📈 Why the VC industry is broken. Thoughts on how to make the vetting process better.

I have been working with VCs and family offices for the past 10 years, bringing deal flow to a number of investors. I have a lot of respect for investors in the industry. It is a tough job when you have to make a lot of decisions and pick potential winners in the industry.

Now with that in mind I have noticed a number of things based on my observations on how VCs and FOs make decisions when deciding to invest into startups. These observations are by no means criticisms but just some observations which I hope will spark some healthy discussions on how we can make the process of investing better.

Analysts are oftentimes the ones vetting the startups initially.

I oftentimes see VCs relaying on analysts to vet, assess potential investment opportunities. But here is the problem I see with this. I don’t doubt that those analysts are extremely smart. They oftentimes have MBAs and a high degree of education. But do they know what it takes to build and scale a startup? How would they make a decision without talking to founders? This is where I think relying on analysts to triage and vet potential investment opportunities needs to get better. I also see analysts looking at those startups and look at the market they are in, the competition, the barriers to entry..their potential competitive advantages. But again you can’t just rely on this type of analysis to make a decision without talking to those founders?

Investors sometimes invest in founders who had previous exits.

You often hear VCs saying “I want to invest in founders who had exits before”. But here is the problem: Does that mean that their next startups will be a success? No. Having a previous exit is no guarantee that they will be able to do it again. I think that VCs should look beyond that. Personally I have seen VCs invest in startups that were led by founders who had past exits but were I felt like their new startup did not have an exciting business.

Investors want to make deal with other VCs and investors.

Another thing I have seen VCs do is invest into startups because they want to co invest with startups that got investment from a VC that they want to co invest with. There is nothing wrong with that. But just because it is a major VC that they want to co invest with, it does not always mean that this next deal is going to be a success.

Investors want to invest in startups who have big names on their cap table

That’s another main trend I have seen. VCs or FOs oftentimes want to invest into a startup because of who is on the cap table already. This goes back to my previous point. But I sometimes feel like they don’t always take the time to assess and vet the startups. There needs to be a bigger motivation there.

Growing number of VCs are relying on AI to vet startups

Venture capital firms are increasingly turning to AI to streamline the process of vetting investment opportunities, leveraging algorithms to analyze market trends, financial data, and founder profiles at scale. While this shift offers speed and efficiency, many VCs are finding that the AI tools currently in use are often too broad and generalized to surface truly high-potential startups. These systems tend to favor pattern recognition based on past successes—like repeat founders from top universities or popular sectors—while overlooking promising outliers, emerging niches, or unconventional but visionary founders. As a result, there’s a growing concern that relying too heavily on AI could lead firms to miss differentiated, high-upside opportunities that don’t fit neatly into the data-driven molds the algorithms are trained on.

So the question now is: Where do we go from there? How do we make this process better? Again these are by no means criticisms and just some thoughts to consider:

🧠 Founding Team Evaluation

• Assess founder-market fit: Evaluate if the founders have deep domain expertise and personal motivation.

• Track record: Examine previous ventures, exits, or failures for patterns of resilience or success.

• Leadership & coachability: Gauge openness to feedback, hiring ability, and long-term vision alignment.

• Team dynamics: Look for cohesion, role clarity, and a balanced skill set across tech, business, and ops.

• Deep founder analysis beyond the pitch: Analysts should go beyond decks and spreadsheets to thoroughly understand the founders’ backgrounds, past ventures, and true motivation. This time-consuming step can significantly improve investment decision quality.

• Partner involvement in early vetting: VC partners should engage earlier in the vetting process—not just after an analyst recommendation. Their experience and instinct can uncover red flags or conviction much earlier, improving hit rates.

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📊 Market & Opportunity Sizing

• TAM/SAM/SOM clarity: Ensure the founders have a grounded understanding of the Total Addressable Market.

• Market timing: Validate if macro trends or tech shifts make this the right time for the solution.

• Customer pain: Confirm that the problem is urgent, frequent, and painful enough to drive adoption.

• Competition & differentiation: Map competitors and examine how the startup’s solution is unique or defensible.

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📈 Traction & Metrics

• Early growth signals: Revenue, user growth, retention, or waitlists (even if pre-revenue).

• Customer validation: Talk to customers or users to confirm value delivery and satisfaction.

• Unit economics: CAC, LTV, payback period, gross margin—even at early stages, trends should point toward scalability.

• Sales funnel clarity: Review how well they understand acquisition, conversion, and churn drivers.

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💡 Product & Technology

• Tech defensibility: IP, proprietary algorithms, technical depth, or network effects.

• Roadmap clarity: Evaluate realism, prioritization, and understanding of customer needs.

• Build quality & UX: Test the product—early builds should show user-centric design and reliability.

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🧾 Business Model & Revenue Strategy

• Monetization model fit: Confirm that the pricing model aligns with buyer behavior and market norms.

• Revenue scalability: Look for models that benefit from scale (e.g., SaaS, marketplaces, embedded finance).

• Go-to-market (GTM) strategy: Assess distribution, partnerships, and scalability of the GTM engine.

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🧮 Financials & Runway

• Burn rate & runway: Evaluate if the startup has enough capital to reach the next key milestone.

• Fundraising history: Review cap table health, previous investors, and deal terms.

• Use of funds: Check if their capital allocation plan aligns with business priorities and scaling needs.

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🛡️ Risk Assessment

• Regulatory risk: Understand if the startup faces compliance issues in healthcare, finance, etc.

• Tech risk: Assess feasibility of building or scaling the tech stack.

• Team risk: Identify any gaps in leadership or succession concerns.

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📚 Reference Checks & Third-Party Validation

• Customer references: Speak with early users, especially if they’ve churned.

• Industry experts: Get feedback from specialists to pressure-test assumptions.

• Founder references: Backchannel with ex-colleagues or investors for deeper character insights.

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🧭 Alignment with Fund Thesis

• Strategic fit: Confirm alignment with the fund’s investment thesis, stage, and domain.

• Exit potential: Evaluate the realistic paths to liquidity—acquisition, IPO, secondary markets.

• Follow-on potential: Consider if this is a company the fund would want to back again at the next round.

Bottom line: Vetting startups as a potential investment opportunity is not easy. You have to look at multiple factors (founders, product, market, ability to execute..) and assess the following questions: Do the founders come from the world of sports? Did they have exits before? Do they have a competitive advantage? Do they know how to execute? VCs and investors need to carefully assess all these elements to make the best decision in the end. As a VC co investing with another leading VC does not guarantee success. Investing into a startup led by a founder that had a past exit is not a guarantee of future success either. Ultimately one of the most important thing is the founding team. It starts with them. But VCs need to do their due diligence on them in the early stage. By doing that it will limit the risk of seeing VCs miss on great investment opportunities just by looking at a VC deck.

As always, if you have any questions, feel free to reach out to me.

Best,

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