In the game of startup funding: Is VC the trump card, or are you really playing the Joker..?

Venture Capital (VC) is often treated as the “trump card” in the startup funding game - a silver-bullet signifier of success. For many founders, landing VC backing feels like winning the jackpot. But that perception can be misleading. VC is just one tool, and not always the right one. For many early-stage UK startups, opting for alternatives may offer a more sustainable, founder-centric path.

This isn’t an argument against VC. Plenty of businesses, especially those in capital-intensive spaces like deeptech, biotech, or AI infrastructure, genuinely need VC to reach their potential. But for most early-stage UK startups - particularly those raising a first or second round - VC often isn’t the most realistic or beneficial option.

Why VC isn’t usually the first move for early-stage founders

While venture capital remains an important part of the UK startup ecosystem, the landscape in 2025 looks meaningfully different from even a couple of years ago.

In early 2025, the UK continued to lead Europe in VC investment value, with billions deployed across hundreds of deals. However, that headline number masks a more challenging reality for early-stage founders: capital is increasingly concentrated into fewer, larger, later-stage rounds.

Deal volumes are down year-on-year, even as total funding remains relatively resilient. Investors are deploying capital more selectively, prioritising startups that already demonstrate strong traction, early revenue, or deep technical validation. In practice, “early-stage” no longer means “idea-stage” - it increasingly means proof already exists.

At the same time, expectations have risen:

• Larger round sizes bring higher burn expectations

• Faster hiring, faster growth, faster market capture

• Less tolerance for experimentation or slower paths to product-market fit

For many first-time founders, this pace simply isn’t realistic - or desirable.

The picture is similar on the angel side. SEIS and EIS-backed investments remain a cornerstone of UK early-stage funding, but angels have become more cautious. Capital hasn’t disappeared, but the bar for credibility, clarity, and execution is higher than it was during the peak funding years.

The result? VC is harder to access, comes with greater pressure, and often arrives earlier than a business is ready to absorb it.

Why VC incentives may not match your own

One of the biggest misunderstandings founders have about VC is why VCs behave the way they do.

The answer lies in the Power Law of venture capital returns.

Understanding the Power Law

VC returns are not evenly distributed. Instead, they follow an extreme pattern where a tiny number of investments generate the vast majority of returns - while most others return little or nothing.

In a typical VC portfolio:

• ~60-70% of investments fail or return less than capital

• ~20-30% return modest multiples (1-5×)

• ~5% generate outsized returns - 10×, 50×, or even 100×

Those few outliers are what make the entire fund work.

A simple worked example

Imagine a £1 million VC fund that invests in 10 startups, writing £100,000 cheques into each.

• If nine companies fail, and the one winner returns 10× (£100K → £1M), the fund merely breaks even.

• If the winner returns 20× (£100K → £2M), the fund achieves a 2× gross return - barely enough to outperform public markets once fees and dilution are considered.

• To deliver the kind of returns VCs need to satisfy their investors, that one winner often needs to return 100× - turning £100K into £10M.

This is why VCs obsess over unicorns.

It’s not that they want companies to fail - it’s that only massive outcomes meaningfully move the needle.

Why this creates tension for founders

For a founder, building a profitable company and exiting for £20-£50 million can be genuinely life-changing.

For a VC, that outcome may be disappointing - because it doesn’t materially impact fund returns.

This mismatch in incentives explains a lot:

• Why VCs prioritise explosive growth over steady profitability

• Why they push for larger markets and faster scaling

• Why they’re comfortable with higher failure rates

And it also explains why VC terms often include liquidation preferences, anti-dilution clauses, board seats, and veto rights. These mechanisms aren’t inherently bad - they’re normal for venture-scale businesses - but they do shift control away from founders.

For founders who only get one shot, it’s a dynamic worth understanding early.

So, what’s the alternative?

For a large portion of early-stage UK founders, two pathways tend to create the most favourable outcomes: bootstrapping or modest angel investment under SEIS/EIS.

These pathways allow founders to maintain control, grow sustainably, and aim for a meaningful exit without the pressure of chasing unicorn status.

Bootstrapping vs Angel Investment

Bootstrapping

Bootstrapping means building your company using your own resources, early customer revenue, or whatever cash flow you can generate. While it can be slower and sometimes harder, it gives founders full control and the freedom to focus on building a product that truly works - rather than chasing artificial milestones to satisfy investors.

For many founders, especially those creating service-based businesses, software tools, marketplaces, or niche B2B products, this approach leads to strong foundations and, often, far more flexibility at exit.

Angel Investors (SEIS/EIS)

Angel investors can be transformative - not just because they provide capital, but because they bring experience, objectivity, and networks. SEIS and EIS make the UK an unusually founder-friendly ecosystem: investors get meaningful tax relief, which encourages them to take early risks without demanding onerous terms.

Angel capital today comes in many forms: individual angels, angel syndicates, private investor clubs, equity crowdfunding platforms, and SEIS/EIS funds.

Most of these are straightforward and founder-friendly - but SEIS/EIS funds require particular attention. Some behave more like small VCs and attempt to include terms that don’t align with the spirit of early-stage investing. We have some great information on SEIS/EIS funds here:

What should I be aware of if I’m using a SEIS / EIS Fund?

SEIS Funds: What they are and how to raise money

By understanding the differences between these models, founders can access the advantages of early equity financing without giving away excessive control.

When VC does make sense

VC is absolutely the correct path when your business:

• requires large amounts of upfront capital to get to market,

• must scale quickly to capture network effects,

• is in a winner-takes-all or winner-takes-most category, or

• has a team prepared to operate at venture pace and accept venture expectations.

In those scenarios, VC isn’t just helpful - it’s essential. But those scenarios are not “every startup,” and they are not “most startups.”

Conclusion: Know the game - and choose your hand wisely

VC can be a powerful trump card - but only when you’re playing the same game as the investors.

For many first-time founders in the UK, particularly in the shifting fundraising landscape, VC may feel more like drawing the Joker: unpredictable, high-stakes, and not always aligned with your goals.

Before chasing the prestige of VC... Ask yourself what game you’re playing, and what outcome you actually want.

Sometimes the smartest, most rewarding play isn’t the flashy card everyone talks about - it’s the ace up your sleeve: bootstrapping, angels, SEIS/EIS, and the freedom to build on your terms.

Choose the hand that matches your ambitions - not someone else’s.

Sam Simpson, Founder of FounderCatalyst

"My key piece of advice is this. Work out what game everyone is playing. Because chasing VC could mean you’re falling into the trap of a game you didn’t realise you were playing.

Instead, consider a different path. VC is just one tool in the startup’s toolkit. Explore alternative funding options that align with your vision, long-term goals, and risk tolerance.

Success in the startup world can take many forms, and sometimes, playing the right game, with the right hand, could lead to the most rewarding outcome."

At FounderCatalyst, we help founders make their UK startups investor-ready, close funding rounds, and motivate their teams. We handle SEIS and EIS advance assurance, fundraising legal paperwork, data rooms, cap table management, and set up EMI and unapproved share option schemes. Book a call with an expert to learn more.