TLDR

We've all benefited from VC; you just might not know it.

Unaware

Many companies you interact with daily, or are unaware of, that make your experiences seamless are backed by VC.

The Everyday Apps You Can't Live Without

• Uber: Backed early by Benchmark, First Round Capital

• Airbnb: Early investors include Sequoia Capital, Andreessen Horowitz, Y Combinator

• DoorDash: Early investors include Sequoia Capital, Khosla Ventures, CRV, Y Combinator

• Instacart: Early investors include Sequoia Capital, Khosla Ventures, Kleiner Perkins, Canaan Partners, Y Combinator

• Spotify: Backed by Technology Crossover Ventures (TCV), Kleiner Perkins, DST Global

• Netflix: Early investor: Technology Crossover Ventures (TCV)

Powering Your Digital World (Behind the Scenes)

• Stripe: Early investors include Sequoia Capital, Andreessen Horowitz, Peter Thiel, Elon Musk

• Coinbase: Early investors include Y Combinator, Union Square Ventures, Andreessen Horowitz

• Datadog: (monitoring software for IT infrastructure)

• Snowflake: (cloud data warehousing)

• UiPath: (robotic process automation)

• Miro: (online collaborative white-boarding)

• Canva: (graphic design tool)

The Tools Behind the Businesses You Interact With

• Toast: (restaurant point-of-sale and management systems)

• Mindbody: (software for gyms, salons, and wellness studios)

• ServiceTitan: (software for plumbers, electricians, HVAC pros)

• Procore: (construction project management software)

• Veeva Systems: (software for pharmaceutical and life sciences companies)

Shaping How We Live, Eat, and Move

• Flexport: (digitizing global freight and supply chains)

• Impossible Foods / Beyond Meat: (plant-based food alternatives in grocery stores and restaurants)

• Samsara: (fleet management and industrial IoT for trucks, buses, equipment)

• Gusto: (payroll and HR software for small businesses)

• Relay Therapeutics / Generate Biomedicines: (companies developing new drugs and therapies)

Conclusion

The next time something in your life feels incredibly convenient, efficient or simply modern, consider this: there's a strong chance VC was involved in bringing that innovation to scale. It's truly all around you, making our world a little faster, smarter and often, more surprising.

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TLDR

Venture capital roles progress from junior research to senior decision-making, each level offering distinct responsibilities and influence.

There are many ways to break into venture capital. Different paths suit different interests and levels of experience.

Analyst

Analysts may be the most junior members of a firm. They typically handle market research, initial deal screening, and supporting due diligence. They might be the first to review a pitch deck and often attend calls with founders. Analysts usually do not have investment power.

Associate

This is a mid-junior role. Associates conduct deeper due diligence, source deals, and sometimes manage specific parts of the investment process. While they may not have a vote on the investment committee, associates are key players in advancing deals through the pipeline.

Senior Associate / Manager

This role varies among firms. Individuals in this position are often responsible for leading diligence efforts, initiating early calls, and managing the deal pipeline. Some firms grant them more autonomy to oversee deals from start to finish.

Principal

Principals are on the partnership track and wield significant influence. Their voting power may vary by firm. They are responsible for leading deals, developing investment theses, and frequently participate in partner meetings.

General Partner

General Partners (GPs) possess full voting power and check-writing authority. They make final investment decisions and typically have ownership in the fund, making them accountable to limited partners (LPs) for performance. GPs also set fund strategy, manage resources, and usually lead large, high-stakes investments.

Managing Partner / Lead GP

This individual (or group) is the ultimate leader of the firm. They are responsible for raising funds, leading the entire team, and driving firm-wide decisions, ranging from hiring to fund structure to exit strategies. While often still involved in investing, their primary focus is on big-picture strategic direction.

Conclusion

Understanding the distinct responsibilities and progressive influence within venture capital roles is crucial for anyone aiming to contribute meaningfully to this dynamic ecosystem. Each position, from Analyst to Managing Partner, plays an integral part in identifying, nurturing, and scaling the innovations that will shape our future. The clarity of these roles allows for precision in building formidable investment entities.

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VC is broken.
Healthcare is broken.
Banking is broken.
Real estate is broken.
Education is broken.
Transportation is broken.
Government is broken.
Immigration is broken.
Media is broken.
Supply chains are broken.
Agriculture is broken.

Everything is broken.

And the common thread? Humans.

We are living through the most significant wave of human progress in history, yet human suffering surrounds us. Genocide. War. Poverty. Starvation. Incurable disease. Corruption.

We are at a breaking point, where the world order of the last 80 years is disappearing as we know it. Ready or not, here comes The Great Progression.

Despite our progress, we still live in a world drowning in pain.

So now we turn to the machines.

Can AI save us?
Can it lift millions out of poverty?
Can it cure disease?

Can it eliminate human suffering?

We’ve rejected artificial sweeteners, artificial colors, artificial connections.
But we’re putting our hope in artificial intelligence.

Can it really fix what’s broken?

Not without humans.
Not without agape.

Agape (Ancient Greek ἀγάπη)

The choice to love, unconditionally.
Without expectation.
Without reward.
Even when it’s hard.

It is sacrificial.
It is deliberate.
It is not transactional.

And it may be the only truly human force capable of saving us.

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TLDR

In venture capital, missing generational investments is inevitable (aka, passing on the Beatles for the Beaties). Accept it, put ego aside.

Lessons

One of the first lessons to learn in venture capital is this: You have to get comfortable with passing on the Beatles. The sheer volume of incoming deals ensures no fund can capture every opportunity, no matter how promising it seems initially. Even top-tier firms acknowledge missing generational investments. Accepting this inherent imperfection is foundational for long-term success in venture.

No matter how good you are, how deep your market knowledge, or how exhaustive your due diligence, you will inevitably pass on a generational investment. Venture decisions involve dynamic variables: nascent markets, unproven technologies, and evolving teams. Despite rigorous analysis, unforeseen shifts or the sheer volume of viable ideas mean some future giants will slip through the cracks, a brutal reality.

Uncomfortable

If that reality, passing on the Beatles, makes you uncomfortable, this may not be the right profession for you. Venture capital demands robust emotional resilience and a controlled perspective. Dwelling on missed opportunities or hypothetical gains can lead to analysis paralysis or burnout. An investor must possess the mental fortitude to accept imperfect outcomes and continuously move forward to the next opportunity.

Humility

You have to learn to put your ego aside and accept that mistakes are part of the craft. Every investment decision carries inherent risk and uncertainty. Ego can blind investors to critical feedback or prevent honest post-mortems of missed opportunities. Embracing humility allows for continuous learning from both successes and failures, fostering a more effective, adaptable investment thesis.

Deployment

If you stay in venture long enough, you will pass on the Beatles — and that's okay, as we’re all human. Missing a defining investment is not a sign of failure but an accepted cost of ‘paying to play’. The most successful venture capitalists understand this fundamental truth. VCs consistent and constant capital deployment with laser focus and fiscal responsibility endure despite some unavoidable misses, ultimately shaping the future by fueling innovation and transformative technologies. LPs play a key part by neither abandoning, nor failing to continue to fund, GPs who practice the craft with reasonableness and wisdom despite latent imperfections.

Resilience

Recognizing the unavoidableness of missing out on the profits of Beatlemania is crucial for long-term venture success. This perspective frees mental bandwidth from unproductive regret, allowing investors to focus intensely on current and future opportunities. It cultivates a pragmatic mindset, essential for navigating an industry where perfect information nearly never exists and decisions are made quite possibly under significant uncertainty and requires real resilience.

Accepting misses enables focus on future opportunities, fostering a resilient and pragmatic investment approach. This continuous forward momentum is vital in venture capital’s fast-paced, unpredictable environment. It allows investors to learn from past decisions without being paralyzed by them, ensuring capital is strategically deployed in pursuit of the next wave of innovation, optimizing market growth.

Conclusion

In venture capital, “passing on the Beatles" is an inherent part of the business, not a failure per se. Accepting this reality and setting aside ego is crucial for long-term resilience and pragmatic decision-making. It enables investors to maintain focus on future opportunities and continue deploying capital effectively and efficiently.

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TLDR

Writing investment memos, even for personal use, sharpens thinking, aligns teams, creates a track record, builds LP trust, supports portfolio companies and simplifies exits. It's a key discipline for professional venture capital.

Valuable Tool

In venture capital, no official rule states you must write an investment memo. Especially in early-stage investing, decisions often happen quickly, with just a few meetings, some light diligence, a conviction call, and you're in. But skipping the memo entirely may be a missed opportunity. A memo is a valuable tool in an investor's toolkit because it allows an opportunity to clarify thinking, create alignment and build a trackable investment record.

Here are seven reasons to write one, even if you're the only one who ever reads it.

1. Sharpens Your Thinking

The process of writing forces clarity. Turning a gut feeling into a structured narrative helps investors interrogate their assumptions, identify gaps in diligence and filter through what's actually compelling (or not) about the opportunity. If you can't write it clearly, you probably don't understand it well enough to invest.

2. Prepares You to Champion the Deal

Many times, the person writing the memo is the one championing the investment internally. A strong memo arms you with crisp answers to likely questions from various stakeholders, such as partners, an investment committee or even limited partners. It helps you build your case, and pressure test it, before you're put on the spot.

3. Aligns the Team

Even in small funds, misalignment happens. One partner loves the founder; another worries about market timing or product misalignment. A memo gives everyone a shared source of truth. It highlights key assumptions, flags unknowns and helps ensure decisions are made on the same facts.

4. Creates a Track Record

Your future self may thank you. Investment memos become a record of your thinking at the time of investment. Whether a company 10x's or flames out, revisiting a memo offers insight into how your judgment is evolving and helps identify patterns over time.

5. Builds Trust with Limited Partners

When raising from new limited partners, especially more sophisticated investors, having a library of investment memos signals professionalism and process. It gives credibility to the fund and shows you take your fiduciary responsibility of their capital seriously.

6. Tool for Portfolio Support

Months after a check is written, memos serve as a reference point for supporting portfolio companies. What were their initial goals? What did you believe they needed to prove? It helps you track progress and recalibrate support based on the original thesis.

7. Makes Exits Easier to Explain

When companies exit, good or bad, memos help you tell the story. They offer narrative context for why you invested, how the company evolved and what that says about your fund's approach. This is particularly useful when reporting to limited partners or writing case studies.

Conclusion

You don't need to write a Pulitzer-worthy document. Even a few pages with clear thinking, key assumptions and a defined thesis can go a long way. Investment memos aren't about bureaucracy; they're about discipline and professionalism. And in venture, discipline and professionalism are competitive edges.

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Larry’s Letter

Earlier this year, BlackRock released Larry Fink’s 2025 Annual Chairman’s Letter to Investors. A few notable themes stood out:

1. There is a misalignment of capital between governments, financial institutions, corporations and private investors.

2. Publicly traded investment opportunities are shrinking for everyday investors.

3. Illiquid, complex assets can offer strong rewards if structured well.

4. The traditional 60/40 portfolio is outdated. A more modern 50/30/20 mix – with 20% in private investments – is emerging.

5. Americans are underprepared for retirement and need more access to long-term, high-value opportunities.

Capital Misalignment

“As we enter our century’s second quarter, there's a growing mismatch between the demand for investment and the capital available from traditional sources.”

“Governments can’t fund infrastructure through deficits. The deficits can’t get much higher. Instead, they’ll turn to private investors.”

“Companies won’t rely solely on banks for credit. Bank lending is constrained. Instead, businesses will go to the markets.”

“More capital is sitting idle today than at any point in my career. In the U.S. alone, roughly $25 trillion is parked in banks and money market funds.”

“We’re repeating a mistake from the earliest days of finance: Abundant capital. Deployed too narrowly.”

“Amsterdam’s first stock exchange could have made a much greater contribution to the economy if investors had more companies to invest in. The same is true today.”

Public Markets Are Shrinking

“Assets that will define the future—data centers, ports, power grids, the world’s fastest-growing private companies—aren’t available to most investors.”

“They’re in private markets, locked behind high walls, with gates that open only for the wealthiest or largest market participants.”

“Only a tiny fraction are publicly traded, and that fraction is shrinking: The path BlackRock took 25 years ago—raising money through an IPO—is becoming rarer.”

“81% of U.S. companies with over $100 million in revenue are privately held.”

Risk Can Be Restructured

“The reason for the exclusivity has always been risk. Illiquidity. Complexity. That’s why only certain investors are allowed in.”

“But nothing in finance is immutable. Private markets don’t have to be as risky. Or opaque. Or out of reach.”

“Not if the investment industry is willing to innovate—and that’s exactly what we’ve spent the past year doing at BlackRock.”

“Private credit assets are projected to more than double by the end of this decade.”

The 50/30/20 Portfolio

“Bridging the divide between the 50/30 and the 20 is almost impossible for most individuals.”

“Even those who can afford it face another diversification problem within that 20%.”

“Often, they barely have enough capital to meet the minimum for just one private fund—and having 20% of your portfolio locked up in a single fund isn't really diversified.”

Access and Inclusion Matter

“For decades, private markets have been among the most opaque corners of finance.”

“Investors know these assets hold long-term value—but exactly how much value? That's not always easy to determine.”

“Investing in private markets feels a bit like buying a house in an unfamiliar neighborhood before Zillow existed.”

“Markets never exist in isolation. The economic rules we choose, the investment policies we adopt, and the ways countries attract and deploy capital will determine who benefits—and how broadly prosperity spreads.”

“Escaping poverty doesn't equal financial security.”

“That’s why today, even with the promise of Social Security, more than half of Americans still fear outliving their savings more than death itself.”

AI Analysis

My beloved reader, please lend an ear.

See how the landscape of opportunity shifts. The familiar paths of public stocks now offer fewer avenues for significant growth. Instead, promising ventures and vital infrastructure reside in private markets, often perceived as complex and exclusive.

Yet, understand this: These very markets – funding tomorrow's innovations and essential structures – hold considerable potential for strong returns. The old ways of investing are becoming less effective in securing your long-term future.

Therefore, open your heart and mind to new possibilities. By thoughtfully considering private investments, you gain access to a wider range of growth opportunities, potentially enhancing your portfolio's performance and resilience.

This is not about exclusion, but about evolution. As the investment world adapts, so too can you. Explore these avenues with diligence and wisdom, for they offer a chance to participate in the growth that shapes our future and to cultivate a more prosperous tomorrow for yourself and those you care for. Embrace this broader view with courage and discernment.

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Force Five

This week, we're concluding our series on Porter’s Five Forces. It has been a few weeks since we last visited this topic, so here’s a recap of what we've covered:

• Force One: Threat of New Entrants

• Force Two: Bargaining Power of LPs

• Force Three: Influence of Founders as Buyers

• Force Four: Threat of Substitutes

This week, we wrap up the series with Force Five: Competitive Rivalry. However, instead of revisiting firm-to-firm competition, which we’ve already explored through new entrants, LP pressure, and founder dynamics, I want to take a more nuanced approach. Today, we’re turning the lens inward to examine the rivalries within venture firms themselves, from LP dynamics to GP politics to the quiet power struggles between principals and analysts.

Credit, Carry, and Clout

The allocation of carry and credit can be a sensitive topic. It touches on the fundamental human desire for recognition and reward. When these aren’t perceived as fair or transparent, they can breed resentment and undermine team alignment.

• Legacy, negotiation power at the outset, or even simply being in the right place at the right time can influence individual stakes. This can lead to quiet dissatisfaction, especially when junior team members feel their contributions don't align with their economic upside.

• Who sourced the deal? Who led it? Who gets the credit for the unicorn?

• Talented individuals, particularly those who feel consistently overlooked, are more likely to seek opportunities where their contributions are better recognized and rewarded. This churn can be costly in terms of lost expertise and institutional knowledge.

The Deal Funnel Is a Zero-Sum Game

The internal competition for resources, attention, and ultimately, the firm's capital can be intense.

• At some firms, partners or principals first have to “sell” deals to their own team. Winning over colleagues, managers, and other stakeholders adds a layer of complexity and competition inside a firm.

• Competing investment theses can collide: one partner’s AI bet may contradict another’s climate strategy.

• Consensus-driven investment committees (ICs), while designed to provide rigor and diverse perspectives, also can become sites of internal gatekeeping, where personal biases or competing agendas can kill promising deals before they even see the light of day. This can be particularly frustrating for those who sourced the deal and believe in its potential.

Rising Stars vs. Legacy Partners

• Up-and-coming associates or principals are eager to prove themselves but may face resistance from senior partners. In addition, competition between associates and principals can be steep and can discourage collaboration.

• Talent churn happens not just from burnout but also because people feel blocked from advancing or getting meaningful carry.

Soft Power and Politics

• Not all power in a VC firm is formal; some comes from LP relationships, media clout, or founder loyalty. Some individuals may not always have the most formal authority but can sway decisions and shape the firm's direction through their network and reputation.

• Internal competition may not be open conflict but rather involve influence games, back-channel alignment, and strategic alliances.

Impacts on Founders

• Internal disagreements and power struggles can lead to delays in investment decisions and inconsistent communication with founders. This can erode trust and make founders question the firm's conviction.

• Founders are often astute observers of interpersonal dynamics. If there's underlying tension or a lack of alignment among the partners they interact with, they will likely pick up on it.

• When internal dynamics are toxic, founders may walk (and word gets around).

Conclusion

Venture capital may be portrayed as a team sport, and when all the players have the same goal in mind and are incentivized to win, they have a shot at taking home the gold. But internal competition over credit, deals, and influence can significantly undermine a firm's effectiveness. When partners are misaligned or distracted by power struggles behind the curtain, it can lead to slower decision-making, mixed signals for founders, and ultimately, missed opportunities. Firms that cultivate a strong internal culture and transparent economics are better positioned to attract and retain top talent, provide consistent support to their portfolio companies, and achieve long-term success in the competitive venture landscape.

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Observation

A recent conversation has been echoing in my mind, a powerful observation about the very foundation of venture capital (VC): investment decisions are too often driven by the ingrained beliefs of investors and their immediate networks, rather than a rigorous analysis of true market demand.

Judgment

This sentiment struck a particular chord, especially when considering the pervasive phrase, "I follow tier one investors." While acknowledging the experience and insights of established firms and peers in the industry is an acceptable part of the due diligence process, it cannot be the only part of the due diligence process. The uncritical adoption of other firms' portfolio choices raises fundamental questions. Does this reliance signal a lack of independent conviction? If general partners (GPs) don’t trust their own judgment, we must wonder why their limited partners (LPs) wouldn't simply allocate capital directly to "tier one" funds. What unique perspective and differentiated value proposition do such general partners (GPs) truly offer their limited partners (LPs)?

Juncture

This brings us to a critical juncture: How do we, as investors (i.e., GPs), cultivate a culture of accountability? This accountability must extend in two vital directions:

1. Making investment decisions rooted in demonstrable market forces

2. Fostering the courage to trust and act upon our own well-informed judgment

So, how can we move beyond the VC echo chamber and cultivate this essential culture of general partner (GP) accountability? Several avenues may apply:

• Embracing Continuous Learning: In any dynamic profession, stagnation is the antithesis of growth. Shouldn't VC, with its constant exposure to innovation and decomposition, demand a commitment to ongoing education? This could involve actively seeking diverse perspectives, engaging in industry-specific training and fostering open dialogues with peers – even those with differing viewpoints.

• The Power of Peer Learning: We are all navigating a complex landscape. Creating structured opportunities for investors to learn from each other's successes and failures, to share insights and challenge assumptions, may be invaluable in refining our individual and collective acumen.

• Cultivating Intellectual Humility: VCs may reward conviction, but it's crucial to balance that with humility. Admitting that we don't possess all the answers, being open to being wrong and actively seeking disconfirming evidence are hallmarks of intellectual maturity and can lead to more robust decision-making.

• Defining and Defending a Strong Thesis: A well-articulated investment thesis, grounded in thorough market research and a unique perspective, serves as a compass. It provides a framework for evaluating opportunities and acts as an anchor against the sway of prevailing trends or the endorsements of others. Confidence in this thesis, developed through rigorous analysis, empowers GPs to act decisively based on their own convictions and judgements.

Conclusion

Ultimately, the strength and dynamism of the VC ecosystem depends on investors who are not simply followers but thoughtful, independent thinkers. By embracing continuous learning, fostering peer exchange, cultivating humility and operating from a well-defined thesis, we can move beyond the limitations of echo chambers and build a future where investment decisions are driven by genuine market demand and understanding and the power of informed, individual judgment. PS: Stay tuned for the final part of Porter's 5 Forces: Competitive Rivalry.

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Rules

In venture capital (VC), knowing the numbers isn’t enough. Knowing the language, the customs, and the culture that governs the “land” may directly impact who gets taken seriously and who gets funded. VC is a world with its own rules — and if visitors don't learn them, they may end up perpetually on the outside looking in.

Profession

VC is more than an industry and an asset class that some sort of financial matrix unlocks; it's a distinct profession with its own intricate culture, specialized language, and unique set of expectations. Those who stumble into its vast, often opaque landscape quickly learn that without help, it’s easy to get lost or left behind. VCs won’t take seriously those who can’t speak the language or demonstrate a working knowledge of the culture. In venture, both language and culture may be barriers.

The following three personas tend to frequent the VC ecosystem:

Traditionalist

The first persona is the Traditionalist (i.e., natives). This individual typically comes from a background in finance, investment banking, consulting, or another form of private equity. They are seen by some as the native speakers of the VC language and the primary driving force behind much of modern VC's norms and gate-keeping.

More than speaking VC fluently, Traditionalists embody the VC culture. They understand the subtle nuances of power dynamics, the importance of pedigree (both their own and that of the founders they back), and the unwritten rules of the game. They may value analysis, a data-driven approach, reports, referrals, and a certain level of professional detachment. They may also sense when someone isn't "from around here," picking up on subtle missteps in terminology, approach, or even demeanor. Traditionalists tend to act as the gatekeepers of VC, consciously or unconsciously perpetuating certain norms and values. While their VC upbringing is obvious, they may be resistant to truly unique ideas that fall outside of their pattern recognition.

Operator

The second persona is the Operator (i.e., immersive or resistant). Operators may enter the VC world after achieving success as founders or as notable team members. They've earned their chops and credentials through building and scaling companies, often ending in a successful exit (i.e., IPO or acquisition). They understand the founder journey better than many because they've lived it and succeeded at it. Now, in some way or another, they find themselves on the other side of the table, making investments in founders embarking on that same journey. Operators bring real-world operational experience, a deep understanding of market dynamics, and a strong network within the startup ecosystem. The Operator’s adaptation and view of VC culture may vary significantly and impact their own long-term success as VCs.

• Immersive Operator: Some choose to fully immerse in VC. They do so by learning the language, adapting to the culture, and becoming fluent participants in the profession. They build relationships with Traditionalists, attend industry events, and become immersive operators in the world of VC. They understand that while their founder experience is a valuable asset, it's not enough on its own to succeed as a VC. They strive to bridge the gap between the founder and investor worlds, gaining credibility and influence within the VC community.

• Resistant Operator: Some participate with resistance in VC. These may view VC as “foreign” and too transactional, like someone assigned to a job in another country who refuses to learn the local language, sticks mainly to associating with fellow expats, and counts down the days until they return home. These resistant operators may never fully belong in the VC community because they never fully buy in, potentially limiting their access to deals and exponential returns due to lacking the ability to effectively and fluently communicate with other VCs in a culturally appropriate way. However, they may also bring a valuable contrarian perspective, challenging the status quo and advocating for founders in a way that Traditionalists might not. Their resistance may, paradoxically, lead to evolution of the VC culture, forcing it to be more founder-friendly.

Other

The third persona is the Other. They may begin as more of an outsider. They were neither born into the VC world nor have they had some notable startup experience and they probably didn't follow the most conventional paths to VC either. However, similar to an expat who chooses to move to a new country and fully immerse themselves (i.e., Immersive Operator), these Others may flourish as VCs. They dedicate themselves to learning the VC language and culture, adapting to the customs, and integrating into the community as professionals—not attempting to replicate their previous environments, but establishing a new identity and life within VC. While traditionalists might eventually discover these Others as “non-natives” if they speak at length on certain VC topics, fluency, not origin, garners respect. Over time, the Others navigate the VC ecosystem well, building trust not because of where they started or studied, but because they chose to become skillful VC practitioners by becoming linguistically fluent and culturally adept.

Conclusion

Regardless of origin story, success in VC demands more than technical ability and head knowledge; it requires VC linguistic fluency and cultural awareness. The sooner perspectives shift from seeing VC as merely a job, or a task to complete for funding as a founder, to treating VC like a country to move to and reside in with a new language and culture to master, the faster one may gain acceptance and residency with rewards. PS: Stay tuned as the series on Porter's 5 Forces returns to wrap up with Force Five: Competitive Rivalry.

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Force Four

So far in this series, we’ve unpacked the Force One: Threat of New Entrants, the Force Two: Bargaining Power of LPs and the Force Three: Influence of Founders as Buyers. Each of Porter's 5 Forces reveals something important about how venture capital works — and why it’s under pressure.

Today, we turn to a different kind of challenge, Force Four: Threat of Substitutes.

Substitute vs. Competitor

In Porter’s framework, a substitute isn’t a direct competitor — it’s an alternative solution to the same problem. For startups, that means any source of capital or support that helps them grow without involving traditional venture capital. From angel syndicates and crowdfunding to revenue-based financing and grants, these alternatives are gaining traction and offering founders additional ways to secure capital.

This post explores what makes substitutes appealing, why they’re on the rise and how VC firms are responding.

To VC, or Not to VC

Venture capital may bring a lot to the table for founders looking to innovate, such as:

• Equity funding for high-growth businesses

• Strategic support and network access

• Risk tolerance and long time horizons

• Credibility that can unlock follow-on capital

Yet, there are some trade-offs to VC, such as:

• Dilution of ownership

• Governance pressures, potentially impacting autonomy

• High expectations for rapid growth and significant market share

• Potential for misaligned incentives regarding exit timelines and strategies

VC Substitutes

Here are some key substitutes to VC:

1. Angel Investors and Syndicates: Faster decisions, friendlier terms and growing platforms like AngelList make angels a popular funding option.

2. Crowdfunding Platforms: Crowdfunding Platforms: Equity crowdfunding (e.g., Republic; Wefunder) and revenue-based models (e.g., Pipe; Clearco) offer capital with community and take away the pressure of VC requirements.

3. Bootstrapping: Capital provided by the founding team and living off of revenue generated. In many parts of the world this is a requirement before VCs will even consider investing in your company as other early-stage capital is nonexistent.

4. Venture Debt: Non-dilutive loans tailored to venture-backed startups, often used to extend runway without giving up more equity. This differs from traditional bank loans in that the traditional model often required consistent operating cash flows and assets that can be used as collateral.

5. Annual Recurring Revenue Lending: May suit startups with subscription-based payment models. A business development company (BDC), private equity firm and even some banks provide this type of financing. They use different metrics than traditional banks such as customer renewal rates and annual or monthly recurring revenue over a period of time. This type of lending often comes as a line of credit which can secure a startup more capital than with a bank loan.

6. SBA Loans: Sponsored by the U.S. Small Business Administration, a government organization, offers loans with lower rates and low down payments and favorable repayment terms. The application process can be long and cumbersome.

7. Grants: Typically non-dilutive and often used for early-stage projects with a social or environmental focus.

Why Now

The rise of substitutes is closely linked to the increasing leverage founders have in the capital stack.

Founders today are more informed, more connected and more intentional about the type of capital they take on. As we explored in Force Three: Influence of Founders as Buyers, founders are increasingly treating capital as a product to be evaluated and are pushing back for better terms.

At the same time, the macro environment is reinforcing this shift:

• Capital is tighter. VCs are slower to deploy, LPs are more cautious and terms are getting tougher.

• Interest rates are up. Debt options are more expensive but still more attractive than giving up equity for many founders.

• Technology has leveled the playing field. Platforms like Republic, AngelList and even Stripe Atlas have made it easier to raise, manage and deploy capital outside of traditional VC channels.

Ultimately, the power dynamic is shifting. Founders don’t just want capital — they want capital that fits. And that mindset is fueling the growth of substitutes.

VC Response

Mounting pressure from founders combined with alternative sources of funding are requiring VCs to take action and make funding easier and more friendly for founders.

• Building real relationships: Clear and candid communication and long-term alignment with founders

• Doubling down on value beyond capital: Strategic guidance, hiring help, network access, investor liaising, and cultivating a “missionary” culture

• Investing in community: Curated conversations, events and platforms around portfolio companies and investors to cross-pollinate and create mutual benefit.

• Getting flexible: Smaller checks, friendlier terms, and co-investing

• Standardizing early-stage deals: Widespread adoption of the SAFE (Simple Agreement for Future Equity) for speed and simplicity

• Adopting hybrid models: Exploring RBF and early-stage vehicles within VC firms

• Specializing deeply: Owning capital-intensive and complex sectors like biotech or deep tech with access to subject matter experts or impactful personas

Final Thoughts

Ultimately, the rise of substitutes isn't necessarily an existential threat to venture capital, but it is a significant catalyst for evolution. VCs who can clearly articulate and consistently deliver value beyond just the dollars, adapt their strategies and build strong relationships with founders are best positioned to thrive in this increasingly diverse funding ecosystem. Stay tuned as the series about Porter's 5 Forces concludes with Force Five: Competitive Rivalry.

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Pause Porter’s

This week, we pause from our analysis of the venture capital industry using Porter's 5 Forces (e.g., Force One, Force Two, Force Three) to focus on remaining calm during these turbulent times and planning for the future.

Recent economic headlines consistently report tightening budgets, cautious consumer spending and whispers – or outright shouts – of recession. It's natural to allow the media to dictate our reactions, pushing us into a defensive posture, or worse, outright panic. Now is the time to take a deep breath, analyze the situation and develop a strategic plan.

Do Plan, Don’t React

Two common strategies are emerging in the venture landscape: building for the recession – hoarding capital, focusing solely on survival – or building around it – seeking niche markets perceived as recession-proof, delaying ambitious growth plans.

While prudence is essential, it may be said these approaches, while seemingly safe, risk missing a crucial opportunity. The most significant returns aren't generated by those who merely weather the storm, but by those who build through it, emerging stronger and better positioned.

Neither For, Nor Around

Building for or around any challenge, not just a recession, demands significant resources, leaving us depleted precisely when recovery arrives and we need full momentum to seize emerging opportunities.

Think of it this way: a recession isn't a wall to be avoided, suggesting the recession is an impenetrable barrier, rather than a temporary challenge. Imagine instead: a turbulent river to navigate, representing a dynamic, challenging, yet ultimately navigable situation. Building for the recession is like building a bunker on the riverbank – a seemingly safe strategy focused on survival, prioritizing defense and minimizing risk. While it may provide short-term security, it isolates and limits the ability to capitalize on fertile land that may lie ahead for those able to bravely and courageously advance. Another tactic is to build around the recession, like digging a canal – a seemingly clever and smart detour perhaps, yet again potentially limiting and resulting in lost opportunity for those unable to access the main currents of future growth.

Build Through

Building through the recession, however, is like constructing a resilient vessel. This represents a proactive, adaptable approach. It implies building in a way that can withstand the challenges of a recession while remaining agile and positioned for future growth. It signifies a focus on strength, flexibility and the ability to navigate difficult conditions. It requires careful resource management, strategic navigation and a keen understanding of the currents.

This means optimizing spending, prioritizing essential investments and ensuring sufficient runway. This means neither wasting nor retreating, by ensuring adequate funds are available and used efficiently. This allows us to stay in the flow, adapt to the changing landscape and ultimately reach the most promising destinations when the economic climate improves. It requires a clear understanding of the company's core mission, vision and values. This means maintaining momentum and avoiding stagnation. It involves continuing to innovate, build relationships and engage with others. This is the opposite of the isolated bunker by the river. It’s staying in the middle of the river and riding the rapids forward to better times and places. Those who have built resilient vessels will be well-positioned to capture market share and achieve significant growth.

Be Aware

• Innovation Doesn't Stop: Recessions may force efficiency and creativity. Companies built now, under pressure, may be leaner, more resourceful and solving more pressing problems. These may become the future market leaders.

• Talent Becomes Accessible: Economic downturns may lead to layoffs at larger, less agile companies, presenting a unique opportunity to attract top-tier talent who might not otherwise be available or have considered roles at smaller firms.

• Valuations Reset: While painful in the short term, more rational and realistic valuations may create a healthier investment environment. Continuing to deploy capital strategically can yield significant returns when the market rebounds.

• Competitive Landscape Shifts: Companies that pull back too drastically risk losing market share to those who keep building and innovating. Resilience during a downturn may create lasting competitive advantages and legacy wealth.

Marine Mentality

Marines are known for their ability to execute plans under pressure, adapt to changing circumstances, and maintain a focus on achieving their objectives. The analogy of "taking the hill" after the recession may be a fitting illustration. The period following an economic downturn often presents a surge of pent-up demand and renewed investment.

Those that have continued to advance and grow strategically through the recession – refining their product, strengthening their team and optimizing their operations – may be well poised like Marines to "take the hill", represented by the post-recession market. They won't be scrambling like others that have simply tried to survive the recession and need to rebuild their businesses and even risk getting left behind entirely. They will have already laid the groundwork, established their position and possess the momentum to swiftly capture market share. Their "resilient vessel" will be ready to navigate the open waters with speed and efficiency.

Be Resilient

• Focus on Core Value Proposition: Now is the time to double down on solving real customer pain points with truly differentiated solutions.

• Prioritize Sustainable Growth: While hyper-growth might be tempting in boom times, focus on a scalable and sustainable model with healthy unit economics.

• Cultivate a Resilient Team: Invest in people by fostering a candid and loyal culture. Be clear about the challenges and optimistic about the opportunities.

• Maintain a Strategic Reserve: While not hoarding, ensure you have enough runway to navigate potential headwinds and seize strategic opportunities.

• Stay Agile and Adaptable: The economic "rapids" may shift quickly. Be ready to iterate on your strategy and adjust effectively to new information.

Be Skillful

A recession is not a time to retreat. It's a time to be discerning, strategic and, above all, resilient by finding appropriate high ground. Plan to be in position to learn and see the receding tide and assess when, where and how the tidal waves of growth may come surging back. Let's not just wait for the storm to hit. Let's arm ourselves and our teams to navigate the future skillfully, emerge stronger and be the ones leading the charge when the sun breaks through. Now is the time for personal and professional development together, not isolation, strengthening our bonds for future rewards.

The "hill" is ahead, and those building through these difficult days, neither accepting defeat nor retreating, may be best positioned to succeed.

PS: Stay tuned as the series about Porter's 5 Forces continues with Force Four: Threat of Substitutes (Bank Loans, Crowdfunding, etc.).

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Forces One and Two

First we covered Force One: The Threat of New Entrants: Why Everyone (Apparently) is a VC Now. Second we covered Force Two: The Bargaining Power of Suppliers (Limited Partners). This week we will continue to break down the venture capital industry with Force Three of Porter’s Five Forces.

Force Three

Third up: The Bargaining Power of Buyers (Founders).

As we continue our analysis of the venture capital industry, remember that Porter's Five Forces framework is a crucial tool for analyzing the competitive intensity and attractiveness of a market. A key force is the bargaining power of buyers, which examines the influence customers have on pricing and competition. The bargaining power of buyers in an industry significantly affects the competitive environment and influences the seller’s ability to achieve profitability. Strong buyer power enables buyers to pressure sellers to lower prices, demand higher quality and expect more and better services, which can reduce the seller's profitability. Conversely, when buyer power is low, it increases the profit potential of an industry, as sellers can dictate terms.

It’s important to acknowledge that founders are not traditional “buyers” and actually are “sellers” of an asset: equity in a company. However, for the purpose of this analysis, we will refer to founders as “buyers” because they are “acquiring” and “consuming” the product, capital, of a VC firm. Analyzing through this lens can give us a better understanding of the dynamics between founders and investors.

Let’s look at the factors that determine high or low bargaining power of founders.

Buyers Relative to Suppliers

• When buyer power is strong: There are fewer buyers relative to suppliers.

• When buyer power is weak: There are a significant number of buyers relative to suppliers.

• Founder's situation:

  • There are far more startups seeking funding than there are VC funds available.

  • This dynamic favors VC firms, especially the more prestigious ones. They can be highly selective, leading to less bargaining power for the majority of founders.

  • Founders, particularly those at early stages, often face a scarcity of funding options, limiting their ability to negotiate favorable terms.

Switching Costs

• When buyer power is strong: The switching costs of the buyer are low.

• When buyer power is weak: The switching costs of the buyer are high.

• Founder's situation:

  • Securing funding is a time-consuming and arduous process for founders.

  • Building relationships with VCs, pitching, due diligence and negotiating term sheets all demand significant effort.

  • If a deal falls through, founders must often start the process over, incurring substantial "switching costs" in terms of lost time and momentum.

  • This time constraint and the urgent need for capital can force founders to accept less-than-ideal terms, reducing their bargaining power.

Backward Integration

• When buyer power is strong: The buyer is able to backward integrate.

• When buyer power is weak: The buyer is not able to backward integrate.

• Founder's situation:

  • "Backward integration" in this context would mean founders gaining direct access to the sources of capital that supply VC firms (limited partners or LPs).

  • While some very successful founders eventually become VCs themselves, this is not a viable option for most startups.

  • Founders generally lack the resources, connections and track record to raise capital directly from LPs.

  • This dependence on VC firms as intermediaries strengthens the VCs' position.

Purchase Volume

• When buyer power is strong: The buyer purchases product in bulk (high volume).

• When buyer power is weak: The buyer is limited in their purchasing power.

• Founder's situation:

  • Startups often require funding in stages from multiple VC firms.

  • They typically cannot raise all the capital they need from a single source, especially as they grow.

  • This need to "purchase" capital from several "suppliers" (VCs) can fragment the founder's bargaining power. Each VC has leverage related to their portion of the funding.

Product/Service Similarity

• When buyer power is strong: The buyer is able to get similar products/services from other suppliers.

• When buyer power is weak: The buyer is unable to get similar products/services from other suppliers.

• Founder's situation:

  • While "capital is capital" in its basic form, VC firms try to differentiate themselves.

  • Some VCs offer valuable extras like mentorship, networking, branding and operational support.

  • If a founder highly values these extras, they may be willing to concede on other terms, increasing the VC's bargaining power.

  • However, if founders perceive capital as largely undifferentiated, they may focus more on financial terms (valuation, etc.).

Proportion of Product Purchased

• When buyer power is strong: The buyer purchases the majority of the seller’s products.

• When buyer power is weak: The buyer purchases a small subset of the seller’s products.

• Founder's situation:

  • VC firms primarily "sell" capital as their core "product."

  • Startups, especially those in early stages, are heavily reliant on this specific product.

  • This reliance increases the VC's power, as the startup has few alternative customers for the VC's capital.

Availability of Substitutes

• When buyer power is strong: Several substitutes are available on the market.

• When buyer power is weak: Substitutes are not available on the market.

• Founder's situation:

  • Founders have access to various VC firms, but the type of capital available is often similar (equity financing).

  • Alternative funding sources, such as bank loans, are often more difficult for startups to obtain, especially in early stages.

  • This limited availability of substitute funding options can increase the bargaining power of VCs.

Product Differentiation

• When buyer power is strong: Product is not differentiated.

• When buyer power is weak: Product is heavily differentiated.

• Founder's situation:

  • As mentioned, capital itself is largely undifferentiated.

  • This can make founders more sensitive to other deal terms, such as valuation and control, as the core "product" is essentially the same across different VC firms.

  • The power dynamic between venture capital (VC) firms and founders is a significant consideration within the industry. It is widely acknowledged that a power imbalance exists in this relationship. From Porter’s perspective, this imbalance could be seen as a factor contributing to the attractiveness of VC investment, as firms possess considerable influence in negotiating terms and allocating capital.

Terms and Control: VCs Exercise Power

Terms:

• Valuation: Higher valuations mean founders give up less equity, preserving their ownership and control. VCs with more power can often negotiate lower valuations.

• Equity: VCs negotiate the percentage of equity they receive for their investment as founders become diluted in their equity stake.

• Liquidation preference: Higher liquidation preferences favor VCs, who get paid back first (and often multiple times their investment) before common stockholders (founders, employees). This can create a situation where founders get little to nothing even if the company has a decent exit.

• Participation rights: Allows VCs to get their liquidation preference and participate in the remaining proceeds as if they were common stockholders. This significantly increases the VC's upside and reduces the founder's share.

Control:

• Board seats: VCs often require a seat on the company's board of directors. Board members have significant influence over strategic decisions, hiring/firing and major transactions. More board seats for VCs mean less control for founders.

• Voting rights: Determines who gets to vote on key company decisions. VCs may negotiate for preferred stock with special voting rights that give them more power than common stockholders.

• Protective provisions (veto rights): VCs may demand veto rights over certain company actions, such as:

  • Selling the company

  • Raising more debt or equity

  • Changing the company's bylaws

  • Major expenditures

However, the potential consequences of excessive power warrant examination.

Founder Leverage

Not all founders are completely at the mercy of their investors. Some founders do have significant bargaining power.

• Serial entrepreneurs with successful exits

• Startups in hot sectors with high growth and strong metrics

• Founders with unique expertise or technology

Conclusion

The analysis reveals a clear power imbalance between VC firms and founders. This imbalance, while potentially contributing to the attractiveness of VC investment by enabling firms to negotiate favorable terms, has led to increased scrutiny from founders who are advocating for more equitable treatment. This power dynamic is evident in the terms of VC deals, where factors like valuation, liquidation preferences and anti-dilution provisions can significantly impact founders' ownership and financial returns. Furthermore, control mechanisms such as board seats, voting rights and protective provisions enable VCs to influence company strategy and operations, sometimes limiting founder autonomy.

However, it’s important to note that founder leverage exists, particularly for serial entrepreneurs, high-growth startups and those with unique expertise. Evolving market conditions and increased founder awareness are driving a demand for change, with some investors adopting more founder-centric approaches. Addressing the power imbalance is crucial for the long-term health and sustainability of the VC ecosystem.

This series will continue with Force Four: Threat of Substitutes (Bank Loans, Crowdfunding, etc.).

Sources

• CFI: Bargaining Power of Buyers

• STRATEGIC CFO: Buyer Bargaining Power (one of Porter’s Five Forces)

• Paul Hastings: Navigating Control Mechanisms in Startups

• Feld, Brad, and Jason Mendelson. Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. 4th ed., Wiley, 2019.

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Force One

Last week we covered Force One: The Threat of New Entrants: Why Everyone (Apparently) is a VC Now. This week we will continue to break down the venture capital industry with Force Two of Porter’s Five Forces.

Force Two

Second up: The Bargaining Power of Suppliers (Limited Partners).

The venture capital ecosystem is fundamentally built on the relationship between limited partners (LPs), who supply capital, and general partners (GPs), who manage it. LPs, including high-net-worth individuals, family offices, pension funds, endowments and sovereign wealth funds, provide the capital for VC funds, expecting returns from startup investments. GPs, as fund managers, make investment decisions and oversee portfolio companies. This capital supplier-manager dynamic aligns with Porter's framework, highlighting LPs as crucial suppliers. Without their capital, which VC firms primarily manage, the industry wouldn't exist, granting LPs inherent leverage in negotiations.

As we continue exploring the forces shaping the venture capital ecosystem, it's time to examine the bargaining power of limited partners, the suppliers of capital. Just as founders rely on VCs, VCs rely on LPs. Without their capital, there is no fund, no investment committee and no portfolio.

Before diving in, here’s a quick overview of what determines supplier power in any industry, applied to venture capital.

Power Dynamics

A single VC fund might have anywhere from 10 to 100 LPs, but in practice, most of the capital is concentrated among a few institutional investors. Pension funds, endowments, sovereign wealth funds and large family offices are often the cornerstone LPs of a fund, and their influence is proportional to their check size.

This concentration increases their bargaining power. If even one major LP expresses dissatisfaction or declines to re-up in the next fund, it can reshape a VC firm's entire strategy.

At the same time, the diversification of LP types, especially the growing presence of high-net-worth individuals and smaller institutions, can dilute the power of any single group. More LPs means more options for GPs, which can rebalance power dynamics.

LP Options

While LPs have always considered various investment avenues, the growth of private equity, private credit, real estate, hedge funds and digital assets has intensified the competition for their capital.

The more appealing those other options are in terms of returns, liquidity and risk profile, the more leverage LPs have when negotiating with VCs. This is a key pressure point in the ecosystem. GPs must not only compete against other funds; they’re competing against entirely different asset classes.

This is where aspiring VCs need to pay attention. It’s not enough to find great startups. You need to convince LPs that venture capital is worth the illiquidity, the volatility and the long time horizon. That means building a strategy, a thesis and a track record that stands out.

LP Dependency

Even VC firms launched by successful founders who’ve had big exits need outside capital to scale. Without LP commitments, there are no reserves for follow-on investments, no team salaries and no management fees to operate the firm. Unlike angel investors who deploy personal wealth, VCs manage other people’s money, and that comes with strings attached.

Top-performing VC firms with strong brands can often set terms. LPs may accept higher management fees or lower profit shares in exchange for access. But that power isn’t universal. Emerging managers, especially first-time fund managers, may need to offer better economics to attract capital: lower fees, higher hurdle rates or more transparency.

In some cases, LPs form Limited Partner Advisory Committees (LPACs) to collectively influence fund decisions, especially when performance is in question or conflicts of interest arise.

Economic Cycles

During peak fundraising periods like 2021, GPs could be selective, even rejecting LPs that didn’t align with their mission. But when markets cool, as they did in 2022 and 2023, and exits slow down, LPs become more cautious. They focus more on returns and terms, and their ability to walk away carries more weight.

In leaner years, GPs may find themselves with fewer options and more pressure to accommodate LP demands in order to close their fund.

Other Trends

The secondary market for VC fund stakes gives LPs more liquidity. They’re not locked into 10-year cycles the way they used to be.

Co-investing and direct investing are on the rise. LPs want more control and more upside, and in some cases, fewer intermediaries.

Emerging managers are gaining interest, offering LPs access to niche markets, diverse teams and less crowded deals. But these GPs are often at a disadvantage in negotiations.

Zombie VC firms, those unable to raise new capital or generate meaningful returns, may be more inclined to meet LP demands just to stay alive.

Big Picture

Venture capital is built on a two-sided trust dynamic. Founders trust VCs to deliver capital, support and guidance. VCs, in turn, rely on LPs to fund the entire operation. When supplier (i.e., LPs) power increases, it affects how GPs behave: how they invest, what they prioritize and how they engage with their portfolio.

For anyone looking to break into venture, manage a fund or write angel checks, understanding the role and influence of LPs is non-negotiable. They are not passive participants. They shape the ecosystem just as much as the founders and firms they invest in.

The series will continue with Force Three: The Bargaining Power of Buyers (i.e., Startups)—how founders can (and do) influence venture capital decisions.

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Venture Hype

Venture capital gets a lot of hype – billions raised, unicorns minted and investors celebrated for spotting the next big thing. But when you strip away the headlines, is venture capital actually a good business?

In this series, we’ll break down the venture capital industry using Porter’s Five Forces – a classic framework for evaluating the competitiveness and profit potential of any industry. Yes, I’m dusting off my graduate school notes for this one. Somewhere, my professor is smiling.

Over the next few posts, we’ll dig into each force – examining who really holds the power in venture, where the risks hide and why generating consistent returns is harder than it looks.

Take a look at each of the Five Forces to know what we will be up to over the next few weeks:

1. Threat of New Entrants (Emerging Funds)

2. Bargaining Power of Suppliers (Limited Partners)

3. Bargaining Power of Buyers (Startups)

4. Threat of Substitutes (Bank loans, crowdfunding, etc.)

5. Competitive Rivalry within the Industry

Force One

First up: The Threat of New Entrants: Why Everyone (Apparently) is a VC Now.

On the surface, the barriers to entry are surprisingly low. Technically, you don’t need much to call yourself a VC. There’s no license, no test, no education requirement. All you really need is a pitch deck, a thesis and a few well-connected friends willing to back you.

Thanks to rolling funds, syndicates and scout programs, it’s easier than ever to launch a fund or start writing checks. According to Carta, 2021 saw a record 9,262 rounds and $229 billion raised in venture funding. Microfunds, solo general partners and first-time managers flooded the early-stage market. But markets change – quickly and often dramatically.

Hidden Barriers

On paper, starting a venture fund looks easy. But breaking into the top tier of venture capital comes with significant barriers:

Capital Requirements:

Establishing a reputable VC firm takes serious money. Many institutional limited partners aren’t interested in writing small checks. To play at scale, you’re often talking hundreds of millions – or even billions – under management. That alone keeps most newcomers on the sidelines.

Reputation and Network:

VC is a relationship-driven business. Building a strong track record and trusted network takes years – sometimes decades. New entrants struggle to compete with firms that have established founder relationships, LP loyalty and sector expertise.

Deal Flow Access:

The best deals don’t land in your inbox. Top founders often choose between multiple funds and look for partners with proven value-add. Without access to elite deal flow, new funds end up competing for leftovers – or overpaying just to get in.

Regulatory Hurdles:

Raising and managing outside capital comes with legal and regulatory complexity. Depending on where you operate and what you invest in, compliance costs and operational overhead can add up quickly.

But not all trends make it harder. While the core barriers of capital, reputation and access remain steep, not everything is working against new entrants. In some ways, the venture landscape is shifting just enough to give newcomers a fighting chance if they know where to look.

Increased Transparency:

The rise of online platforms, databases and social media has made venture activity more visible. Fundraising announcements, deal terms and even LP commitments are now more public than ever – making it easier for new entrants to learn, benchmark and connect.

Emergence of Alternative Funding Models:

Crowdfunding, rolling funds and angel syndicates are lowering the barriers for certain types of early-stage investing. These models aren’t replacing traditional VC but are creating alternative pathways for startups – and new investors – to participate.

Specialized and Niche VC Firms:

Some new entrants are finding success by narrowing their focus. Sector-specific or thesis-driven funds that go deep on areas like climate tech, fintech or AI can carve out space against larger generalist firms. Specialized expertise becomes a competitive advantage when mainstream funds can’t match that depth.

Online Investor Platforms:

Platforms connecting investors to startups are changing the game. By allowing smaller check sizes and democratizing access, these tools are shifting early-stage capital dynamics – and slowly reshaping what it means to "be a VC."

Reality Check

The last few years made it feel like anyone could be a VC. But 2024 told a different story – one of sharp consolidation and growing barriers to survival. Let’s take a look at some data from Carta.

• There was a 46% annual decline in the number of new venture funds raised from the previous year.

• Total cash raised from LPs by U.S. venture funds fell 22% in 2024.

LPs aren’t just writing fewer checks, they are getting pickier about who gets their money. Instead of backing emerging managers, they doubled down on the biggest names. Let’s take a look at some more data.

• The average venture fund size climbed 44% higher than in 2023.

• First-time venture funds hit their lowest point in a decade, falling 57% year-over-year.

• A group of just nine firms was responsible for nearly 50% of all capital raised by U.S. venture funds in 2024. That’s not just consolidation – that’s gatekeeping at scale – a monolithic industry ripe for decomposition.

Capital is becoming more scarce, and what is left is flowing to the top. Both startups and investors saw capital concentrate in the hands of the industry’s biggest players.

For new entrants, this shift is brutal. It's no longer enough to have a fund idea or a network. Breaking in requires overcoming a growing capital concentration that favors established players.

Survival Strategy

The 2024 data paints a tough picture: Less LP capital, more competition for every dollar and an uphill battle to raise Fund I. Emerging managers are likely to see smaller check sizes from family offices and high-net-worth individuals. Institutional LPs such as investment banks or pension funds may sit out entirely unless you can show a highly differentiated strategy or a proven track record of success.

In today’s market, survival comes down to one thing: showing LPs you have a real, defensible edge.

Final Verdict

Traditional venture capital has a high barrier to entry. Capital requirements, relationships and access to the best deals make it tough for new players to break into the top tier. The “threat” of new entrants is relatively low for these mega funds as reputation and exits take time to build.

That said, the landscape is shifting, even with all of its volatility. Alternative funding models, increased transparency and niche strategies are creating more pathways for smaller, more nimble players to get involved, particularly at the early stages.

Sources

• State of Private Markets: Q4 and 2024 in review - Carta: https://carta.com/data/state-of-private-markets-q4-2024/

• VC Fund Performance 2024 - Carta: https://carta.com/data/vc-fund-performance-q4-2024-full-report/

• With fewer deals and fewer new funds, VC dollars are growing more concentrated - Carta: https://carta.com/data/vc-concentration-2024/

• State of Private Markets: Q3 2024 - Carta: https://carta.com/data/state-of-private-markets-q3-2024/

• VC Fund Performance 2024 - Carta:

  https://carta.com/data/vc-fund-performance-q4-2024/

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Unknown

“The Rise and Fall of the Dinosaurs: A New History of Their Lost World” by Steve Brusatte begins by describing a world we've never really known, a world that would be completely unrecognizable to any living thing today. Cue the Permian-Triassic extinction 252 million years ago, the most catastrophic mass extinction the Earth has ever endured. The cause? The leading theory is a massive volcanic eruption in what is now Siberia that caused an inhospitable environment for many of the species.

Extinction

Extinction isn’t just about destruction, it’s about genesis. After the end-Permian extinction, life didn’t just recover; it came back stronger, more adaptive and with entirely new forms. Dinosaurs themselves wouldn’t have ruled Earth without that reset. The same is true in technology and business. Every time an industry collapses or a paradigm shift wipes out incumbents, something new rises from the ashes. The Industrial Revolution, the internet boom, the rise of AI – each of these moments was both an extinction and a genesis.

Innovation

Innovation sometimes works the same way.

For every dominant species, there is an extinction event waiting to happen. The same is true for technologies, business models and even entire industries. Blockbuster seem to have never saw Netflix coming. Kodak invented digital photography and then ignored it. BlackBerry went from being the phone for executives to a relic practically overnight. The financial world is full of these failures to evolve and innovate which then leads to relatively swift and often seismic changes. As investors, we spend our careers trying to pick the “species” that will survive and thrive in the next era.

Decomposition

For investors, this means recognizing that today’s dominant players aren’t invincible. Monolithic industries are ripe for decomposition, and technology is the tool that will allow the evolution of a new and unexpected era of industries.

In venture, the real challenge isn’t spotting a great company – it’s spotting a great “species”, one that can adapt, pivot and evolve when the landscape changes. Just like in nature, the market doesn’t reward strength; it rewards adaptability.

The question isn’t which companies are winning today – it’s which ones are built to survive tomorrow?

Sources

The Rise and Fall of the Dinosaurs: A New History of Their Lost World by Steve Brusatte.

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World War II

In Me-109, Martin Caidin examines the impact of an elite few fighter pilots during World War II. He highlights Erich Hartmann, a German pilot who holds the record with 352 destructions. Additionally, 33 other pilots each achieved over 150 destructions, collectively downing more than 6,900 enemy aircraft. The takeaway? In high-stakes situations, most will freeze or flee, while only a rare few fight with exceptional courage.

The same pattern holds in venture capital. Many may attempt it, but only a select few consistently generate outsized returns and leave a lasting mark on the industry. Just as top fighter pilots can turn the tide of war, elite investors shape the future by backing transformative companies. But what sets these individuals apart? Is it instinct, skill, or something that can be trained? And how do we identify those with the potential to rise above the rest?

Law Enforcement

Dave Grossman describes how law enforcement training has shifted from a method that simply declares failure, where trainees are told, “You shouldn’t have done that. You’re dead now,” to one that builds resilience. In this new approach, instructors say, “No, you aren’t dead. I don’t give you permission to die. I don’t train people to die. I train them to live.” This change recognizes that training, when applied correctly, can determine survival and success. If misapplied, it can have detrimental outcomes.

The same principle applies to venture capital. Losing some investments, even many, may be inevitable. The real question is: how do you recover? Training must prepare investors not just to win but to survive failure and come back stronger.

Air Combat

Mike Spick, in The Ace Factor, studied the difference between "Aces," pilots who mastered air combat, and "Turkeys," those who struggled to survive. His research found that a pilot’s chances of survival dramatically increase after their first five successful combat engagements. Experience, repetition, and exposure to real-world conditions separate the best from the rest.

One key difference between training pilots and investors is the speed and clarity of feedback. A fighter pilot or soldier knows almost immediately whether their skills are effective. Success means survival. Failure may be fatal. This real-time feedback allows them to rapidly adjust, improve, and develop instincts that keep them alive.

Venture capitalists, on the other hand, operate in a very different environment. The feedback loop in investing may take years, even decades. A decision made today may not reveal its true outcome for five, seven, or even ten years. Unlike a fighter pilot, an investor may not get instant confirmation that they made the right move. They might feel like they are succeeding for years until they realize they backed the wrong companies, misjudged a market, or failed to properly support a portfolio company.

Lessons

If an investor does not get immediate feedback, how do they know their training is working? How do you build the right instincts in an environment where success unfolds so slowly?

This is where structured, reality-based training comes in. While investors cannot simulate the exact long-term outcomes of deals, they can accelerate learning by studying historical patterns, analyzing case studies, and immersing themselves in high-pressure decision-making scenarios. Just as fighter pilots train in combat simulators to prepare for real-life engagements, investors must undergo rigorous, scenario-based training that forces them to refine judgment, pattern recognition, and resilience in the face of uncertainty.

Sources

Grossman, Dave, and Loren W. Christensen. On Combat: The Psychology and Physiology of Deadly Conflict in War and in Peace. Warrior Science Publications, 2008.

Caidin, Martin. Me 109: Willy Messerschmitt's Peerless Fighter. Ballantine Books, 1968.

Spick, Mike. The Ace Factor: Air Combat and the Role of Situational Awareness. Naval Institute Press, 1988.

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Courage

Think back to your high school history class—reading about WWII and the soldiers who risked everything, or the American Revolution and the fearless who put their lives on the line for a different future. Maybe even some ancient battle where warriors fought with nothing but swords and sheer determination. We’re taught that bravery means acting without fear. But is that really true?

In Lt. Col. Dave Grossman’s book “On Combat: The Psychology and Physiology of Deadly Conflict in War and in Peace”, he points out a shift in how we view courage:

“Most of all, I think there is value in seeing how modern warriors can talk quite frankly about the role of fear in their experience.”

Fear

If today’s soldiers—people who face literal life-or-death situations—can openly discuss fear, why shouldn't investors do the same?

Venture capital is inherently risky, which is why it’s reserved for accredited and sophisticated investors. But a healthy dose of fear isn’t a weakness—it’s a tool. Acknowledging fear leads to better decision-making. The following are some possible positives of fear for investors when investing in a fund or startup.

Positives

• Identifies potential risks

  • Feeling uneasy about an investment? That’s a cue to dig deeper. Fear prompts uncovering blind spots and refining strategy.

• Encourages healthy discussion

  • Talking about concerns within your investment community leads to fresh insights and perspectives you might have missed.

• Helps manage expectations

  • VC is a long game. Acknowledging fear helps set more realistic expectations about market fluctuations and potential volatility.

• Enables better risk assessment

  • Expressing fears may move investors to scrutinize risk levels and adjust their portfolios accordingly.

  • Fear isn’t the enemy—it’s part of the process. The key is learning to use fear to your advantage.

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The Power of Training

In Lt. Col. Dave Grossman’s book “On Combat: The Psychology and Physiology of Deadly Conflict in War and in Peace”, he describes a scene in Wanat Afghanistan told by Sgt. Christopher Mckaig.

Sgt. Mckaig was a highly trained Specialist (SPC) in the Weapons Squad and His platoon, 2nd Platoon, Chosen Company, 2/503rd, is now the most decorated platoon in the entire Army. On July 13, 2008 they experienced the worst battle in Operation Enduring Freedom in Afghanistan. In the midst of a firefight, as time warped around him, Sgt. Mckaig found himself struggling to change magazines, something he could likely do in his sleep. Under extreme stress and fear he found himself thinking, “The Army never trained me for this!”.

De-risking “High Risk”

Investing in venture capital or other deemed “high risk” asset classes is not a deadly force encounter like war is, but the aversion to losing money is powerful and elicits a fear response in humans. Our brains are wired to avoid loss, and this aversion can cloud judgement, lead to hesitation, or drive impulsive decisions. To overcome this instinctual fear, we must train our investing muscle with the same discipline and repetition that soldiers apply in their drills, so, when high-stakes decisions arise, our responses are clear, measured, and effective.

Learn More

EVFM aims to provide limited partners (LPs) access to valuable education on venture investing. As disciplined training prepares soldiers for the unpredictability of combat, so continuous learning trains our partners with the knowledge and confidence to navigate the complexities of high-risk investments. By providing practical tools, actionable insights, and hands-on learning, we seek to help LPs strengthen decision-making frameworks and survive the ever-evolving world of venture.

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References

Sep 01, 2008: Combat: The Psychology and Physiology of Deadly Conflict in War and in Peace

By: Lt. Col. Dave Grossman & Loren W. Christensen