Founder VC

The House Always Wins—Except in Venture Capital

Las Vegas thrives on a simple rule: the house always wins. Early-stage venture capital shares similarities with gambling, but with one key difference—the house usually loses.

A staggering 75% of VC funds globally underperform the S&P 500, a passive investment with far less risk. Only the top quartile of VC funds generates strong returns, and even among them, it’s the top 5% that drive outsized performance—primarily due to the sheer volume of bets they place.

 
The Broken System of Venture Capital


Venture capital is marketed as a data-driven discipline, but in reality, early-stage investing is a chaotic mix of market trends, charisma, and FOMO. At the seed stage, investors have little concrete data. The best they can hope for is evidence of an engaged market, a founder with financial literacy, and a theoretical path to a billion-dollar exit.

This data deficiency is why founders experience shifting goalposts and why selling a vision can feel indistinguishable from deception.

If venture capital is so structurally flawed, why does it persist? The answer lies in VC fund math and human psychology.

 
The Numbers Game: How Many Bets to Find a Unicorn?


Running a venture fund is a statistical exercise. To back a unicorn—a company that delivers massive returns—a VC fund must place many bets. The odds are daunting:

  • <1% of venture-backed startups generate 50x returns.
  • 3-4% of startups achieve 10x returns.
  • 90%+ of startups return little or nothing.

To outperform the S&P 500’s average 10% annual return, a VC fund must generate 3x its invested capital over a decade.Since most investments fail or yield modest gains, funds rely on a few major wins to carry the portfolio.

The best way to improve the odds? Invest early, write as many small checks as possible, and hope to stumble across an outlier before the fund's capital runs dry. This is why early-stage investing is hyper-competitive—funds prioritize high ticket volume over meticulous selection.

Without solid data, VCs rely on investor signals, market hype, and momentum-driven trends. This creates a feedback loop where companies that attract attention—rather than those with strong fundamentals—secure the most funding, reinforcing venture capital’s chaotic nature.

The Performance of the Average VC Fund


Most VC firms brand themselves as top-tier, but the reality is stark:

  • Median VC fund returns lag behind passive S&P 500 investments.
  • Only the top quartile consistently outperforms public markets.
  • Even among top performers, returns are skewed by a few outliers.

For LPs (Limited Partners), investing in a single venture fund is a gamble. The best strategy? Spread LP bets across multiple funds, increasing the likelihood of landing in the top decile.

 
The Top 5%: Where Real Returns Come From

The true wealth in venture capital is concentrated at the very top. While the top 25% of funds outperform public markets, the majority of returns come from the top 5%.

This phenomenon is driven by the power law dynamic, where a small number of investments generate outsized returns while most yield little to no profit. Even within these elite funds, performance is driven by one or two investments per fund. Without those outliers, returns regress to the mean.

For example, Sequoia Capital’s early $60 million investment in WhatsApp ultimately returned over $3 billion when Facebook acquired the company, accounting for a significant portion of the fund’s total returns.

This dependence fuels the obsession with blitzscaling and valuation inflation—VCs must deploy enough capital to find the rare winners that define their returns.

 
The Venture Casino: Where Everyone Thinks They’ll Get Lucky


The takeaway? The game is rigged against founders. They’re pressured to scale aggressively, raise larger rounds, and inflate valuations—not necessarily to build sustainable businesses, but to fit the economics of venture funds. More venture capital has not been proven to equal greater success. 

But here’s the irony: most VCs don’t win either. And neither do many LPs.

Venture capital only works at scale. Solo GPs with small portfolios have slim chances of backing a unicorn. LPs betting on a single fund would often fare better in index funds. Even for VCs, the house rarely wins.

So why does venture capital continue to attract billions? The same reason people gamble in Vegas—everyone believes they’ll be the lucky one.

Details from a casino

Sources:

Cambridge Associates – US Venture Capital Index and Selected Benchmark Statistics
Correlation Ventures – Venture Capital Return Distribution Analysis: 
StepStone Group – Analysis of Top-Performing VC Funds: 
Seraf Investor – Understanding Venture Fund Economics: 
Founder VC – The Broken Venture Capital System


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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.