In the eyes of a seasoned VC, there are only two types of startups: a Good Startup and a Bad Startup.

1. Good Startup (noun, adjective) = adds value, solves a problem, sustainable model, makes money, good team.

2. Bad Startup (noun, adjective) = adds little value, doesn’t solve a problem, unsustainable model, may or may not make money, stokes an investor’s emotion instead of solving a problem.

VCs are trying to label you as efficiently and accurately as possible as either Good Startup or Bad Startup.

The Phenomena

A lot of Good Startups don’t get funded.

Many Bad Startups get funded. 

So, if VCs are so smart, shouldn’t they be able to recognize Good Startups versus Bad Startups before making an investment decision?

Not always.

Reason 1: A Good Startup with a founder who does not effectively communicate why his/her startup is a Good Startup won’t get serious consideration from a VC.

I once passed on a Startup that became a Unicorn less than 3 years later because the Founder couldn’t effectively explain how his business model was sustainable during our first two meetings.

Reason 2: VCs rely on referrals and first, second and tenth impressions. Sometimes, VCs simply get fooled or caught up in the excitement of an opportunity (i.e.: Elizabeth Holmes & Theranos).

Other times, the Founder of a Bad Startup is simply well-coached, well-connected and well-spoken.

Reason 3: The VC doesn’t truly “see how the sausage is made” until after the check is written.

But, by then, the VC is already on board and along for the ride and will be more likely to deploy more capital to try to fix the problem rather than cut ties and move on from a bad investment.

Reason 4: There are many new VC funds investing in areas where there is no domain expertise. These investors struggle to assess whether a product adds true value and solves a real problem.

Reason 5: There are a lot of new VC funds that are less experienced in due diligence and deal-making altogether. It’s never been easier to raise a fund.