies using AI, blockchain and DeFi will be the ones likely to prosper. 

Ready to invest in the future? Contact Avestix and let’s chat. 

All investments involve risk and some investments and investment sectors discussed may not be suitable for all investors. Please consult your financial advisor before making any investment decisions.