Decomposing Venture: Reality Check
Investor Liaison Hannah Savage talks 'the 2024 culling of the VC pride'
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:
Threat of New Entrants (Emerging Funds)
Bargaining Power of Suppliers (Limited Partners)
Bargaining Power of Buyers (Startups)
Threat of Substitutes (Bank loans, crowdfunding, etc.)
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:
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