Why the Best VCs Might Not Be the Best for You

When founders think about securing funding, the names of top-tier VC firms often dominate their wish lists. After all, these firms are synonymous with success, having backed iconic companies and consistently delivered strong returns.

The assumption? If they can pick winners, they must also be the best partners to help scale startups.

But what if this assumption is flawed? Research published in the Journal of Financial Economics offers a contrarian view: the persistent success of certain VCs has less to do with their ability to build great companies and more with their early access to deals and strong reputations. In other words, the biggest VCs may not be the best company builders – and they might not be the right partners for your startup.

The original research, undertaken by IESE Business School at the University of Navarra, Spain, was published just as the pandemic took hold in 2020. As a result, it went largely unnoticed at the time. But more recent insights from Pitchbook and Cambridge Associates support many of the key findings, bringing new relevance to this extensive piece of research. Together, these observations debunk many of the myths of successful VCs.

In today's briefing note we explore the key findings from this analysis and provide actionable insights for founders to rethink how they target VCs. Spoiler alert: the best support may come from firms without household-name status.

Key Findings: What Makes VCs "Successful"?

1. Early Success Creates a Reputation Feedback Loop

The research finds that early wins – such as investing in startups that achieve successful exits or IPOs – significantly boost a VC’s future success. These early wins enhance their reputation, enabling them to gain preferential access to top-tier deal flow. Entrepreneurs gravitate toward these firms, believing their backing adds credibility and attracts future investors.

However, this success often stems from being in the right place at the right time, rather than a unique ability to select or nurture companies. For example, the paper highlights that initial investments in booming industries or regions – rather than superior decision-making – explain much of the early success. A 10-percentage-point higher IPO rate among a VC firm’s first 10 investments correlates with an 8% higher likelihood of future IPOs, showing how reputation quickly compounds success.

Similar findings have been observed in certain European VC markets, where more fragmented ecosystems mean that regional VCs can dominate niches like FinTech or HealthTech, achieving localised reputation effects. Data from PitchBook supports this, showing that niche-focused VCs often outperform generalists in terms of internal rates of return (IRR) and total value to paid-in (TVPI) multiples, with some niche-focused funds delivering IRRs up to 23.2% compared to 17.5% for generalists.

Niche VCs' success often derives from their specialized understanding of a sector or ecosystem, enabling them to identify winning investments. But this does not guarantee they provide the hands-on mentorship or scaling expertise that founders often seek from their investors.

Founder takeaway: Just because a VC has a strong track record doesn’t mean they’re the best at building companies. Evaluate their true value-add beyond their brand reputation.

2. Access to Later-Stage Deals Drives Success

As top-tier VCs become more established, they shift their focus away from early-stage investments (where risk and uncertainty are highest) toward later-stage deals. These rounds involve companies that have already proven their potential, making it easier for VCs to back winners and perpetuate their success metrics. According to the research, successful VCs also tend to favour syndicated investments in later rounds, leveraging their central position in investment networks.

For founders, this means early-stage startups may find it harder to get meaningful support from top-tier VCs focused on scaling later-stage businesses. European founders may find this particularly relevant. A less mature and more fragmented ecosystem means many European startups take longer to develop. A greater proportion are still in their nascent stages (compared to their US peers) and require hands-on guidance rather than later-stage financial injections.

In addition, other research suggests that top-tier VCs are more inclined to partner with serial entrepreneurs rather than first timers and that serial entrepreneurs tend to raise more venture capital in early funding rounds. This advantage is attributed to the skills and knowledge acquired from prior founding experiences, which make serial entrepreneurs (who may be seen as less demanding) more attractive to such investors.

When top-tier VCs make sense: Despite the drawbacks, top-tier VCs with larger funds can be crucial partners for startups that require significant capital for scaling, such as those in capital-intensive industries like hardware, DeepTech, or BioTech. For founders in these sectors, targeting these firms may be a strategic choice, particularly at Series B or later stages.

Founder takeaway: If you’re at the Seed or Series A stage, consider VCs who specialise in your stage and actively engage with portfolio companies during the earliest, most critical phases. For growth-stage needs, however, top-tier firms with larger war chests may offer the financial muscle required.

3. Prestige May Outweigh Operational Support

Research also suggests that many successful VCs thrive by leveraging their brand to attract co-investors and entrepreneurs, rather than by offering exceptional hands-on support. Founders often accept lower valuations or less favourable terms just to associate with prestigious VCs, expecting their name to open doors. However, operational guidance, mentorship, and sector-specific expertise may be stronger with less "glamorous" firms.

For instance, studies have shown that European VCs outside major hubs like London and Berlin often provide deeper operational involvement, especially in emerging markets such as Central and Eastern Europe. These VCs can offer tailored support to navigate local challenges, regulatory environments, and market-specific nuances. Analysis by Bunch Capital also shows that smaller funds specialising in early-stage investments often outshine larger generalist VCs in their ability to provide meaningful hands-on engagement.

Founder takeaway: Look beyond the logo. Depending on your needs, focus on VCs who can provide tailored support in hiring, market strategy, and navigating industry challenges – even if they’re not the flashiest name in town.

4. Performance Persistence Isn’t Forever

While top-tier VCs enjoy advantages in deal flow and reputation, their performance advantage diminishes over time. This "mean reversion" suggests that the industry levels out in the long run, with newer or smaller VCs often catching up in terms of returns. The research indicates that after a VC’s first 60 investments, their ability to outperform significantly erodes, levelling the playing field.

Recent findings from Cambridge Associates echo this trend. In their 'US PE/VC Benchmark Commentary: Calendar Year 2023', they observed that venture capital performance declined for the second consecutive year, driven by a reset in valuations and reduced exit activity. This reinforces the idea that even top-tier VCs experience cyclical downturns, underscoring the importance of evaluating investors based on their current relevance and sector focus rather than solely on past performance. This is especially critical today given the increasing number of 'zombie funds'.

PitchBook also highlights that newer, specialised VCs often deliver higher returns during their early fund cycles. In the European market, these smaller funds have been particularly successful in underserved sectors, such as ClimateTech and MedTech, where larger VCs have less presence.

Founder takeaway: Don’t overlook up-and-coming or smaller VCs. Their hunger and focus may align more closely with your needs as a founder.

Rethinking How Founders Should Target VCs

The above findings challenge the "bigger is better" mindset when it comes to choosing a VC partner. Here are actionable strategies for founders to navigate this landscape:

1. Prioritise Stage-Focused Investors. Look for VCs with a track record of investing and actively supporting startups at your stage. Early-stage investors often dedicate more time and resources to guiding founders through the challenges of product development, customer acquisition, and team building.
2. Evaluate Their Operational Value. Ask potential investors for examples of how they’ve supported portfolio companies. Have they helped with hiring, securing partnerships, or scaling operations? Speak to founders they’ve backed to get unfiltered feedback on their involvement.
3. Seek Sector-Specific Expertise. Instead of being swayed by a VC’s brand, focus on their knowledge of your industry. Firms with domain expertise can provide more relevant advice, connect you with strategic partners, and help you avoid common pitfalls.
4. Leverage Emerging and Regional VCs. Newer VCs and those based outside major hubs often bring fresh energy and are willing to go the extra mile for founders. They may also offer better terms and deeper engagement than more established firms.
5. Don’t Overpay for Prestige. While the backing of a big-name VC can enhance credibility, it may come at a cost. Carefully weigh whether the benefits of their brand justify potential trade-offs, such as lower valuations or less personalised support.

Conclusion: Finding the Right Partner for Your Growth

The persistent success of top-tier VCs often stems from reputation and access, not necessarily their ability to build great companies. For early-stage founders, this distinction is crucial. Your goal should be to find an investor who understands your unique needs, aligns with your vision, and is willing to roll up their sleeves to help you succeed.

Remember: the best partner isn’t always the one with the most exits or the flashiest logo. Sometimes, the most impactful support comes from investors who are hungry to prove themselves, deeply engaged in your sector, and committed to your journey. This is likely going to be a 5-7 year relationship. Choose wisely.

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