This is more of a rant and refresher as the influencers and clout chasers always try to hate on VC as an easy punching bag when some startup didn’t work out. I try to comment and push back for their readers/followers as they will never agree with me but it’s always good to reset and understand the world we live in. They’re not wrong but they’re definitely not right - starting a company and raising VC $ is crazy!
Venture capital is often viewed with skepticism, primarily due to the massive sums of money involved—hundreds of millions, even billions—and the high failure rates of startups. From an outsider’s perspective, this criticism is understandable. The idea that vast amounts of capital are invested in companies that often fail to generate returns can seem irrational. However, within the industry, these dynamics are not only expected but fundamental to the venture ecosystem - sadly a company that raised hundreds of millions in VC that shuts down is just another Wednesday for us.
Why Most Startups Fail—and Why That’s Expected
Venture capital is inherently a high-risk, high-reward game. Not every investment will succeed, and in fact, most won’t. Research from Harvard Business School suggests that about75% of venture-backed startups fail to return capital more to investors than invested, with 30-40% ending in total losses. This is a built-in feature of venture capital, not a flaw.
To balance this, the model relies onoutliers—the rare but transformative companies that generate at minimum10x, ideally at least to 50x to 100xreturns that will return the fund and more. A single Uber, Airbnb, Pinterest or OpenAI can make up all of your failed investments and much more. It’s a power law game, where a small percentage of winners account for the vast majority of total returns.
Check out the portfolio of Lightspeed and how just a few companies return most of the fund.
Boom and Bust: Understanding Market Cycles in VC
The VC industry moves in cycles, with periods of excessive optimism and investment followed by necessary corrections. TheCOVID-19 pandemic fueled an investment surge, with global venture funding peaking at$350 billion in 2021. But as interest rates rose and liquidity tightened,2023 saw a 38% drop in global VC funding. In2024, funding stabilized at $314 billion, representing a3% increasefrom the previous year.
Certain sectors have fared better than others:
AI investment dominated late 2024, withfour massive AI deals totaling $26.6 billion, representingover 60% of all VC investment in Q4.
Climate-tech startups, on the other hand, struggled, seeing a41% drop in funding in Q3 2024compared to the previous quarter.
The Role of VCs: More Than Just Capital
Venture capitalists are often perceived as reckless gamblers, throwing money at speculative ideas. But in reality, they operate with afiduciary duty to their limited partners (LPs)—institutional investors, family offices, and high-net-worth individuals who entrust them with capital.
VCs arenot responsiblefor whether a startup ultimately succeeds or fails—that responsibility falls on thefounders. What VCs do isidentify promising companies, provide funding, strategic guidance, and key industry connections. However, once capital is deployed, execution is mostly in the hands of the entrepreneurs. Thehigh failure rate isn’t due to VCs being reckless—it’s simply the nature of the startup game.
To Raise or Not to Raise: The Founder’s Choice
Despite how it may seem,venture capital is not necessary for every business. Many successful companiesbootstrap, relying on revenue to fund their growth instead of outside investors.
However, for startups that requirerapid scaling, market dominance, or extensive R&D, VC can be a necessary fuel for growth. But foundersmust understand what they’re signing up for—venture capital is designed for high-growth startups that aim to become billion-dollar companies. If that’s not the goal, taking VC money might not be the right move.
99% of companies dont need to raise $.
Angel Investors: Micro-VCs, Not Charity
Angel investors play a crucial role in early-stage startup funding, often writing smaller checks than institutional VCs. However,the expectation remains the same—angels aren’t donating money; they’re investing to make a return.
Some founders assume that raising from angels is different, that the pressure isn’t as high. But if an investor calls themselves an “angel,” they are playing the same game as VCs—just with their own money. A serious angel investorshould expect the same 20x-100x returnsas any venture capitalist. Anything less than the best is a felony
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