Startups! Investors Are Fundraising the Same as You
Understanding How Venture Capital Works (So You Don't Look Misinformed)
Startups often approach venture capitalists (VCs) thinking that investors are sitting on piles of cash, waiting to write checks. The reality? Investors are constantly fundraising, just like you. Understanding this dynamic will not only make you more informed but will also help you build stronger relationships with potential investors.
If you've ever pitched to a VC without realizing this, you might have come off as uninformed. Let's break down how venture capital really works, so you don’t make the same mistake again.
How Venture Capital Funds Raise Money
VCs don’t invest their own money (except in rare cases). Instead, they raise capital from Limited Partners (LPs)—institutional investors, family offices, endowments, pension funds, and high-net-worth individuals. These LPs commit capital to the fund with the expectation of high returns, often based on the track record and investment thesis of the VC firm.
Who Are Limited Partners (LPs)?
Institutional Investors – Large entities such as university endowments, pension funds, and insurance companies that allocate a portion of their capital into venture capital for diversification and growth.
Family Offices – Wealthy families that manage their investments privately, often seeking long-term growth opportunities in innovative sectors.
Endowments & Foundations – Nonprofit institutions that allocate portions of their funds to VC investments to sustain operations and philanthropy.
High-Net-Worth Individuals – Successful entrepreneurs or wealthy individuals who diversify their portfolios by backing venture funds.
Why LPs Invest in VC Funds
LPs invest in venture funds primarily for outsized returns that are not typically achievable in public markets. Unlike stocks or bonds, VC investments provide exposure to early-stage, high-growth companies that, if successful, can yield exponential returns. However, they also accept the high-risk nature of these investments, knowing that not all startups will succeed.
Example: A university endowment might allocate 5% of its capital to VC funds as part of its strategy to achieve long-term growth. The fund it invests in might focus on biotech startups, aligning with the university’s research focus.
How the Fundraising Process Works
The VC firm raises a fund – The firm pitches to LPs, presenting their investment strategy, past successes, and future potential to secure financial commitments.
LPs commit capital, but it isn’t available all at once – Instead, VCs make "capital calls" over time as they find suitable investments.
The fund is deployed – Over the next several years, the VC invests in startups that match their investment thesis.
Portfolio companies grow (or fail) – Some companies scale successfully, while others fail. The VC fund manages these investments actively.
VCs exit via acquisitions or IPOs – The goal is to generate high returns for LPs through company exits.
VCs distribute profits and raise a new fund – Once a fund matures (typically 10 years), the firm starts fundraising again to continue investing.
Example:
Let’s say a VC fund raises $200 million. This capital is not immediately available—it’s drawn down as investments are made. The firm may allocate $10M to a Series A startup today and reserve another $5M for follow-on funding two years later. This phased approach ensures they can support portfolio companies through multiple funding rounds.
This cycle means that VCs are constantly fundraising from their own investors while also managing their existing portfolio. If you assume that a VC can invest in any startup at any time, you're missing the bigger picture.
Investors Need Investors Too
You’re raising money for your startup, right? Well, VCs and investment funds are doing the same thing—but on a much larger scale. A startup might seek $1M–$10M in a funding round, but a VC fund needs hundreds of millions to invest across multiple companies. This means that while you’re perfecting your pitch deck to secure a few key investors, VC firms are presenting their own pitch decks to Limited Partners (LPs) to secure commitments of $50M, $100M, or more.
How VC Firms Fundraise While Investing
Unlike startups that raise funding in distinct rounds (Seed, Series A, B, etc.), VC firms often raise their next fund while still deploying capital from their current fund. This allows them to maintain continuity and avoid downtime between investment cycles. A successful VC firm needs to show LPs that their previous investments are performing well while demonstrating a solid pipeline of new deals that align with their investment thesis.
Example:
A VC firm managing a $300M fund may have already deployed 70% of its capital into existing startups. To ensure they can continue investing, they start raising their next fund (e.g., a $500M Fund II) before fully exhausting Fund I. This way, they avoid a funding gap that would otherwise limit their ability to back promising startups. Moderne Ventures recently raised $230 million for its third fund. Despite already managing a successful portfolio, they needed fresh capital to continue investing in new startups. This means that if a founder approaches them with a great idea at the wrong time (e.g., while they’re still finalizing the fund), they might get a “not now” response rather than a “no.”
Lesson for founders: Just because a VC fund exists doesn’t mean it has cash readily available. They may be in between funds, actively deploying capital, or waiting on commitments from LPs.
Why Investment Funds Have a Purpose (And Why That Matters to You)
One of the biggest mistakes startups make is pitching to the wrong investors. Many founders assume that all investors are created equal, but the reality is that venture capital funds have specific mandates, preferences, and restrictions. Each fund has a defined investment thesis that dictates the industries, company stages, and geographic locations they focus on. If a startup pitches an investor whose fund is not aligned with their business model or sector, they are not only wasting time but also potentially burning a bridge with a firm that might have been a better fit for a future endeavor.
Not every VC invests in all types of startups. Funds are structured around specific themes, tailored to their expertise, risk appetite, and strategic objectives. These themes help investors optimize their portfolio for maximum returns while aligning with their core competencies. A fund’s theme determines which startups they are likely to invest in and which ones they will pass on, no matter how great the opportunity might seem. Understanding these themes is crucial for founders, as targeting the right investors can significantly improve the chances of securing funding.
Common Investment Themes
Industry focus (e.g., fintech, healthcare, AI, SaaS, consumer brands, clean energy, blockchain, cybersecurity, deep tech, agritech)
Geographic focus (e.g., US-based startups, emerging markets, Latin America, EU startups, Asia-Pacific, Africa-based startups)
Stage focus (e.g., pre-seed, Series A, growth stage, late-stage, IPO-prep)
Business Model Preference (e.g., B2B, B2C, marketplace, enterprise SaaS, subscription-based models, e-commerce)
Social Impact & ESG Criteria (e.g., sustainability-focused, climate tech, diversity-led startups, ethical AI, social good initiatives)
Example:
Slow Ventures recently raised a $60 million fund specifically for investing in social media creators. If you're a B2B SaaS startup and pitch them, you’ll be wasting your time (and theirs).
Lesson for founders: Always research a VC’s investment thesis before pitching them. Look at the types of companies they’ve invested in before, and make sure your startup aligns.
How to Find the Right Investors for Your Startup
Now that you understand how VCs operate, how do you find the ones that will actually invest in your company? Here are three ways to do it:
Use Investor Databases
Platforms like Visible.vc allow you to filter VCs based on industry, stage, and geography. Use these tools to narrow your search. Or wait until Q3 2025 when you can get all the information you need on X1 Pipeline.
Look at Similar Companies
Who funded startups similar to yours? Investors who backed companies in your space are more likely to understand your business model and be interested. Only watch out because most investors will use the excuse that they can’t back a startup that competes with one they already funded. They can fund you as well if they want to, but it is less likely that they will.
Read Fund Mandates & Mission Statements
Each VC has a specific investment thesis. Read their website, portfolio, and past investments to see if they align with your startup. Run their website or thesis through AI and get the summary, their thesis wasn’t written for you it was made for their LPs, lawyers, and banks.
Final Thoughts
Startups that understand how venture capital works have a much higher chance of securing funding. Before pitching, remember:
VCs raise money just like startups—they don’t have unlimited cash.
Funds have specific investment theses—not every VC is a good fit for your startup.
Doing your homework on investors will set you apart from other founders.
The more informed you are, the better conversations you’ll have with investors—and the closer you’ll be to securing the funding you need to grow.
Want help identifying the right investors? X1 Pipeline can match your startup with the best-fit investors based on data-driven insights. Join us today!