Chasing Hypergrowth? You Might Be Missing the Best Investments
“Being positioned to make investments in an uncrowded arena conveys vast advantages. Participating in a field that everyone's throwing money at is a formula for underperformance.”
Howard Marks (founder of Oaktree Capital)
📈 The Hypergrowth Challenge
Venture capital has never been more abundant. Since 2008, venture assets under management have surged from $300 billion to $3.5 trillion, now representing 25% of total private capital assets (source: Stepstone Group). The venture model is built on a power law distribution of outcomes—where a small number of positive outliers generate the vast majority of returns.
But what does a “positive outlier” actually look like? Consider a $20 million Series A investment in a three-year-old software business generating $4 million in annual revenue, valued at $80 million pre-money (a 20x revenue multiple). If this company follows a traditional venture trajectory—diluting 50% through IPO over six years and exiting at a 7x multiple—it would need to sustain a 200% compound annual growth rate (CAGR) to deliver a 100x gross MOIC. That’s tripling revenues every year for six years.
For most businesses, even great ones, this level of growth is virtually unattainable. The top quartile of software businesses under $30 million in revenue grows at 60-70% annually, while the median SaaS business grows at 30% annually. And very few even reach that scale—only 13% of software startups surpass $10 million in revenue within a decade, and of those, only about two-thirds exceed 100% annual growth (source: ChartMogul).
🪡 An Expensive Needle in a Growing Haystack
No matter how much capital investors deploy, hypergrowth outcomes remain exceedingly rare. Even within Y Combinator (YC)—often regarded as a gold standard for startup talent selection—the rate of unicorn creation has declined. Between 2010 and 2015, 5.4% of YC-backed startups reached unicorn status. For the 2016–2020 cohorts, that number fell to 3.4%—even as the average cohort size ballooned from ~150 to over 500 startups per year (source: Pitchbook). Similar trends hold across other top-tier accelerators.
Even if more outliers existed, access to them is far from evenly distributed. Research suggests private investors do not have uniform access to the information, networks, or deal flow necessary to reliably identify future winners (source: NBER). Yet, many still behave as though they do—overestimating their opportunity set, overpaying for growth, and crowding into the same hypercompetitive investments.
The abundance of capital chasing hypergrowth has led to shrinking equity ownership sold per funding round and heightened growth thresholds (source: Kruze) —where even solidly growing companies are deemed unworthy.
🔍 Overlooked Growth Opportunities
This dynamic increasingly sidelines a growing number of excellent technology businesses—particularly those in industries with longer adoption cycles, higher risk aversion, or regulatory constraints such as financial services. Founders and owners in these sectors are being forced to rethink their fundraising strategies beyond traditional venture capital.
Software businesses generating up to $30 million in sales growing at 30-100% annually, particularly those with good revenue diversification, customer retention and unit economics, represent compelling growth investment opportunities. A simpler infusion of equity, without debt, is preferable to achieve increased stakeholder alignment and cash flow generation. These investments tend to perform better when capital is paired with operational guidance and fiduciary oversight to reduce the dispersion of outcomes.
By applying intelligent augmentation—leveraging technology to streamline workflows, optimize resources, and enhance human expertise—these companies can scale profitably and sustainably.
The best investments aren’t always the loudest or fastest-growing. Sometimes, they’re simply the most durable and well-run.
In Short: The venture capital model’s singular focus on hypergrowth has created a funding gap for lower middle-market technology businesses that, while not fitting the power law mold, are nonetheless valuable, scalable, and capable of delivering strong returns. Investors willing to step outside the hypergrowth framework can capture significant value in these high-quality businesses—without chasing an ever-shrinking set of outliers. The key is a pricing approach that aligns with sustainable value creation, driving multiple expansion through a combination of capital, expertise, and strategic oversight.
