The Biggest Challenging Facing Most VC Funds

"Incentives drive behavior. And if you can’t raise another fund, you die."

Here are my learnings in ventue so far:

#1. The biggest challenge for 70% of VCs is Raising Money.

VCs have their own investors, the LPs (Limited Partners). Until about 2018, the biggest funds tended to gobble up most of the available capital. In the boom years of ‘19-’21, more money was available to newer funds … but in ‘22 and ‘23 that’s retreated again. Established funds are sucking up the vast majority of available capital. If you don’t either (x) have a very strong, successful brand (y) top 20% returns over multiple funds, or (z) a new small/microfund with a truly exciting thesis … then raising new VC funds are very difficult today.

Ultimately, much of VC behavior can be explained by their relationships with their own investors. Incentives drive behavior. And if you can’t raise another fund, you die. Albeit very, very, very slowly (because funds have a 10-year lifetime).

#2. Noise

There are very few truly great start-ups, but there are a lot of promising ones.  1000s and 1000s at the early stage. Many talk about “deal flow”, but assuming you have deal flow, the bigger challenge so far seems to be noise. It’s hard to meet with 10+ new, promising start-ups a week and provide quality feedback and be responsive and dig in on 2-3 of them in more depth. That’s why you probably want to make it easy on VCs unless you are Super Hot (If You Want to Get Funded – Dude, Make It Easy On Them).

3. Not That Collaborative.

If you’ve been a successful founder CEO, you’ve had a great team under you and together with you. Being a VC is a more solo experience, a more silo’d experience. If you like collaborating as a team, it’s a challenging transition. As a founder, I never really cared that much what I sold, what product I worked on. I cared mostly about the journey, the customers, and the team. I’ve found that many founder CEOs who have become VCs have struggled a bit here.

4. Takes Long, Long, Long Time.

Especially if you are an early-stage VC, it takes a very, very long time to make any money.  It can take 10+ years for a fund to return true profits (returning all the capital invested, plus expenses). Once you get there, the returns can be good. If you do later-stage investing, you can get to carry / profitability faster. But even with a Unicorn or two or three, if you are investing say $200m in pre- or very early revenue enterprise start-ups … it just takes a while to get all that money back out to investors and then achieve a targeted 3x return. Start-ups also take a very, very long time. But not always. You just don’t know. There’s more mystery there to help you through the 7-10 year journey.