Making Markets in Time (summary)
Summary of an essay by Abraham Thomas, published in Pivotal on 25 January 2025. Read the full essay on Pivotal →
Abraham Thomas argues that “if Wall Street is in the business of spatial arbitrage, Silicon Valley is in the business of temporal arbitrage.” Futures markets made commodity trading efficient by dividing the supply chain into stages and defining exactly what is delivered where. Venture capital does the same thing across time: it divides a startup’s path into labelled rounds (seed, Series A, Series B, and so on), each financed by specialist investors. That turns an impossible extrapolation problem into a tractable interpolation problem. The same structure explains why VCs value consensus, why modern multi-stage firms behave like market makers, and why a few “venture majors” now dominate the industry.
What is spatial arbitrage?
Supply chains, such as wheat to flour to bread, are held together by profit-seeking intermediaries who buy where something is cheap and sell where it is dear. No participant needs the full picture. Futures contracts made this far more efficient by specifying what (quantity and quality) and where (delivery location and date). A price gap between Kansas City and Chicago wheat no longer needs one trader to buy, ship and sell. It can be split into small trades, each handled by a specialist: a Kansas City trader, a Chicago trader, and a spread trader between them. Each trade needs less capital and carries less risk, so markets tighten and prices are discovered faster.
The general trick is divide, define, and financialize: slice the value chain into stages, specify each handoff precisely, and let people trade abstract representations of it.
How does venture capital do the same across time?
- Divide: the path from idea to IPO is sliced into rounds: angel, seed, Series A, B, C, and exit.
- Define: each round stands for a stage of progress. Seed backs a team or hypothesis; Series A, product-market fit and initial traction; Series B onward, growth and scalable economics.
- Specialize: angels fund angel rounds, seed funds fund seed rounds, and so on.
A seed investor doesn’t need to model the path to IPO, only whether the company can plausibly reach the next round. This “converts the extrapolation problem (how do you predict the future of technological innovations?) to an interpolation problem.” It also allocates each slice of risk to the investors who want it, which greatly widens the pool of investors. “Efficiency unlocks volume”: temporal arbitrage made venture legible, and the capital inflows of the past 15 years followed.
Why are venture capitalists so consensus-driven?
Venture has no central exchange to write the contract specifications. The industry has to create shared knowledge of “what” and “when” itself, which is why VCs obsess over round benchmarks (product-market fit, revenue thresholds for each round) and fundability, meaning whether a company will hit the milestones downstream investors care about. Herd behaviour is “a feature, not a bug.”
It also means that in venture, being right is defined by follow-on rounds and markups, that is, by becoming the consensus. Front-running consensus is the winning strategy: venture is “the Keynesian beauty contest in its purest form.” In Thomas’s estimate, “80% of the value-add offered by 80% of VCs is helping companies with downstream funding.” This explains, among other things:
- the preference for in-network, pedigreed founders;
- sector stampedes;
- career risk in backing “unfundable” companies;
- the difficulty of “tweener” rounds;
- the gap between price, value, and valuation.
Why are modern VCs market makers?
| Investor type | Behaviour | Examples |
|---|---|---|
| Price taker | Accepts the market price if it looks cheap relative to fair value | Mutual funds, hedge funds |
| Price maker | Sets price and terms for each deal | Classic VC firms |
| Market maker | Matches supply (founders) with ultimate demand (public-market investors), and cares more about whether downstream investors will follow on than about intrinsic value | Modern multi-stage VC firms |
Market-maker traits Thomas identifies in modern venture:
- consensus and price-agnosticism (“you have to play the game on the field”);
- obsession with coverage and dealflow;
- inventory, in the form of scout and exploratory cheques;
- correlated books;
- a preference for huge markets (“size-pilling”);
- loud branding;
- positive and adverse selection;
- the winner’s curse;
- franchise protection;
- winner-takes-all economics.
Who are the venture majors?
A handful of firms that captured market-maker scale effects: vertically integrated from pre-seed onward, horizontally expansive across sectors, and increasingly spread across geographies and the capital structure. They offer something close to beta on the private tech market, which LPs want, and LP capital scales more easily than LP diligence. That explains the concentration Thomas cites: in 2024, 50% of new LP dollars went to just 9 firms. The venture majors aim to become “the investment banks of the technology world”, as Goldman, JPMorgan and Citi grew from financing canals, railroads and coal into broader market-making franchises. Venture alpha, meanwhile, moves upstream, to outsider founders, unglamorous markets and atypical business models.
Thomas also notes that the AI buildout may be too large even for the venture majors: its money is coming from defence budgets, sovereign wealth funds, and megacap tech companies.
What open questions does the essay raise?
- If IPOs dry up and companies stay private indefinitely, does the market-making model become more or less attractive?
- How will changes in the time value of money, from AI productivity or from tariffs and money-printing, affect recurring-revenue business models and the temporal arbitrage that funds them?
Related
- Full essay: Making Markets in Time, Pivotal, 25 January 2025
- Minsky Moments in Venture Capital (summary), where the temporal-arbitrage idea first appeared
- The Perils of Prudence (summary)