Venture Capital's Long Game: Why VC Firms Should Become Policy Powerhouses
Paul Fehlinger and Nicolas Colin decode why VCs are suddenly engaging in policy to win in regulated markets.
“Within a few years, most VC firms will have dedicated policy functions.”
That bold prediction from Hemant Taneja, CEO of General Catalyst, during our conversation at the AI Action Summit 2025, reflects a shift that is already well underway. His firm’s newly established GC Institute is just one example of how venture capital is evolving to engage more deeply with policy and governance.
For some time, Nicolas Colin—entrepreneur, VC, and one of the sharpest thinkers at the intersection of capital, innovation, and policy (see his blog DriftSignal)—and I have discussed this convergence. What’s taking shape is nothing less than a fundamental reinvention of how venture capital operates.
This transformation isn’t just a response to regulation; it’s a structural shift in the industry’s business model. As venture capital moves deeper into inherently regulated markets, the old short-termism is giving way to long-term strategic engagement. Sustained dialogue with policymakers and other stakeholders is no longer just prudent—it’s becoming a competitive advantage.
After many conversations, Nicolas and I finally put pen to paper to map out this shift. In the analysis that follows, we break down the forces reshaping venture capital and why this evolution may prove to be one of the industry’s most consequential yet.
Venture capital (VC) is undergoing a fundamental transformation. As innovation increasingly targets regulated industries, the rules of the game are changing. The most successful VC firms of the next decade won't just provide capital—they'll become sophisticated policy players capable of co-designing regulatory environments for cutting-edge technologies, not merely reacting to them.
In this article, we explore how the VC industry is being reinvented at the intersection of innovation, regulation, and long-term capital deployment. The transformation rests on four critical pillars that forward-thinking firms are already embracing:
First, the shift to regulated industries is accelerating. High-growth ventures are moving beyond pure software into healthcare, artificial intelligence, energy, advanced manufacturing, and dual-use technologies—sectors where regulatory engagement isn't optional but essential from day one.
Second, structural changes within VC itself have created new economic incentives. Extended fund lifecycles, innovative liquidity mechanisms, and increasingly diverse limited partner bases now reward firms that can create sustainable value in regulated markets over longer time horizons.
Third, policy strategy has evolved from reactive to proactive. What was once viewed as mere regulatory compliance has transformed into a proactive strategy generating measurable alpha through market access acceleration, regulatory navigation, relationship building, thought leadership, and strategic positioning.
Finally, as these trends converge, policy sophistication is becoming the competitive differentiator that separates market-leading venture firms from merely commoditized capital providers.
This article charts the evolution of VC's stance toward policy—from historic detachment to strategic engagement. It examines how leading firms, especially in the US, are already developing regulatory capabilities as competitive advantages in today's complex markets. The implications for innovation financing are significant, particularly in Europe, where distinct regulatory and market structures present both challenges and opportunities.
VC and Policy: It's Complicated
Venture capitalists (VCs) have historically avoided policy-related matters for several reasons. Few have formal training in the field, and most policy expertise in the tech sector resides within dedicated teams at large tech companies. Andreessen Horowitz’s 2015 hiring of Ted Ullyot, a former George W. Bush administration official, as a partner in charge of policy, was one of the earliest exceptions. The prevailing assumption has been clear: policy is a challenge to be addressed at the portfolio company level—and in most cases only at a later stage—rather than by an investment firm managing an entire portfolio. The main exception is when VC firms have a direct stake in their operating environment and lobby for their own interests, such as stock options, carried interest, European capital markets, or the 28th regime (also known as EU-Inc). In the US, the National Venture Capital Association (NVCA), founded by Lionel Pincus and other prominent VCs in the 1970s, has an already long tradition of lobbying on behalf of the entire industry.
A psychological factor is also at play. As one equity analyst wryly observed to one of the authors during a closed-door policy discussion, while 80% of telco profits depend on regulatory decisions, many telco CEOs act as if the opposite were true. Not because regulations don’t matter, but because acknowledging their outsized influence would undermine the CEO’s sense of agency—and perhaps the justification for their sky-high salaries. Similarly, VCs often view a portfolio company’s success as a product of their strategic insight and value-adding contributions. Admitting that policy and regulation might play an even greater role in their portfolio’s performance would mean reckoning with the limits of their own influence.
Finally, there's an element of self-selection. VCs have traditionally avoided startups targeting heavily regulated markets because VC economics relies on increasing returns to scale, which regulations often impede. Regulations can limit growth potential (as when German regulator BaFin required neobank N26 to slow its expansion to ensure compliance) and create market fragmentation, as regulatory requirements vary across jurisdictions. Both scenarios diminish returns to scale, running counter to the original VC model that seeks high growth and outsized returns in 5-7 years.
In retrospect, the VC industry's historical aversion to policy engagement seems paradoxical given the clear regulatory challenges faced by iconic tech companies between 2000-2020. Google battled with rights holders; Facebook struggled with content moderation; Uber clashed with the taxi industry; Airbnb faced opposition from hotels and local governments; and financial technology firms such as Monzo, Revolut, and N26 navigated complex regulatory frameworks.
Several factors explain why these cases didn't prompt VCs to address policy challenges directly. First, these companies initially adopted aggressive approaches—“move fast and break things” or “act now, ask for permission later”—when facing regulatory obstacles, with everyone, including investors, seemingly assuming that policy needn't be an issue at the early stage. Then, policy expertise was typically developed at a later stage, when companies could afford specialized teams of lawyers and lobbyists, with investors playing peripheral roles. This sequential approach reinforced the belief that VC involvement in policy wasn't necessary: companies should disrupt first, scale rapidly, then handle regulations themselves once established.
Moreover, the VC industry itself evolved to avoid policy conflicts by increasingly focusing on low capital expenditure B2B/enterprise software-as-a-service (SaaS) startups—a space generally less regulated or where regulatory responsibility ultimately falls on the customer rather than the service provider. While VC activity expanded significantly during the 2010s, this wasn't necessarily due to more traditional VCs entering the market. Rather, as unconventional investors flooded the ecosystem with capital, traditional VCs retreated to the safer niche of funding B2B SaaS startups where policy concerns were minimal. When companies like Uber transitioned from disruption to compliance, subsequent funding rounds were often led by institutional investors rather than VCs, as the companies had largely taken control of their regulatory challenges independently.
The New Era of VC and Policy
For nearly 15 years, VC has been anchored in SaaS, a model with low capital expenditure requirements and minimal regulatory hurdles. This allowed VCs to focus on rapid scaling while avoiding policy concerns and maximizing returns within short timeframes. That era is now ending.
The next wave of innovation is emerging in heavily regulated sectors—artificial intelligence, healthcare, crypto, energy, advanced manufacturing, or dual-use technologies. Unlike the “disrupt first, deal with regulators later” mindset that defined early software investments, these industries require continuous engagement with policymakers from the outset. High-growth ventures increasingly operate at the intersection of innovation and regulation, demanding specialized expertise to navigate complex policy environments.
At the same time, geopolitics is reshaping markets. The relatively frictionless global expansion that technology companies once enjoyed is giving way to a more fragmented landscape, marked by assertive industrial policies, protectionist trade measures, and growing jurisdictional tensions. Scaling across markets now requires navigating these geopolitical complexities. This is further enhanced by government procurement becoming a critical channel for startups in strategic sectors. The historical VC playbook—built on rapid international expansion—faces new challenges as cross-border growth across the US, Europe, and Asia becomes far less straightforward.
Looking back, the relationship between VC and policy has evolved through three distinct eras. From the 1940s through the 1970s, VC emerged from the interplay between public funding and private innovation. Early pioneers like Arthur Rock helped create Fairchild Semiconductor using technologies developed through defense contracts and ARPA funding. During this period, the state wasn’t just a regulator—it was the primary customer, research funder, and market-maker, forging a symbiotic relationship between government and high-tech innovation.
The digital revolution of the 1980s through the 2010s marked a break from this interdependence. Software’s intangible nature and favorable regulatory conditions allowed VCs to operate with unprecedented independence from the state. Key policy developments—most notably Section 230’s liability protections for internet platforms—combined with rapid globalization to create ideal conditions for VC-backed growth. Software services and platforms became the dominant investment model, offering high margins, minimal regulatory oversight, and short investment cycles. The prevailing VC strategy—disrupt first, scale rapidly, and address regulations later—proved extraordinarily effective in delivering outsized returns.
Today, as VC investment shifts toward infrastructure, AI, healthcare, crypto, energy, and dual-use technologies, we are seeing a return to deeper interdependence between innovation capital and government. These sectors operate within complex regulatory frameworks from day one. This new era isn’t merely a return to the past but an evolution—where regulatory engagement is no longer just a constraint to manage but a core driver of value creation and market formation.
VC’s Structural Transformation
For decades, VC thrived in a world where software-driven innovation operated largely free from policy constraints. The traditional VC model—fixed-term funds, institutional limited partners (LPs), and 7-10 years investment cycles—was well-suited to this environment. However, this model, too, is now undergoing a profound transformation.
Institutional LPs—whose decades-long return horizons demand legal certainty—are shifting away from the traditional “move fast and break things” mentality. In response, VCs are not merely adapting to changing market conditions; they are fundamentally rethinking their business model. Shifts in investment horizons, investor composition, and liquidity mechanisms are reshaping how the industry operates.
Traditional exit routes are also becoming less reliable. IPO markets remain challenging, while acquisitions—though still common—face growing regulatory scrutiny. In response, robust secondary markets have emerged, allowing investors to sell startup shares and creating alternative liquidity paths. These mechanisms reduce dependence on IPOs and acquisitions, enabling investors to hold long-term positions while maintaining flexibility.
Meanwhile, VC’s investor base is expanding. Private wealth investors—including family offices and high-net-worth individuals who collectively control $450 trillion globally—are increasingly entering the space. According to a 2024 PitchBook study, they are expected to deploy $7 trillion into VC by 2033. These investors demand greater flexibility and liquidity options than institutional LPs, further pressuring venture firms to develop adaptable fund structures.
By mid-2024, 19 leading firms, including Sequoia, Andreessen Horowitz, Lightspeed, Accel, and General Catalyst, had restructured as Registered Investment Advisors (RIAs) in the US. While RIA status brings increased regulatory oversight, it also allows firms to hold assets much longer while still providing liquidity options for LPs. Since 2019, nearly $400 billion has flowed into these models, which better accommodate regulated markets with extended development cycles.
This shift aligns with the needs of today’s startups. Unlike the software-driven ventures of the past, capital-intensive sectors such as energy, AI, healthcare, defense and advanced manufacturing require longer investment timelines. The traditional seven-year fund cycle, optimized for the rapid scale-up of SaaS businesses, is increasingly misaligned with the development trajectories of these industries.
As VC firms evolve into larger, permanent investment platforms, they are naturally gravitating toward regulated markets. These industries require longer horizons and greater capital commitments, making regulatory certainty a priority. In turn, this deepens policy engagement, which becomes a competitive advantage—attracting more capital and reinforcing VC’s structural transformation.
Policy Engagement: Evolution Not Revolution
Big VCs could always just call ministers or government administrators to solve an urgent regulatory issue, but now more systematic engagement is needed. The industry is transitioning from relationship-based ad-hoc influence to expertise-driven engagement. This is not just about lobbying or regulatory compliance—it is a strategic imperative that directly impacts investment success.
Modern VCs need capabilities for ongoing regulatory management across jurisdictions. Portfolio management requires persistent rather than episodic policy engagement. In capital-intensive sectors with decade-plus time horizons, regulatory certainty is crucial for reducing risk. As one naval tactical principle suggests, “Slow is smooth, and smooth is fast.” By proactively engaging with policymakers, VC firms can create a more predictable operating environment for their portfolio companies, ultimately accelerating progress and performance. The traditional “move fast and break things” approach is being replaced by “move fast while shaping the environment”—a recognition that regulatory frameworks are not just constraints but essential infrastructure for innovation.
In addition, early-stage startups in regulated markets lack capacity and experience for policy navigation. VC firms provide increasingly sophisticated regulatory guidance as a core value-add. Forward-thinking VC firms increasingly see policy expertise not as an external function to be outsourced but as a core capability that creates a competitive advantage. This advantage manifests in multiple ways: better deal sourcing in regulated industries, more effective portfolio company support, enhanced ability to anticipate regulatory developments, and deeper relationships with key stakeholders.
A growing number of firms are already pioneering this approach, investing in substantial policy capabilities to differentiate themselves and succeed in increasingly regulated markets. General Catalyst's 2024 establishment of its Institute and Andreessen Horowitz's earlier efforts signal this transformation from episodic to systematic policy engagement. The cryptocurrency sector exemplifies this evolution, with Haun Ventures and Paradigm's Policy Lab developing capabilities that shape regulatory frameworks rather than merely responding to them. We also witness firms like Breakthrough Energy Ventures that developed, at least in the past, significant capabilities to engage with energy policy.
Some firms have built entire investment theses around regulatory navigation: Tusk Ventures in the US, alongside Form Ventures in the UK, deliberately target regulated sectors, positioning policy expertise as their primary competitive advantage in markets where regulatory acumen directly drives returns. In Europe, Index Ventures has established its Not Optional initiative, while EU-Inc represents another example of more visible and active policy engagement of VCs.
Building Policy Functions
The transition from ad-hoc policy engagement to structured policy capabilities requires a deliberate approach. VC firms seeking to develop these functions must consider scale requirements, cost structures, and strategic alternatives based on their unique positioning in the market.
Different fund sizes naturally require different approaches with varying cost structures. Large multi-strategy platforms can amortize policy costs across numerous investments, while focused funds must develop more targeted capabilities aligned with their specific sectors. The economics of a dedicated policy function typically become viable at the $300-500 million AUM threshold while the US market provides evidence that funds with $2bn+ AUM are pioneering the establishment of policy functions. At this scale, firms can support specialized personnel who develop expertise across relevant regulatory domains.
For larger multi-stage firms managing billions in assets, comprehensive policy teams may include former government officials, regulatory specialists, and sector-specific experts organized as a shared resource across funds. Notably, sector-specific funds may require policy expertise at smaller AUM levels due to the regulatory intensity of their focus areas. A $150 million fund focused exclusively on healthcare or financial technology may need more substantial policy capabilities than a $1bn million AUM generalist fund due to the regulatory complexity inherent in these sectors.
While scale matters, smaller funds can develop effective policy capabilities through strategic alternatives. These include forming industry coalitions to address common regulatory challenges, sharing policy resources with complementary venture firms, cultivating networks of on-demand policy advisors, and partnering with think tanks or academic institutions for specialized expertise. The most effective approach is often incremental—starting with targeted external partnerships and gradually building internal capabilities as assets and regulated portfolio companies grow, allowing firms to develop policy expertise that matches their strategic needs while maintaining cost discipline.
As for organizational models, they vary widely: some firms integrate policy specialists directly into investment teams, while others maintain separate policy groups that collaborate with deal teams. Forward-thinking firms increasingly favor hybrid models, where policy professionals participate in both investment decisions and portfolio support.
Policy function costs can be justified through multiple value-creation mechanisms. Enhanced due diligence capabilities identify regulatory risks and opportunities during the investment process, preventing costly mistakes and uncovering overlooked opportunities. Firms with sophisticated policy functions can evaluate regulatory risk profiles more accurately than competitors, giving them an edge in pricing and structuring investments.
During the holding period, policy expertise creates measurable returns through regulatory navigation, compliance cost reduction, and strategic positioning. In regulated markets, building the product and contributing to shaping the enabling regulatory environment must happen simultaneously. Early-stage companies typically lack the bandwidth to engage in sophisticated policy development for cutting-edge technologies.
This is where forward-thinking VCs create distinctive value—by engaging with regulators and policymakers to shape frameworks that enable innovation while their portfolio companies focus on technology development. This parallel approach, where VCs help build both the product and its regulatory foundation, represents a fundamental evolution in the investor-company relationship in regulated sectors.
Long-term participation in policy discussions builds reputational capital with regulators, industry groups, and entrepreneurs. This translates into proprietary deal flow as founders in regulated industries increasingly seek investors who can provide regulatory guidance alongside capital.
In other words, policy sophistication is becoming a competitive advantage in the VC market. Strategic regulatory positioning is as valuable as product-market fit for some ventures. The ability to understand both global policy trends and local regulatory nuances creates advantages that directly impact investment success. It enables the most advanced firms to secure the best deals, better negotiate the terms, better help their portfolio companies scale across borders, and bring most of their investments in regulated industries to fruition.
The culmination of these trends is the emergence of what might be called "VC+" models—VC firms that extend beyond traditional boundaries and begin to resemble diversified financial institutions like Blackstone, Carlyle, or KKR. These firms retain their venture focus but develop flexible investment horizons, multiple investment vehicles, diverse liquidity options, and comprehensive policy capabilities. They represent a new breed of capital provider, uniquely positioned to navigate the intersection of technology, capital, and policy in today's complex innovation landscape.
Europe's VC Paradox
While the transformation of VC is well underway in the US, Europe faces unique structural challenges that complicate its ability to adapt. It’s not that Europe has more regulations than the US. Instead, one of the primary obstacles is at the same time one of the biggest reasons why VC firms need policy capacities: market fragmentation. Unlike in the US, where VC firms can scale nationally with relative ease, European VCs often operate within national markets. This is partly due to the nature of their anchor LPs—many of which are government-backed institutions like KfW in Germany or Bpifrance in France—tying capital to specific geographies.
Another constraint is the limited scale of European VC firms. Most manage smaller funds than their American counterparts, making it difficult to sustain dedicated policy functions. Compounding this issue is the mindset of European LPs, who often lack the continental perspective needed to support truly pan-European VC firms capable of competing on a global scale.
This creates a paradox: just as Europe needs strong venture-backed innovation to maintain economic competitiveness, its venture ecosystem lacks the scale, structure, and policy capabilities necessary to thrive in regulated markets.
The historical parallel of the Rothschild banking dynasty, which established branches across European financial capitals in the 19th century and developed sophisticated information-sharing systems, offers an instructive model. European venture firms may need to adopt similar approaches, developing networked policy capabilities across multiple jurisdictions rather than centralizing expertise in one large city alone, whether it's London, Paris, or Munich. Evidence of this approach is the EU-Inc campaign to establish a 28th incorporation regime for pan-European startups that is backed by multiple top VC firms and steered by two Berlin-based solo-GPs, or the Not Optional campaign for stock-option reform in Europe that was initiated by Index Ventures.
Conclusion: The Future of VC and Policy
The convergence of VC and policy represents more than just a tactical adjustment—it marks a fundamental shift in how innovation is financed and developed. As markets grow more regulated and investment horizons lengthen, the firms that will thrive in this new era will be those that recognize policy engagement as not a peripheral activity but a core business function central to investment success.
The increasing complexity of industries like healthcare, energy, artificial intelligence, and advanced manufacturing requires a new breed of VC firm—one that does not merely adapt to policy environments but actively helps shape them. By doing so, these firms will create the conditions necessary for their portfolio companies to succeed in increasingly regulated markets.
What we are witnessing is the emergence of a more sophisticated, patient, and engaged form of innovation capital that requires de-risking the operating environment until a liquidation event in an intentional and proactive way. The most successful VC firms of the next decade will thus be those that integrate commercial and policy strategies to shape, not merely react to, the regulatory environments of their portfolio companies. The integration of policy expertise will no longer be optional—it will be a competitive differentiator that defines success in the rapidly evolving innovation landscape.
