Why Most Startups Fail at Raising Venture Capital

The Harsh Funnel of Venture Capital

Its very hard for startups to successfully acquire venture capital (VC). In 2024, German startups raised approximately 7 billion Euros across 755 funding rounds, marking a 17% increase in deal value while the number of funding rounds decreased by 12% over the previous year. Still 755 closed deals mark the fourth-highest figure in the last 10 years. Hence both, deal volume and total number of closed funding rounds reflect a cautiously optimistic trend - a recovering market, despite global downturns in venture activity (EY 2025).

But when you compare these figures to the number of newly founded businesses in Germany - over 594,500 new registrations in 2024 alone which marked an increase of 0.2% in comparison to 2023 (Destatis 2024) - these numbers make it quite obvious that only a tiny fraction of newly founded businesses will be funded with VC. Most startups who are actively seeking VC will never make it past the first investor filter. And even high-potential cases often struggle to break through.

So where does this difficulty come from? It’s tempting to blame external conditions, limited local funds, risk-averse investors, or less mature startup ecosystems. And indeed, many authors highlight the structural differences between the U.S. and German VC markets (Weitnauer 2011). But the data tells a different story.

The core problem is not the market. It’s the mismatch between startups and what VC investors actually want.

What VC Investors Are Really Looking For

One key finding from my research - both from literature and my own empirical data - is that venture capital firms (VCs) do not invest in good ideas. They invest in scalable execution machines. This might sound harsh, but it reflects the investment logic: VCs are not banks, nor philanthropists. Their goal is a significant return on equity, ideally through a high-value exit (Bygrave 2010). That’s why most startups are filtered out so early in the process: they don’t meet even the basic investment criteria.

Among the most decisive factors, the founding team consistently ranks highest. Studies such as MacMillan et al. (1985) and later German replications (Kollmann & Kuckertz 2009) confirm that personal and team-related factors dominate early investment decisions. In practice, this means that solo founders or teams with no previous startup experience are often seen as too risky - even if their ideas are innovative.

The Business Model Trap

The second major pitfall is the business model. Many founders pitch products, not companies. They speak enthusiastically about their technology or app, but cannot clearly explain their customer acquisition strategy, monetization logic, or cost structure. This leads to doubts about scalability, which is the single most important trait VCs look for (Bygrave 2010; Ermisch & Thoma 2002).

VCs are not interested in niche products with small markets. They want companies that have a clear path to becoming dominant players in growing industries. That’s why market size and competitive positioning are so heavily scrutinized in pitch decks. Without a clearly defined go-to-market strategy and a compelling argument for long-term defensibility, most founders are quickly ruled out.

It’s Not About the Deck - It’s About the Story

Another reason for early rejection is surprisingly simple: poor communication. Many founders submit generic decks that do not clearly address the most important questions like e.g. which real-world problem is being solved and how, the market opportunity, the product, business model etc. The story often becomes unclear. The VCs are literally not getting hooked. The result? No connection. No curiosity. No follow-up, and no closed funding round.

Startup founders who are actively seeking VC should be aware that investors are human too. They receive many pitch decks from many founders. They read dozens of decks per week. Hence VCs need to apply strict selcetion criteria filtering out the best pitches - in short - they scan for narratives that resonate, and discard the rest. As a founder, your job is to build a story that inspires confidence, not just admiration. You need to show not only what your idea is, but why you and your team are the right people to execute it, at this moment, for this market.

Conclusion: From Rejection to Readiness

The hard truth is: VC is not for everyone. And also not every business needs it, and its your duty as a founder to also consider alternative sources of funding for your startup. But if you’re aiming for VC, you need to play by its rules. That means at least:

1. Build a team that balances skills, experience, and trust.
2. Design a model that can scale profitably,  and explain it simply.
3. Frame your story around investability, not just innovation.

Most founders fail at raising VC because they chase it being entirely unprepared, or lacking timing - chasing it too early, too casually, or with the wrong mindset. Please do not step into the VC funding process unprepared. The chances of acquiring VC are low anyways already. But with the right preparation, even in Germany’s challenging ecosystem, your odds can shift.

Reference(s)

• Bygrave, William D. (2010): Equity Financing: Informal Investment, Venture Capital, and Harvesting, in: Bygrave, William D./ Zacharakis, Andrew (Hg.): The Portable MBA in Entrepreneurship. Fourth Edition, 4. Auflage, New Yersey (John Wiley & Sons, Inc.), S.161-195.
• Destatis (2024): Erneut mehr Betriebsgründungen als Betriebsaufgaben im Jahr 2024. Pressemitteilung Nr. 067 vom 21. Februar 2025. https://www.destatis.de/DE/Presse/Pressemitteilungen/2025/02/PD25_067_52.html (accessed on June 13, 2025)
• Ermisch, Ralf/Thoma, Patrick (2002): Zehn Schritte zum Venture Capital. Ein Ratgeber für junge Technologieunternehmen, Heidelberg.
• EY (2025). EY Startup Barometer Germany. January 2025. Ernst & Young.
• Kollmann, Tobias/Kuckertz, Andreas (2009): Bewertungsunsicherheit der Investitionskriterien von Venture-Capital-Gebern. Eine Prozessperspektive, in: Kredit und Kapital, 42. Jg. (4), S. 563-595.
• MacMillan, I. C., Siegel, R., & Narasimha, P. N. S. (1985). “Criteria used by venture capitalists to evaluate new venture proposals,” Journal of Business Venturing, 1(1), 119–128.
• Weitnauer, Wolfgang (2011): Handbuch Venture Capital. Von der Innovation zum Börsengang, 4. Auflage, München.