Are There Too Many VCs: Why 98% Are Average Or Mediocre? (2024)

FAQs

What percent of VCs fail? ›

And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail. One in five fail by the end of their first year; only thirty percent will survive more than ten years.

According to data from industry associations and research firms, there are approximately 8,000-10,000 active venture capital (VC) firms globally as of 2022. However, the venture capital landscape is highly concentrated towards certain regions when it comes to actual investments.

Experts from The National Venture Capital Association estimate that 25% to 30% of startups backed by VC funding go on to fail.

They work backward by an expected ROI. The average multiple for a “home run” VC exit (which drives a portfolio) is 16x. This is driven by the pareto rule in venture investing – because of the high failure rate of startups, the successes need to be home runs to drive portfolio returns.

If you are considering starting a company, you need to understand the entrepreneurial landscape in terms of how you can increase the odds of your startup success when so many startups fail. According to a report by Startup Genome, 90% of startups fail.

The relatively high startup failure rates are due to various reasons, with the most significant being the absence of a product-market fit, poor marketing strategy formulation and implementation, and cash flow problems. Why do entrepreneurs fail? In most cases, a business fails due to multiple reasons.

The number of active investors in US VC, which we defined as making two or more deals, plummeted by 38% in the first three quarters of 2023 compared to the same period last year, according to PitchBook data. That translates to 2,725 fewer firms making deals.

VCs will often focus on businesses in specific industries that are related to their areas of expertise. How many venture capital firms are there in the US? According to the National Venture Capital Association (NVCA), there are currently more than 400 venture capital firms in the United States.

While a quarter of both groups earned between $50,000 and $100,000 per year, just 4% of the VC-backed crowd was paid $0, versus 29% of the bootstrapped founders. But then 29% of the VC-backed group made between $100,000 and $150,000, while a mere 9% of the bootstrapped group pocketed that amount.

Is VC funding slowing down? ›

The slow final quarter put 2023 on record as the lowest total for venture funding since 2018, Crunchbase said. Specifically, global startup investment in 2023 reached just $285 billion, marking a 38% decline year over year, down from the $462 billion invested in 2022.

VCs often use the shorthand phrase “two and twenty” to refer to the 2% of annual management fees a venture fund might take and the 20% carried interest (or “performance fee”) it would charge.

In venture capital, IRR expectations often exceed traditional investment benchmarks due to the higher risk associated with early-stage startups. As a general guideline, an IRR of 20% or higher is often considered a strong performance in the venture capital industry.

The agreement is typically structured so that once the fund's investments start getting distributed back to the fund investors, the VC firm gets a percentage of any profits. Most carries are 20%, but a very successful firm with a strong track record might negotiate for a higher carry.

Startup Failure Rates

About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.

There are a number of reasons why some startups fail with venture capital. One reason is that the startup may have a great product or service, but it doesn't have a viable business model. This means that the company isn't generating enough revenue to sustain itself or that it isn't profitable.

Once you look at the five-year failure rate, though, the information industry takes the lead, with 55.7% of businesses failing. Source: LendingTree analysis of BLS data.

The truth is, like most careers, there are multiple paths into VC despite how daunting it might appear. But it's still hard. If you only have a few minutes, here are some takeaways to consider when thinking about how to break into VC: Go niche to stand out.