Why the Venture Capital Market is Struggling
- caramiller5
- Dec 4
- 4 min read
Updated: 6 days ago
The Need to Deliver Long-Term Value in Targeted Markets
The venture capital (VC) market has long been a cornerstone of innovation, fueling startups with the financial resources and strategic guidance needed to disrupt industries with transformational innovations. However, in recent years, cracks have begun to appear in this ecosystem, leaving many investors and entrepreneurs grappling with uncertainty. With questionable performance and less available capital, the VC world is navigating turbulent waters. This article delves into the reasons behind the current challenges facing the VC market and their broader implications.
The VC Market’s Track Record
Approximately 90% of all startups fail. This includes 75% of venture-backed companies that never return cash to investors. These statistics alone merit exploration. High failure rates are often explained by referring to the power law, where a small number of high-performing investments offset widespread losses, but it begs an important question. Why should investors pay significant fees to VC firms if their portfolio choices are only marginally better than random selection – especially considering the fact that the capital injections they provide these startups may be the only thing that gives them (slightly) better odds of success?
A VC firm is expected to provide value in several important ways:
Select companies with the best chance of success
Fund these companies in a way that is beneficial to both the investors and the companies
Provide guidance and expertise, and open doors to create new market opportunities
The above statistics argue strongly that VC firms struggle to select companies with the best chance of success. Let’s evaluate the other two key criteria.
Funding That Benefits Both Investors And Portfolio Companies
Far from a cookie-cutter model, smart investments are by definition bespoke investments. Fund managers must work to invest the right amount of capital based on the company’s current scale and needs. Injecting too much capital too quickly can push companies to scale prematurely, leading to inefficient spending, bloated teams, or unsustainable growth. Underfunding, on the other hand, can starve a company of needed resources and force founders to spend an inordinate amount of their time seeking additional rounds of funding.
To be successful, venture funds must also avoid chasing quick exits and prioritizing metrics that position the company for a short-term sale vs. long-term results. Setting artificial targets for IPOs or acquisitions can lead to unsound strategies that deliver short-term results at the cost of lower product quality, poor customer satisfaction, higher churn, etc. Founders need to know that their investors are in it with them for the long term, and will enable them to move at a proper pace to create long-term value by solving important problems.
Providing Guidance and Opening Doors
Smart money should be accompanied by significant strategic benefits. These benefits are generally derived from fund managers with relevant experience in their field and useful connections to potential partners and customers. While most every firm claims to be capable of delivering these benefits, most are unable to deliver for several reasons. For instance, in a prior role as a founder of a high-tech intelligence company selling primarily to the public sector, I found myself working with VCs with stated focus areas like “technology”. This is, of course, an extremely broad focus, and I found that the partners and staff I worked with had no notable experience in intelligence or public-sector sales, and no history as a founders or even working in high-tech companies. Despite significant intelligence and financial acumen, they struggled to deliver strategic benefits beyond capital.
To deliver these benefits, founders must find venture funds that are focused on their vertical and that have relevant experience in developing and selling in their targeted vertical and markets. In addition to carefully vetting for the right experience, founders should ensure that the fund is able to focus on their success. Firms with 25 or more investments struggle to maintain senior-level engagement in each of their portfolio companies. As this work is assigned to lower-level staff, founders lose many of the benefits they hoped to gain.
Funding For Truly Early-Stage Companies
A final issue that has had a significant effect on the VC market is consolidation of capital. While there are over 3,000 funds in the United States with a total of $1.25 Trillion in assets under management (AUM), in 2024 Andreessen Horowitz raised 10% of all capital raised, with the top 9 firms raising 50% and the top 30 raising 75%. While these funds are certainly impressive, they find themselves in a quandary, with no choice but to invest in more established growth stage companies with clear paths to billion-dollar exits. For instance, the average age (founding date) of companies in Sequoia Capital’s portfolio is 14 years! Some of Sequoia’s most recent investments include Kalshi (a $300M Series D) and N8n (a $180M Series C).
It is simply impractical for funds of this size to invest in early-stage companies. At an average investment of $10M per company, Andreessen Horowitz would have to invest in 720 companies (nearly 2 per day) to put the funds it raised in 2024 to work! With 75% or more of all capital raised in these large funds, it becomes critical for smaller, boutique venture firms to find and invest in early-stage opportunities.
Summary
With an increasing percentage of all venture capital going to a few large VCs that must, by necessity, make increasingly large and later stage investments, smaller, very focused VCs are critical for early-stage investments in innovative new products, services, and technologies. Far from a “spray and pray” approach to investment, these firms must bring relevant experience and acumen and be prepared to invest significant time and resources to help their portfolio companies to succeed. Without this early-stage investment and guidance, fewer companies will reach growth stages where larger firms can fuel their ascent and – more importantly – fewer important problems will be solved as innovators struggle to find the resources they need to succeed.
