The conventional venture capital funding path – from raising an institutional Seed, Series A, B, C, D, E, etc, all the way to exit via IPO – has long been treated as gospel. Its verses are most heavily preached by VC board members, whose business model it also supports.
But there is an influential tide of founders on the rise that is opting out of this path and quietly plotting a new one that leads to building generational companies.
It’s a hybrid path, combining the growth of targeted venture funding with the durability found in bootstrapping (i.e. profitability). It’s a path with less venture capital and more self-reliance.
And it’s the direct result of founders emerging from a tumultuous period of feast (with 5x more venture capital offered to startups over the past decade) and a brief flirtation with famine from the recent pullback that has left some venture-dependent companies in starvation mode.
For many founders, a steady reliance on venture capital, as it is heavily prescribed today, is often seen as unhealthy, if not risky.
Increasingly, these founders are seeking freedom from the risk and control of the perpetual pursuit of venture capital. Instead, they’re ready to reroute their time, efforts, and attention to building enduring companies on their own terms.
These founders are choosing to raise less and build more.
“Foie gras” venture capital
The clearest trend in the venture industry over the past decade is VCs offering startups more money.
To gain visibility into this trend, we can examine the ratio of VC capital raised to new startups in any given year. An imperfect but close proxy for viable new startups is the annual number of Seed deals (inclusive of Angel, Pre-Seed, and Seed deals). When you take total VC dollars raised, divided by the number of new companies, you’ll see the average startup today has 5x more VC capital available than its counterpart did in 2013:
The primary driver of this trend is VCs increasing their fund sizes, particularly larger firms. Nearly every single major fund has implemented this change. No other strategy has been so universally adopted.
As a result, every single type of round, from Seed to Series C on, has also increased in size. Here are some averages over time:
While 2023 will likely prove to be a down year for total VC capital raised, both the average and median fund size will remain up. The average fund size went from $336M in 2020 to $386M in 2022 to $538M in 2023 (PitchBook). The trend has become the new baseline.
More isn’t always better
Why is this trend so pervasive?
Do today’s startups need more money?
Well, no.
The main driver of a startup’s burn is salaries. Salaries over time have increased, but not by 5x (the rate VC capital has increased). Even the new increased infastructue costs with AI will ultimately come down as companies scale and the industry matures. None of this justifies the rate and breadth of this capital increase from VCs.
Contrary to popular myth, statistically venture backed startups aren’t staying “private longer,” either. Between 2011 and 2021, the median time from venture funding to IPO exit in the US has fluctuated between 5 and 7 years, with no visible increase in time (Statistica 2023). Granted, SPACs may have impacted these numbers, but it’s nonetheless interesting that the data does not align to the myth.
Do bigger funds perform better?
Again, no.
Smaller funds consistently outperform large funds (on a multiple basis). More on this, below.
Does giving a startup more capital make it reliably perform better?
Another no. There is no conclusive data to support this. There is no empirical study that I know of that suggests that raising more capital increases a startup’s odds of success.
Looking at case studies, for every Stripe ($8.7B raised), there are countless startups who raised too much and did not make it. To avoid speaking ill of the dead or the fatally wounded, I’ll withhold names (the headlines will tell this story).
The lack of conclusive evidence se
