The pitfalls of raising from big ventures capital funds and what to do about it

Many founders aren't aware of some of the pitfalls that await them when pitching VCs, especially the bigger ones, especially now.

Consider the following:

1. VCs want a bigger exit than the founding team wants or needs: Most VCs spread their capital across many startups, with a few big wins responsible for the majority of the returns on their funds. This means that a startup that sells for tens of millions doesn't "cut it" for most VCs - they are hoping for exits in billions. Founders who can become multi-millionaires by selling their company are often pressured by their VC investors to decline the deal and chase a bigger exit, at the risk of losing it all.
2. Bigger funds + market trends widen the gap even further: Since endowment and pension funds started investing in venture capital funds, some VCs have a huge pool of capital to deploy. The VC power law described above becomes even more extreme, and so does the pressure on founders to go all-in on the most distant target. On the other hand, current AI tools allow startups to build and go to market faster, which opens more opportunities for quicker exits.
3. Easy seed brings scarcity at A: With some of the bigger VCs, the abovementioned situation results in an unhealthy dynamic. With so much capital to deploy, VCs become incentivized to add more and more seed startups to their portfolio, to secure their spot in the few that show exceptional growth. They pull back from the majority of their portfolio startups. This is seen as a very negative signal for other investors, and those startups have a very hard time closing their next round, or are forced to a downround.

What to do if you need to raise VC capital?

1. Be sure to understand how VCs actually make money and what their real goals and interests are.
2. Don't take any money you can - go with those that you believe you can trust to act in your best interests whenever possible. Get references and ask around.
3. Consider working with a smaller VCs even if they don't carry a big brand name. Opt for the bigger VCs if you really want to go as big as possible and have ambitions beyond financial returns.

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