This year has been an odd one for venture capitalists, between bank failures, shifting tides of a volatile economy, and the resurgence of tech entrepreneurship in Silicon Valley driven by advances in generative AI.

And though this may be a particularly tenuous time for venture capital, some challenges will always present themselves. Here are the top nine challenges VCs face, from initial lead generation to funding and beyond.

Deal Sourcing

If you’re a venture capitalist, you’re already aware of the “around-the-clock” nature of filling your deal pipeline. It’s a constant challenge for VCs to find promising investment opportunities, many of which come from existing business connections, hearsay, or other difficult-to-replicate methods. Finding leads is one thing, but ensuring that these startups are high-quality and align with your investment thesis and criteria requires extensive research, networking, and staying up-to-date with industry trends. There’s also pressure to move quickly in a competitive industry, in which there is often heavy competition between VCs for the best deals. 

Due Diligence

Venture capitalist firms, on average, spend a minimum of 20 hours of due diligence for each potential investment opportunity. That’s a considerable amount of time, effort, and money dedicated to determining the viability and potential of a prospect. This process involves evaluating the market, analyzing the business model, assessing the team’s capabilities, reviewing financials, and understanding the competitive landscape. Due diligence ties up your team’s resources, drawing them away from other potentially profitable activities, but that isn’t an invitation to cut corners — which could be even more costly down the road.

Simply conducting due diligence is hard work and requires attention to (the right) details. Having the right team members and technologies involved in this process can be the difference between a winning and losing investment.

Risk Assessment

The balance of risk and return — a science and an art — is at the heart of every VC business. No matter how promising a startup looks on paper, it always involves a degree of risk that demands a measured analysis of its prospective reward. There’s a lot to consider when it comes to risk assessment, including:

• Market conditions. In an uncertain market, VCs have to weigh investments extra carefully. VCs also must exercise more caution when there are potential challenges with market size, saturation, or competition for a product or solution.
• Technology risks. If the company is developing a new technology, how long will it take to be ready to sell? Are there heavy dependencies on specific technologies to make the product or service marketable? 
• Regulatory challenges. Compliance and regulations can hold up even the most well-planned business strategies.
• Strength of management team. Can the team execute the business plan? Do they have experience where it matters, or are they new to running or scaling a business?

Portfolio Management & Performance Reporting

Portfolio management is an active and ongoing challenge for VCs. It’s essential, beyond the initial investment, for VCs to support and bring value to their portfolio companies. This includes providing strategic guidance, advice, connections, and ongoing business development. The “more you give, the more you get” applies heavily to VCs when it comes to portfolio management, but this can be difficult to implement in practice when VCs are pulled in a hundred different directions. It’s a delicate balance of time and resources between seeking new investments and optimizing existing ones.

VCs also have to regularly optimize their portfolios, which includes both doubling down on high-growth companies and handling underperforming companies. Further, because venture capitalists are judged based on the overall performance of their investment portfolios, there’s pressure to regularly report on performance. While some VCs may use tailor-made software to get better visibility into key data, others may rely on more traditional and time-consuming methods. 

Exit Strategy and Liquidity

Venture capitalists use exit strategies to either secure gains or avoid losses. The ideal situation, of course, is for a portfolio company to go public (IPO) or be acquired. However, sometimes venture capitalists have to exit underperforming companies, as well, to avoid further losses on their investments.

Planning exit strategies involves a bit of fortune-telling. Determining the timing and success of an exit opportunity is often very uncertain and challenging to predict.

Market Volatility

As with any financial or business venture, VCs and their portfolio companies are subject to the state of the economy. 

Whereas venture capital firms themselves might not be as directly impacted as the companies they invest in, there’s no doubt that economic challenges can stifle innovation, resulting in fewer potential investment startups for VCs. Market volatility, economic cycles, and industry-specific dynamics can also affect fundraising, valuation, and exit opportunities.

Investor Relations

Venture capitalists often manage relationships with their own investors, including limited partners (LPs) who provide the capital for the VC fund. Keeping LPs informed about the progress of investments, managing their expectations, and maintaining a strong rapport can be demanding and time-consuming for VCs — and often requires both a degree of technical and relational aptitude. It’s essential for VCs to be able to quickly and accurately report to partners on the status of their investments in order to inspire confidence in the VC firm and keep business flowing.

Regulatory and Legal Considerations

Venture capitalists must navigate a complex and ever-changing landscape of regulations and legal requirements. Compliance with securities laws is essential for VCs to protect investors’ interests, prevent fraud, and support the integrity of the market as a whole. Protecting intellectual property through contracts, licensing agreements, and other mechanisms is also critically important in order to ensure that valuable assets are not misappropriated. 

VCs must also address governance issues such as conflicts of interest, board composition, and voting rights to ensure that all stakeholders have a voice in decision-making. Additionally, transparent transactions and accurate reporting must be maintained to ensure fair dealings with investors, partners, and other relevant parties. By proactively addressing these challenges, venture capitalists can effectively manage legal risk and maximize their chances for success.