VCs are Sheep and that's ok

AI is unlocking a new wave of builders and if you're one of them trying to get venture funding for the first time, you're about to bump into one of the more frustrating truths about venture capital. VCs are 🐑. They're supposed to be risk-takers willing to bet on unproven people and ideas, yet unless you fit a very specific and predictable mold you'll struggle to get them to take a bet on you. It's not dumb and it's not irrational, it's structural to the asset class.

"What's your traction?", "Who else is in the round", "let me know when you've found a lead", and "this is too early for us." These are all symptoms of an underlying cause. It shows up on the other end when you hear about an oversubscribed $30m round for two ex-FAANG engineers with no product when you're struggling to get $200k with thousands of users. The herd mentality seems backwards for a risk-seeking asset class, but it isn't.

This happens because venture is an asset class where the asset has to choose you. In public markets you buy whatever stock you want. For venture capital, the founder decides who gets to invest. That one difference changes everything about how the game is played. Because founders choose investors, many VCs compete not with a better crystal ball but through sales, network, and brand.

In public markets, the entire game is prediction, you need to predict the future better than your competitors through better research, better data, better models. In venture, it's often easier to just be the investor founders want to work with. The analysis is optional.

There are multiple viable strategies. Compete on brand. Compete on network. Compete on content and social media presence. Compete on post-investment value add. These are all more reliable paths than "I'm better at picking than other VCs" which is genuinely hard to prove and takes a decade of data.

There’s a second dynamic reinforcing this. VCs have to raise their own capital, and to do that they need to show traction. Traction is measured through markups, and markups only happen when other investors write follow-on checks. The actual skill being selected for isn’t ‘can you find great companies’, it’s ‘can you find companies that other investors will eventually want to fund.’ Being good at following the herd isn’t just a side effect, it’s practically a job requirement.

This isn't to say VCs are bad at picking, many are quite good compared to non-VCs. It's just not how they compete with each other. There are exceptions, especially at the earliest stages where you're writing a check before there's enough signal for the herd to form.

On the founder side, AI has also made an already stark divide even starker. If you're hot you're feasting and everyone is chasing you with dollars in their fists. Billion dollar rounds based on background alone. If you're not, you're in famine wondering why no one will take a bet on you. As a founder, how do you actually navigate that?

If you're a founder who's feasting right now, enjoy the ride. It's never been a better time to raise capital. Just be clear about why you're taking an investment. If you're not just taking the largest check be realistic about what value you'll get beyond dollars. Be wary of big promises and glitzy sales tactics. Even the best investors have a ceiling on how much value they can add.

If you're in famine, the first question to ask yourself is if you even need the money. AI has changed the equation and you can go a lot farther on your own. Venture capital is rocket fuel, only useful for a very specific kind of business that needs to get big fast to work at all. For everyone else it's more likely to blow up your engine. Even if you're building a rocket, ask yourself if you need VC to build the rocket or just to launch it once it's ready.

If you absolutely need venture now and you're struggling to find that first check, don't internalize the volume of no's. Pay attention to the why. Sometimes the feedback is real and you need to hear it. But you might also just be talking to the wrong people. Spend time finding the investors who actually compete on their ability to pick for your vertical and stage. They exist, they're just not the majority.

Regardless of which you're in right now, it's never been a better time to build. If you're feasting, enjoy the meal but be wary of food that tastes too rich. If you're in famine, just keep building and you're moving forward. Eventually you might get invited to the table. Or, perhaps, you'll realize you can build a better one on your own.