Democratized Venture Capital: Is More Better?

Over the past decade, we've witnessed a dramatic transformation in early-stage investing. Local startup ecosystems are being built everywhere. With it has come an explosion of accelerators, incubators, and pitch competitions which have made raising seed capital more accessible than ever for founders. Meanwhile platforms like AngelList, Republic, and WeFunder have thrown open the doors to venture capital, bringing thousands of new investors into the startup funding world at the click of a button.

This democratization was heralded as a revolution – one that would distribute opportunity more equitably and unleash innovation from beyond Silicon Valley's borders. But as we survey the landscape in 2025, it's worth asking: Has democratizing venture capital actually improved outcomes?

The Investor Knowledge Gap

The fundamental challenge with this democratization is that it lowered barriers to entry without also ensuring investors understand the unique nature of venture capital itself. Many new investors approach angel and VC investing with mental models borrowed from public markets or real estate, failing to grasp the power law dynamics that govern venture returns.

Most new angel investors don't recognize that venture capital isn't simply about picking "good companies" but identifying opportunities with genuine potential for exponential growth. They haven't internalized that venture is a hits-driven business where the vast majority of returns come from a tiny fraction of investments. Most new investors do not realize that 1,000x outcomes must compensate for the numerous zeros in their portfolio if they are to get returns that beat the S&P 500. This misalignment of expectations leads to poor selection criteria—backing lifestyle businesses, niche products, or companies in constrained markets that could never deliver venture-scale returns. Good businesses, but not VC-aligned businesses.

And, while they're often successful in their own fields, many new investors haven't developed the pattern recognition that comes from seeing hundreds (or even thousands) of deals and watching companies succeed or fail over 7-10 year periods. Without this experience, many make decisions based primarily on emotion, founder charisma, or following what others are doing.

These "tourist investors" flooded the market during the 2020-2022 period, attracted by stories of quick wins / mythic returns and fueled by near-zero interest rates. Without understanding the fundamental mechanics of venture—patient capital, multi-stage investing, and the need for concentrated ownership in outliers—they prioritized short-term signals over durable company-building. The predictable result? A market distorted by inflated valuations and misallocated capital to businesses ill-suited for the venture model.

The Valuation Distortion

This influx of inexperienced capital has contributed to a troubling trend: early-stage valuations that make little mathematical sense. When companies valued at $15 million have only $50,000 in revenue and unclear paths to profitability, the math simply doesn't work for long-term investor returns.

According to Carta, the median valuation for primary seed rounds reached $15 million in 2024, up from $8 million in 2020, despite no corresponding improvement in early-stage company performance metrics. These inflated early valuations create pressure for even higher follow-on round valuations, regardless of underlying business performance.

This distortion creates downstream problems: most companies never secure follow-on funding at all, with CB Insights data showing that less than half (48%) of companies that raise seed funding manage to raise a second round. This leads to a "valley of death" where promising companies fail despite potentially viable business models and solid growth prospects.

The Founder-Side Problem

Democratization has affected the entrepreneurial landscape in complex ways. The proliferation of accelerators, pitch competitions, and early-stage funds has made it easier for first-time founders to raise initial capital, but it has also created a distorted perception of how businesses get funded and grow.

This isn't merely about founder quality or experience – it's about a fundamental misalignment between diverse business models and a one-size-fits-all funding approach. In fact, most of the fastest-growing companies in America deliberately chose not to pursue venture capital, and instead bootstrapped their way to remarkable growth, maintaining control and building fundamentally sound businesses that were customer-focused and bottom-line driven from day one. Companies like Mailchimp, Wayfair, and SurveyMonkey operated for years without venture funding, focusing on sustainable growth models before eventually taking institutional capital on their own terms.

The democratization of capital ought to provide founders with more options, not funnel everyone into a single high-growth, high-burn model. Sustainable high-growth businesses can thrive without the pressure to deliver 50-100x returns, and many founders have discovered that maintaining ownership and focusing on profitability creates more resilient companies and greater personal wealth in the long term.

When Quantity Doesn't Equal Quality

One of the most troubling aspects of democratization is the tacit assumption that more deals and more investors naturally lead to better outcomes. The data suggests otherwise.

Angel investment returns remain highly concentrated in a small percentage of deals, just as they were before democratization. According to the Angel Capital Association, the top 10% of angel deals still generate approximately 85% of all returns. Despite more people playing the game, the fundamental power laws of venture returns haven't changed.

What has changed is the dilution of quality. With more capital chasing deals and founders optimizing for "getting funded" rather than building sustainable businesses, we've created an ecosystem where mediocre companies can raise seed rounds but ultimately fail to create lasting value, sustainable enterprises, or returns to their investors. They, and their communities, ultimately pay the price when ventures that could have become successful job-creating companies fail.

The Path Forward: Thoughtful Democratization

This isn't an argument against democratization itself (we are huge fans at Builders + Backers), but rather a call for thoughtful democratization that includes:

1. Aligned Investor Expectations: New angel investors need a better understanding about venture economics, portfolio theory, and how to conduct proper due diligence.

2. Alternative Funding Models: We need to develop and normalize alternative funding models for companies that aren't suited for the traditional VC path. Revenue-based financing, profit-sharing arrangements, and other aligned structures can provide capital without forcing every business into the unicorn mold and are the better option for most new companies.

3. Transparent Data: Greater transparency around angel investment returns and startup outcomes would help everyone make more informed decisions.

4. Community Over Platform: The most successful angel investments typically come from investors with deep domain expertise investing in sectors they understand. Community-based investing models that leverage collective expertise rather than simply pooling capital could improve outcomes.

As we plod along in today’s more challenging fundraising environment, we're likely to see many "tourist investors" exit the market, and valuations will return to more sustainable levels. This correction, while painful in the short term, may ultimately strengthen the startup ecosystem by forcing a return to business fundamentals: sustainable business models and aligned investment structures with more reasonable valuations.

The democratization of venture capital isn't inherently bad – but like any significant change, it comes with unintended consequences. By recognizing these challenges and adapting our approaches accordingly, we can work toward a more sustainable and effective funding ecosystem that truly supports and democratizes innovation at scale.