The Problem with the Modern VC Model
Much has been said recently about how the venture capital (VC) model is broken. One of the biggest, yet often overlooked reasons is simple: VC firms have become too large to serve early-stage startups effectively.
This isn’t just a structural issue—it’s a strategic misfit for entrepreneurs and angel investors alike.
Why VC Firms Grew So Large
In the early days of tech, scaling a startup required massive capital. Building companies like early semiconductor firms or internet giants demanded tens or even hundreds of millions of dollars. Venture capital grew to meet that demand, and so did the size of the funds.
But size also brought perks for fund managers. Most VC funds are structured to charge around 2.5% of assets annually as a management fee. That fee funds salaries, operations, and overhead. In practice, it means a $200 million fund produces $5 million in annual fees, regardless of performance.
As a result, fund managers began targeting larger and larger funds, not just to support portfolio companies, but to generate attractive compensation packages and support larger operations. Over time, this institutional momentum made small funds seem inefficient or unattractive.
The Capital Burden Per Partner
As funds grew, so did the capital load per general partner. In the 1980s, a typical VC partner managed less than $3 million in capital. Today, that number has ballooned to well over $25 million per partner in many firms.
This shift has real implications for how venture partners invest.
Bigger Funds Mean Bigger Checks
Managing more capital doesn’t mean more investments—it means larger investments. The work required to manage a $1 million deal is nearly identical to a $10 million deal. But to deploy capital efficiently, today’s VC partners are forced to write larger checks to fewer companies.
That trend is clearly visible in exit data. In the mid-1990s, companies that exited via merger or acquisition typically raised about $5 million in equity beforehand. Today, that figure has jumped to $25 million or more.
In other words, VC-backed companies are now capital-intensive by necessity, not always by strategy.
Why This Hurts Early-Stage Founders and Angels
This structural reality creates significant misalignment with entrepreneurs and angel investors. Here’s why:
- Early-stage startups don’t need $10–20 million right away—they need guidance, flexibility, and room to grow.
- Large VC funds can’t justify small checks, even for promising opportunities.
- Capital efficiency is devalued, as success is now measured by how much money a company can raise and deploy, not necessarily by how much value it creates per dollar.
The result? For many startups, VC funding is no longer the best fit, and in many cases, not even a viable option.
The Takeaway for Entrepreneurs and Angels
The size of modern VC funds isn’t just a background detail—it directly affects how VCs invest, how startups are evaluated, and how exit strategies unfold.
If you’re building a capital-efficient business or planning for a strategic early exit, large VC firms may not align with your goals. In fact, they may work against them.
This is why many experienced founders and early-stage investors are shifting their focus toward angel funds, micro-VCs, and other alternatives that prioritize strategic growth over massive capital deployment.