Why Starting a Venture Capital Firm is the Next Big Startup Idea
The venture capital world isn’t just growing — it’s evolving. With personal brands, niche funds, and distribution-first strategies leading the way, starting a VC firm today looks a lot like launching a startup itself.
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Over the past decade, the startup ecosystem has not only seen explosive growth in the number of new businesses but also a significant rise in venture capital (VC) firms and angel investors. Interestingly, setting up a VC firm has itself become a startup-like initiative, transforming the landscape of entrepreneurship and investment.
The Rapid Rise of Venture Capital Firms and Angel Investors
Venture Capital, once a specialized sector dominated by institutional players, has become increasingly democratized.
According to NVCA, the number of active VC firms in the US grew from around 1,132 in 2013 to 2,718 in 2022. While global figures are not specified, the trend is similar, with significant growth in the number of VC firms worldwide. Concurrently, angel investors—individuals investing their personal capital into startups—have multiplied even more rapidly, driven by platforms such as AngelList that simplify early-stage investing. Angel investing, however, involves different strategies and dynamics, which will be explored in detail in a forthcoming article.
Why Are New Venture Capital Funds and Angel Investors Increasing Rapidly?
Several factors contribute to the rise of new VC firms and individual investors entering the space:
Lower Entry Barriers: Technological advancements, regulatory improvements, and innovative financial structures like rolling funds have significantly reduced the barriers to entry.
Increased Wealth Generation: The proliferation of successful startups, exits, IPOs, and subsequent wealth creation has created new pools of capital seeking investment opportunities.
Niche Specialization: New VCs increasingly focus on niche or emerging sectors such as AI, blockchain, climate tech, or specific geographical regions, thus catering to specialized investor interests and market gaps.
Personal Branding and Influence: Increasingly, individuals who have built strong personal brands, often through content creation or successful angel investing, are leveraging their public profiles and networks to transition into launching their own venture funds. This trend has effectively transformed personal brands into venture capital products, further accelerating fund formation.
In an era where distribution precedes capital, founders often take capital from those who help amplify their story — not just wire the money.
I don’t recall the interview or the person’s name but what they said felt right,
"Investment firms used to be monolithic brands. Ten years ago, as a founder you might not have really heard of the person, only the brand. And now we’re seeing both firms and people specialize in certain areas. … Post 2020, I now think that being a renegade in venture is becoming more and more about the individual investor’s brand vs the mothership’s brand."
Why Do Startup Valuations Feel So Inflated These Days?
As we know, “Beauty is in the eye of the beholder.”
Similarly, some startup valuations today often reflect perception more than fundamentals.
Today’s startup valuations are often driven more by perception than fundamentals, especially in fast-moving sectors like AI or climate tech. As Harvard Business Review outlines, valuations are often swayed by investor hype, fear of missing out (FOMO), and optimistic market sentiment, which can overshadow fundamental business metrics. Disciplined investment analysis is therefore critical to mitigate these valuation distortions.
In this game, some startups get massively overvalued, while others remain unfairly ignored.
There’s rarely a middle ground. One side always has to adjust — either the founder’s expectations or the investor’s conviction.
That said, not all valuations are irrational. In well-researched sectors or with seasoned investors at the table, startups do achieve fair, fundamentals-based valuations. Strong unit economics, proven traction, and repeat founder profiles often lead to more grounded pricing — though such clarity is increasingly rare in hype-driven markets.
👀 Curious how startup valuations are actually calculated — not just inflated?
Stay tuned for our next blog: “How Are Startups Actually Valued?”
How Venture Capital Firms Work and Create Value for Startups
VC firms provide much more than capital; they deliver extensive operational support, including:
Strategic mentorship from seasoned entrepreneurs.
Access to expansive networks for talent acquisition, partnerships, and subsequent funding.
Operational expertise, including guidance in marketing, legal compliance, and financial management, significantly enhancing a startup's likelihood of success.
Prominent firms such as Andreessen Horowitz emphasize their comprehensive operational support as a critical differentiator.
Thinking of Starting a VC Fund? Here’s What It Takes
It’s worth noting that not every VC journey starts with a full-scale fund. Micro-VCs and scout programs like Sequoia’s Scout Program or AngelList’s Rolling Funds have opened more accessible paths into venture investing. These smaller vehicles allow new investors to build track records, develop networks, and gain early exposure to the dynamics of startup funding.
Establishing a VC firm is no small feat—it mirrors launching a startup itself. Here's what it typically takes:
Network Building: Cultivating robust connections to ensure a consistent, high-quality deal flow.
Fundraising: Securing commitments from Limited Partners (LPs) such as institutional investors, family offices, and high-net-worth individuals.
Defining Your Investment Thesis: Clearly specifying your sector, geographic, or stage-based investment strategy to attract suitable LPs.
Navigating Regulatory Compliance: Ensuring rigorous adherence to fund registration, reporting requirements, and other regulatory obligations.
Understanding the Fund Lifecycle: Most VC funds operate on a 10-year closed-end structure: ~3–4 years for deployment, ~3 years for follow-ons, and the final stretch for harvesting returns via exits.
However, this model is gradually evolving. We're seeing increased adoption of rolling funds, evergreen structures, and continuation vehicles that offer more flexibility and earlier liquidity. Faster market cycles, the rise of secondary markets, and LP demand for shorter exit horizons are also pushing some funds toward 5–7 year timelines, particularly in high-velocity sectors like AI and SaaS.
If You’re Wondering Why I Haven’t Started My Own VC Yet…
Operating a VC fund requires extensive networks, financial acumen, substantial ongoing capital management, and operational involvement.
As an analyst, my strength lies primarily in research, in-depth analysis, and demystifying complex dynamics rather than managing the operational intricacies of a fund.
That being said, it's not that I'm incapable of doing so. Should the right opportunity arise, I would be eager to collaborate with VCs, deepen my understanding, and perhaps one day lead my own venture—but today is not that day.
The Race Is On: Why VCs Now Compete Like Startups
In today’s market, founders vet VCs just as rigorously as VCs vet them — speed, value-add, and founder-first ethos are non-negotiables.
The contemporary VC landscape moves at breakneck speed and resembles startup dynamics more than ever. Top startups typically receive multiple funding offers, compelling VCs to:
Act decisively and swiftly.
Clearly communicate their unique value proposition early in negotiations.
Build strong, trust-based relationships with entrepreneurs to secure deals ahead of competitors.
The Economist underscores the crucial roles that reputation, speed, and operational support capabilities play in securing high-quality investment opportunities
Want to Work in Venture Capital? Here’s How to Start
For those aspiring to enter the VC industry, essential preparation includes:
Specialized Education: Enroll in renowned programs like Stanford's Venture Capital Executive Program, Wharton's Private Equity and Venture Capital courses, or Indian programs such as the Indian School of Business (ISB) Venture Capital program or IIM Bangalore’s Startup Investing program.
Relevant Industry Experience: Gain practical experience through roles in investment banking, management consulting, or direct operational involvement in startups.
Skill Development and Networking: Cultivate analytical rigor, financial literacy, and an extensive professional network to excel in the industry.
Entry-Level Opportunities: Start as an analyst or associate at established VC firms to gain valuable on-the-job experience. However, it’s important to note that entry-level programs at top firms have stringent eligibility criteria and competitive selection processes.
Curious How VCs Actually Make Money? Let’s Break It Down
Understanding common VC exit routes is essential:
Mergers & Acquisitions (M&A): Sale to larger corporations seeking technology or market share.
Initial Public Offerings (IPOs): Public listings enabling broader liquidity.
Secondary Sales: Selling equity stakes to other investors.
Management Buyouts and Buybacks: Founders or management teams repurchase equity.
Acquihires: Acquisition focused primarily on talent rather than products.
How VCs Actually Get Paid:
Venture capital firms primarily earn revenue in two ways:
Management Fees: Typically 2% annually of the total committed capital — used to pay salaries, overhead, and operational expenses. For a $100M fund, that’s ~$2M/year.
Carry (Carried Interest): This is the 20% share of profits VCs earn on successful exits — after returning capital to LPs. For example, if a $100M fund returns $300M, the VC firm keeps $40M (20% of the $200M gain) as carry.
This “2 and 20” model aligns incentives — VCs get paid for both managing and performing. However, newer fund structures (like rolling funds or revenue-based financing) are experimenting with alternative models.
📌 We’ll break down how VC fund models are evolving in a future post on fund structures and secondaries.
In conclusion, venture capital itself is now a vibrant entrepreneurial opportunity, offering substantial potential and complexity. Grasping these dynamics—how firms operate, compete, and succeed—is vital for anyone exploring a future within this dynamic industry.
🚀 Whether you’re an aspiring analyst, a founder weighing funding options, or someone exploring the next wave of investment innovation — understanding VC isn’t just optional, it’s essential.
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💡 And in the GenAI era, smart prompting can unlock even deeper insights — And yes we’re publishing more on this very soon.
📝 Up next: “How Are Startups Actually Valued?” — stay tuned.
🧠 Visual Recap: Mind Map of This Article
A structured overview of everything we explored above — ideal for revisiting or sharing.
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References for Further Exploration
“Inside the Machine of Andreessen Horowitz” – WIRED
"Value Creation in Venture Capital" – Roundtable.eu
"Top Venture Capital Trends to Watch" – AlphaSense
"Mastering the Art of Successful Exits in Venture Capital" – GoingVC
“How VCs Differentiate Themselves” - Mostly Metrics