The original version of this post was published in 2006. The post has since been updated to reflect more recent industry data. 

The pressures to put money to work are increasing. Entrepreneurs who hit Sand Hill Road looking to raise a few million dollars, end up walking away wondering if they should raise more. We’ve experienced this phenomenon first hand. We’ve helped raise billions of dollars for our portfolio companies. We typically have more difficulty finding co-investors who are willing to invest a few million dollars than finding co-investors who prefer to invest tens to hundreds of millions of dollars in a single round.

Compounding the problem, there is an increasing sense of urgency to hit bigger and bigger home-runs. Venture capital is a hits-driven business. Take away a few homeruns and returns look mediocre at best.

Smaller hits no longer move the needle. Investors chase hot deals while small or “low-beta” opportunities are overlooked. Billions are invested in companies targeting big, fast-growing markets, and great people are recruited into those companies hoping to create “the next big thing.” Companies get over-funded, and feeling pressures to grow quickly, they ramp-up to high burn-rates and experience high rates of failures, which are acceptable as long as enough winners materialize. The sobering reality is that most venture-backed companies are sold for less than $50 million, if they don’t go out of business. The typical deal will lose money.

Some people might read this and say that there is nothing wrong. Failures come with the territory and VCs are supposed to take risks. Paradoxically, despite high failure rates, entrepreneurs think that VCs don’t take enough risks. They get turned away because their teams are not “proven,” or there is not enough market traction, compelling technology, or big