Founder VC

The Great VC Cover-Up: Power, Psychology, and the Future of Transparency

Venture capital has never been transparent—by design. Unlike public markets, where financials are disclosed and performance is scrutinized, VC has operated in a world of selective storytelling, asymmetric information, and exclusivity-driven power dynamics. But why?

The answer isn’t just structural; it’s deeply psychological. Venture capital’s opacity has been fueled by a mix of self-preservation, status maintenance, and illusion-building. Understanding how these forces shaped VC’s history helps us predict where the industry is headed next.

1. The Illusion of Exclusivity: Secrecy as a Power Play (1940s–1980s)


Venture capital emerged in the mid-20th century as an elite, club-like industry. Firms like American Research and Development Corporation (ARDC) and later, Sequoia and Kleiner Perkins, operated through tightly controlled networks. The fewer people who understood how deals were made, the more valuable access became. Transparency would have diluted this exclusivity.

Psychological driver: Scarcity bias—people assign greater value to things that are perceived as rare or difficult to access.

How it played out:

  • No standardized reporting on fund performance, fees, or investment strategy.
  • LPs received vague, periodic updates with little financial detail.
  • Relationship-driven dealmaking reinforced the notion that success was about “who you knew.”
  • Secrecy wasn’t just a side effect; it was a competitive advantage. If founders or LPs had to ask for details, they were already outsiders.

2. The Dot-Com Boom: The Bluff That Became the Norm (1980s–2000s)


As institutional investors—pension funds, university endowments—started pouring money into VC, the demand for transparency grew. However, firms resisted. Instead, they leaned into storytelling and selective disclosure.

Psychological driver: Survivorship bias—people tend to focus on success stories while ignoring failures, creating a distorted perception of reality.

How it played out:

  • Firms hyped their winners (Amazon, Google) but ignored the failures making up most of their portfolios.
  • Fund performance remained self-reported, allowing firms to cherry-pick favorable metrics.
  • LPs had little negotiating power because “access” was still the primary value proposition.
  • Even when the dot-com bubble burst, the industry didn’t increase transparency. Instead, it doubled down on controlling the narrative—reinforcing a world where failure was invisible.

3. The First Cracks in the Facade: Transparency Pressure Mounts (2010s)


The 2008 financial crisis ushered in regulatory scrutiny across all investment classes. While VC largely escaped direct oversight (unlike hedge funds and banks), the demand for accountability grew. Data platforms like Crunchbase (2007) and AngelList (2010) started exposing startup financing details, making it harder to maintain total opacity.

At the same time, a new generation of VCs, led by figures like Paul Graham of Y Combinator, recognized that leveraging social media and blogging could differentiate their firms. Instead of relying solely on exclusivity, these investors began using transparency as a marketing strategy.

Psychological driver: Cognitive dissonance—when presented with contradictory information (e.g., VCs claiming top-tier returns but avoiding true disclosures), people experience discomfort and start questioning the narrative.

How it played out:

  • LPs pushed for more fund transparency but still lacked bargaining power to enforce it.
  • “Zombie VCs” (funds with capital but no real investment activity) misled founders about their ability to provide follow-on funding.
  • Firms continued to report returns selectively, shielding mediocre performance from scrutiny.
  • VCs like Fred Wilson (AVC), Mark Suster, and Jason Calacanis began blogging, offering insights into the industry, and demystifying some aspects of venture capital.
  • The industry was at a crossroads. Data availability had increased, but the old guard resisted true openness.

4. The 2020/2021 Investment Frenzy and the Aftermath


The early 2020s were defined by an unprecedented investment boom. Fueled by ultra-low interest rates, pandemic-driven digital acceleration, and abundant liquidity, venture capitalists deployed record-breaking amounts of capital into startups. However, this era of excess was followed by a dramatic market correction.

Psychological driver: Euphoria Bias—investors, caught in a wave of optimism, overestimated future returns and ignored risk signals.

How it played out:

  • Skyrocketing valuations created unsustainable expectations for exits.
  • Startups raised at inflated multiples, often without strong fundamentals to justify them.
  • Investors prioritized speed over diligence, betting on momentum rather than long-term viability.

By late 2022, rising interest rates, inflation concerns, and macroeconomic uncertainty caused a stark reversal. VC firms that had been deploying aggressively now struggled to raise new funds. LPs, once eager to pour money into tech, became far more cautious. Many startups that had raised at peak valuations found themselves unable to secure follow-on funding, leading to mass layoffs and shutdowns.

5. Today: Transparency as a Competitive Advantage


We’re witnessing a shift: a handful of firms are recognizing that transparency isn’t just a compliance issue—it’s a way to build trust and gain an edge in an evolving market.

Psychological driver: Social proof—people look to others when making decisions, meaning once transparency gains momentum, firms fear being left behind.

How it’s playing out:

  • VC bloggers like Fred Wilson (AVC) and Chamath Palihapitiya are breaking the silence on industry dynamics.
  • Open investment models (OpenVC, TinySeed) promote accessible deal flow and decision-making frameworks.
  • Institutional LPs are demanding standardized reporting on financials, ESG, and DEI metrics.

Yet, the majority of the industry still resists full transparency. Why? Because opacity preserves power.

The Psychology of VC Secrecy: Why the Old Guard Won’t Change Easily


Even with external pressure, psychological forces keep the status quo intact.

Information Asymmetry = Control

The less founders and LPs know, the stronger VCs’ negotiating position. Many firms obscure their follow-on investment strategy to maintain leverage.

Fear of Exposing the Bluff

Many firms still rely on gut feel, social proof, and trend-following. Full transparency would reveal that elite firms aren’t necessarily making better decisions—just better bets based on better access.

Herd Mentality & Status Anxiety

Many firms invest simply because others are doing the same. No firm wants to be the first to reveal performance data, fearing scrutiny or loss of negotiation power.


What Comes Next: The Future of VC Transparency


Venture capital may never reach the transparency levels of public markets—but major shifts are coming:

  • LPs will demand standardized performance metrics. Institutional investors are already pushing for true net IRR reporting.
  • AI-driven due diligence will level the playing field. Startups will vet VCs as rigorously as VCs vet them, flipping the power dynamic.
  • Blockchain-based investment structures will reduce hidden terms. On-chain verification could expose preference stacks, hidden dilution, and retroactive fund adjustments.
  • Social media will become a primary deal flow driver. Funds will capitalize on the lack of transparency by shaping narratives, showcasing select investments, and building founder and investor communities online.

The firms that master audience engagement will create their own inbound pipelines, reducing reliance on traditional gatekeeping networks.

Bottom Line: Transparency is an Edge—For Those Willing to Embrace It


For legacy firms built on exclusivity, transparency is a threat. But for emerging firms willing to operate in the open, it’s a competitive advantage. The next generation of LPs, founders, and investors won’t accept the status quo—and the firms that adapt will define the future of venture capital.

Founder VC, among others, is proving that data-driven transparency isn’t just possible—it’s inevitable. But disruption won’t come from the top down; it will be driven by founders and emerging investors who challenge the status quo.

Those who capitalize on bottom-up momentum—rather than resist it—will define the next era of venture capital. The only question is: who will embrace it first, and who will be left behind?

Sources

American Research and Development Corporation historical records: https://en.wikipedia.org/wiki/American_Research_and_Development_Corporation

Cambridge Associates & Preqin VC performance reports: https://www.cambridgeassociates.com/research/venture-capital-performance/

Dodd-Frank Act (2010) regulatory filings: https://www.sec.gov/spotlight/dodd-frank.shtml

Crunchbase: https://www.crunchbase.com/

AngelList: https://angel.co/

PitchBook: https://pitchbook.com/

CB Insights: https://www.cbinsights.com/

OpenVC: https://openvc.app/

TinySeed: https://www.tinyseed.com/

Institutional Limited Partners Association (ILPA) guidelines: https://ilpa.org/guidelines/

FlamingoDAO: https://flamingodao.xyz/


Lane Litz is a proven startup founder, operator, and venture capitalist with a track record of building, scaling, and investing in high-potential startups. As employee #6 at VIPKID, she helped grow the company to a $3B valuation. Later, as the CEO and Co-founder of Speakia, she navigated challenging market conditions to lead the startup to acquisition. Her time in venture capital gave her a front-row seat to the systemic flaws in traditional VC, inspiring her to found Founder VC. Now, Lane is reshaping the venture landscape with a founder-first approach, focusing on sustainable investments that deliver measurable value for both founders and investors.