Study reveals how venture capital really works for Brazilian startups

A new study by Omri Drory, a PhD and venture capital partner, offers a rare look inside how venture capital funds decide which startups receive funding. According to Startupi, the research explains why most startup pitches are rejected and what founders must demonstrate to attract investment.

The analysis compares angel investors, who use their own money and may act on personal motives, with venture capital managers, who invest money from limited partners under strict performance rules. Venture funds typically charge a 2% annual management fee on assets and take a 20% share of profits above a set return threshold. Most funds operate on a 10-to-15-year timeline and aim to return at least three times the capital invested.

In Brazil, funds such as Monashees, Kaszek Ventures, and Canary follow similar structures but adapt to local regulations by operating as FIPs (Fundos de Investimento em Participações), supervised by the CVM. The study highlights that venture capital portfolios do not follow a normal distribution. Instead, they follow a power-law pattern: most investments yield little or no return, while a small number generate all or more than the fund’s total returns.

This means each investment must be evaluated not by average expected returns but by its ability to recover the entire capital on its own. For a US$ 100 million fund holding a 10% stake in a startup, the company would need to be valued at least US$ 1 billion just to justify the investment. This logic applies in Brazil as well, where founders who do not understand this dynamic often pitch solid businesses that do not meet the required profile.

The research frames startup evaluation around three core questions. First, can the business truly scale to a significant size? The study suggests founders should aim for at least US$ 100 million in annual sales or a US$ 1 billion market capitalization in a best-case scenario. Second, does the business have a defensible “magic” advantage—such as strong intellectual property, network effects, or rare technological innovation—that competitors cannot easily copy? Third, are the founders considered among the best professionals in their field, forming an unlikely yet high-impact team for the opportunity?

The study notes that most rejections without feedback relate to this last factor. In Brazil, where the number of venture capital firms has grown over the past decade and funds have become more selective since 2022, investors now prioritize real traction, predictable revenue, and execution capability before assessing qualitative aspects. Founders must therefore meet two simultaneous milestones: demonstrating the potential to reach significant scale and proving operational credibility to turn vision into reality.

Startups that fall into the “no” zone, according to Drory, rarely fail due to lack of ambition. Instead, they struggle to convincingly present the combined strength of market size, differentiation, and team quality. The research also identifies a common pattern among founders with scientific or technical backgrounds: they often present the solution before clearly explaining the problem and its market size.