WFH Has Made it More of an Insider’s Game to Secure Venture Funding

VC activity may have climbed back up to pre-pandemic levels, but that statistic masks an important development: COVID has changed the rules for startup funding.

On one hand, the pandemic has sparked some positive founder-friendly developments. For starters, it’s dramatically easier to get in front of VCs because they’re taking substantially more meetings than before. Before the pandemic, most early-stage investors sat down with entrepreneurs a few times each week, but right now, most investors are engaging in back-to-back 30-minute conversations all day, every day. In addition, the pitch-to-funding timeline has accelerated—by as much as 50% by my estimates—now that meetings are more efficient, and travel has been eliminated.

Despite these changes and the flush of capital flooding into the venture ecosystem, it has not become easier to get funding. It’s only different. In short, many VCs have responded to the pandemic by replacing depth with volume, spending on average 20% less time year-over-year reviewing each pitch deck. Most of that volume—including many strong teams with promising ideas—will never get funded. Who is getting funded: insiders.

Venture capital, especially at the early stages, has always been an intensely relationship-based business. Early-stage investors are betting as much on the team as they are the idea—often even more so given how often early startups pivot—and as such, early-stage investors have historically invested a lot of time and energy into getting to know teams before writing checks for them. Because they’ve always built relationships through the kinds of rich interactions that take place over coffees and dinners, many VCs aren’t comfortable making big bets on people they’ve only come to know through whiplash-inducing, back-to-back 30-minute Zoom sessions. It’s obviously possible to build meaningful relationships fully virtually, and people around the world are doing so, but it takes more creativity and human-centered planning than many VCs can devote to these sessions.

In pursuit of what they consider to be lower-risk investments during a tumultuous year, many VCs are doubling down on entrepreneurs they already know and trust or who already have secured venture funding and are therefore already known and trusted by other VCs. This is one of the reasons that so much of the pandemic’s venture dollars have poured into later-stage startups and bigger funding rounds.

This decreasing share of first financings is making it tougher for early-stage startups to get off the ground. Most of the few early-stage founders who are managing to get funded by VCs right now are insiders. By that I mean that they held important roles at one of the top tech companies, or are well-known by seed and angel investors, well-regarded entrepreneurs and other influencers within the cohort of Silicon Valley. Researching contacts and references on founding teams has always been part of investors’ jobs, but right now references are being used to supplant what used to be the in-person relationship building courtship. Naturally, they are prioritizing references from contacts they know and trust. Regrettably, this can enable unconscious bias.

The result is that founders with enough of the right connections to venture establishment are getting funded, with many VCs piling on. Others really aren’t. That’s unfortunately one of the reasons why funding for female founders has dropped to a three-year low and a reminder of the importance of diversity in venture capital.

Fortunately, being an “outsider” who lacks close connections to the venture ecosystem is an obstacle that can be overcome. Below, I have captured the top advice I have been sharing with entrepreneurs who are looking to fundraise.