Well-connected VCs and the Investing Echo Chamber
PitchBook recently released data that proves that “VC is a relationship game.” Their report shows that "well-connected investors" saw startup failure rates at least ten percentage points lower than their less-connected counterparts. At later funding stages, the divide becomes even more dramatic.
The Data Behind the Closed Doors
For Series D investments and beyond, well-connected investors experienced only a 4% failure rate among their portfolio companies, while peripheral investors saw failure rates upwards of 15%. Returns tell a similar story, with companies backed by well-connected lead investors generating average annualized returns of 25.6% at later stages compared to just 3.1% for companies backed by less-connected investors.
These statistics might initially seem like a validation of network value. After all, if connected investors drive better outcomes, isn't that good for everyone? But look deeper, and a more troubling picture emerges.
A Self-Reinforcing Cycle
What these numbers actually reveal is a closed system designed to perpetuate itself. Well-connected VCs aren't necessarily better at picking winners; they're better at ensuring their portfolio companies succeed through social capital and preferential treatment:
Deal access based on relationships, not merit: Top-tier investors invite each other into their deals, creating an exclusive club where the primary qualification is prior membership.
Social proof over due diligence: Investment decisions increasingly rely on "who else is in" rather than rigorous analysis of the business fundamentals. When Fund A invests because Fund B is investing (who's investing because Fund C is investing), herd mentality takes over and independent thinking disappears.
Self-fulfilling prophecies: Companies backed by connected investors gain automatic access to customers, talent, and follow-on funding—resources denied to equally promising startups with less-connected backers.
The True Cost of Network-Driven Investing
This closed system has consequences far beyond individual portfolio returns:
Innovation suffers: When funding flows primarily through established networks, we miss breakthrough ideas from founders outside those networks.
Diversity remains elusive: Networks tend to form among people with similar backgrounds. As long as "who you know" drives investment decisions, achieving meaningful diversity in venture funding will remain nearly impossible.
Geographic inequality persists: Despite predictions of diminishing influence in a remote-work world, the San Francisco Bay Area and New York still dominate venture capital, together comprising $123.8 billion in venture deal value in 2024. The network effect ensures these geographic monopolies continue.
Breaking the Cycle
At Builders + Backers, we believe entrepreneurial potential exists everywhere, not just within established venture networks. Our approach challenges the closed system by:
Democratizing access to capital through non-traditional funding models
Providing the tools, knowledge, and networks entrepreneurs need regardless of their background or location
Focusing on the merit of ideas rather than the pedigree or connections of founders
Building entirely new networks that aren't predicated on existing privilege
The Path Forward
We see data like this as evidence of a system in need of disruption. True meritocracy in venture funding won't emerge naturally from within the existing power structures. It requires intentional action to create new pathways to capital, knowledge, and yes, networks—ones that are accessible based on the quality of ideas rather than pre-existing privilege.
As we build the next generation of startup investing, let's ensure it's defined by openness and opportunity rather than the closed networks that have dominated its past.