Entrepreneurial VCs are the best partners for startups in the current market

As funding and building a business gets harder, takes longer and becomes more complex, startup founders need VCs to be a true partner on their growth journey. 

Startup investing in 2024/25 is a different ballgame to a few years ago when funding was plentiful and rapid growth curves were the norm. Deals are still happening and there are still exciting businesses out there, but VCs are a lot pickier about who they back, and potential customers are much tougher to convince. 

Natural selection means the best founders are rising to the top, while others are falling by the wayside. The same goes for VCs, as the most talented founders work hard to ensure they have the best partner for the journey. Increasingly they are signing not with big asset managers or corporate VCs, but with smaller, scrappier entrepreneurially minded investors, who can add real value to the business. 

A spectrum of VCs

VCs vary widely in their background and approach. At one end of the scale are the more traditional asset manager-style funds, with a hands-off approach. These investors can achieve huge success in a buoyant market and there are still plenty of them around, writing big cheques. But, as the market has turned, founders are looking for more support and input, and a different mindset. Entrepreneurial VCs who take an ‘activist’ approach are coming into their own. 

We’ve seen a wave of these types of VCs in recent years. On the one hand, you have funds set up by ex-entrepreneurs such as QuantumLight, founded by Revolut CEO Nik Storonsky, Plural, started by Taavet Hinrikus of Transferwise, and Cherry Ventures, built by founders from Zalando, Spotify, and Uber. On the other, some investors combine more traditional finance experience with a founder mindset, operating at the seed end of the market with a scrappy, small team. They’re on the same wavelength as startups and looking to take an active role in building businesses, alongside founders. 

It’s the latter two VC models that are coming to the fore, for three main reasons. 

More experienced founders are demanding more 

Building a business now isn’t for the faint-hearted, which is why serial founders are dominating the startup space. Having been there and done it before, they have the confidence to navigate the headwinds and attract funding. According to Pitchbook, in 2023 serial founders attracted 2.5 times more participation from the top 100 investors to first-time entrepreneurs. 

These founders are well-connected individuals who know what they want from their VC partner and, in some cases, have learned the hard way what does and doesn’t work. Consequently, it makes sense that they want to partner with funds with a similar mindset, who will provide valuable contacts, advice, and hands-on support when needed.   

Longer hold periods 

Another knock-on effect of the tougher climate is that building businesses takes longer. A few years ago, the best founders could be confident of growing fast and fundraising regularly, providing opportunities to refresh the cap table. Nobody expects the market to return to those highs soon, meaning that founders could be with the same investors for 10 or even 15 years. Pitchbook data found the average lifespan of VC and private equity funds is now 13.1 years.

With that in mind, startups are approaching investor due diligence with a longer-term mindset, asking who is going to help them navigate a tough and unpredictable few years, and who they can have the most productive, constructive, and enjoyable relationship with. The answer is invariably the investor who treats the founder like a partner, rather than purely an investment.  

More complex businesses 

Finally, startups are becoming both more complex from a technology perspective, and more niche in the problems they are solving. All the low-hanging fruit has been harvested and the most promising ideas now invariably involve B2B challenges, deep tech, or identifying or developing use cases for AI. 

Not only do these businesses, by definition, take longer to build – see above – but they are also more likely to benefit from investors with a background in their sector or technology niche. VC funds comprising ex-entrepreneurs and sector or technology specialists offer much more than just cash, and for these founders, choosing between them and a large asset management style firm is a no-brainer.  

Jumping off a cliff

There is a famous quote from Reid Hoffman, co-founder of LinkedIn: ‘Entrepreneurs jump off a cliff and build parachutes on their way down.’ 

Large hands-off VC funds will always have a place in the startup ecosystem, particularly in the later rounds, where businesses need less day-to-day support. The outsized power of these funds will also continue as long as governments and institutional LPs prioritise them when allocating funds. But my prediction is that the most exciting and sustainable businesses from this vintage will be those in which VCs are right there on the cliff with their founder partners - and ready to jump.