Debunking the "Kingmaking" Myth
And Why You Can't Buy Your Way to Success
If your competitor raises a huge round from the best firms in the world, your first reaction may be: “Are we dead?” That reaction is part of the design. Beyond capital, a big round is a message to the market that the category winner has already been decided.
This happens because venture is a power law business. A few true outliers built by exceptional entrepreneurs end up moving the needle for several funds. Those founders are rare, so when some investors think they’ve found one, they lean in early and try to make the outcome feel inevitable.
“Kingmaking” is the name of this move: a deliberate attempt to define the category winner, then reinforce that conviction with extremely large checks and loud signaling.
This is one of those self-fulfilling prophecies, built on the idea that overfunding raises your chances of success disproportionately. Because the winners are often the most-funded companies, we get the chicken-and-egg problem. Did they win because they received the most funding or did they receive the most funding because they were already winning?
For entrepreneurs, this seems like pure upside. Since dilution is limited within rounds, larger rounds mean higher valuations, translating into cheaper capital. In fact, most times, you should take the “kingmaker” offer if you receive one. Still, in this article we want to present the overlooked side effects that can come with it.
At SaaSholic we don’t believe in kingmaking. We have seen multiple cases where the underdog beats the overhyped player and multiple companies bootstrap their way to success1. We also think it hurts venture returns, which is bad for the asset class and its LPs (we personally like investing in contrarian underdogs too, but that’s another story!). Here are the reasons we’re skeptical.
Mercenaries over Missionaries
Extra funding can help you hire the most pedigreed talent, however, early in the journey it’s well known that you need “missionaries” over “mercenaries”2. You want people with an owner’s mindset and the grit to make your company win, even when it feels irrational from the outside.
Having extra money will help to hire the Dev from big tech, or the polite leader with the right vocabulary, but those aren’t the ones that move the needle. More often than not, this profile will bring politics into the organization earlier than the company can afford.
In startups, even at later stages when the risk of ruin has apparently dropped, you still need to run with the “only the paranoids survive”3 mindset. The moment you start believing your crown is real, you stop doing the things that would earn it in the first place.
Startups are living experiments. You must iterate, iterate and iterate until you can (hopefully) find your way to success. You can’t buy your way into it.
We heard the clearest rebuttal to kingmaking from someone who would benefit from it. In a recent 20VC episode4, Winston Weinberg, founder & CEO of Harvey, the $6B legaltech that raised $1B from OpenAI, Sequoia, Kleiner Perkins, a16z and Coatue, explained why the idea breaks down in practice.
Harry Stebbings: Why do you disagree with kingmaking as a theory?
Winston Weinberg: One, they think of kingmaking as it provides you with more capital. More capital does not mean you run a better business. You could have as much capital in the world as you want. If you make the wrong product decisions, you’re just going to invest in all the wrong places and it doesn’t matter. It’s the same as VC. You have a hundred billion and if you put it all into the wrong things, that still goes to zero, right?
[…] How many times a day do you think something goes wrong at Harvey? Constantly. Like 24/7. How many times a day do you think we feel like there’s an existential threat? […] All the time. Startups are very difficult places to work.
And so you think from the outside, “Oh wow, they’re growing revenue so much. They’re the category leader. They have all these investors. But internally at all of these companies, it’s chaos and morale goes up and down. You face really difficult things and then you have to figure out how to get through them.
And so being a missionary really does matter because the reality is once you’re on the inside, the brand of the company and the success of the company matters less than when you’re on the outside. […] People just don’t realize that because they aren’t inside of these companies, they’re on the outside.”
Overfunding raises the bar
Most VCs run 30-50 company portfolios, often with multiple funds operating simultaneously while having limited headcount. They also need to raise new funds, source new companies and manage their own firms. As brutal as this can be, many end up following Peter Thiel’s advice5:
“This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. [...] But because of the power law, the apparent ‘losers’ are mostly just irrelevant. The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
[However], most venture capitalists spend their time on the most problematic companies... The power law means that investors should focus on the few companies that are successfully going from 0 to 1, but most investors spend their time trying to fix the companies that aren’t working.”
If we connect the dots, the conclusion is unavoidable:
Most VCs will focus attention on their winners.
The “winners” are the ones expected to be fund returners.
When kingmaking occurs, entry valuations are higher.
When valuations are higher, the hurdle to become a fund returner gets much higher.
The chance that VCs stop caring if you miss these more ambitious hurdles increases. VC attention may disappear earlier than most founders expect.
This is why you should not only optimize for the highest valuation you can get, but also make sure that the partner you’re choosing will be with you even after they realize you may not be the decacorn needed to return their fund.
The Brex vs. Ramp case
It’s easier to illustrate with an example. Last month, the Brex exit was announced in a $5.1B deal to Capital One. This is a remarkable outcome by any standard. As Brazilians, we feel really proud of seeing founders winning globally and shaping the global software landscape. Pedro and Henrique belong in the pantheon of Brazilian founders.
Much of the post-exit debate has been focused on the competition between Brex and Ramp, and why it’s a clean counterexample to the kingmaking narrative. When Ramp started and raised its $4.5M seed, Brex had already raised $282M at $2.6B, backed by several tier 1 investors.
By February 2020, Brex was valued at $2.75B while Ramp was closing a round at $75M, a 37x gap. Four years later, the picture looks different. Ramp has continued to compound, recently raising at $32B, with $1B in revenue run-rate6.
There is still a long road to see how this journey will end, but the lesson is that a competitor’s funding and investor list are only the start of the story, not the finish line. Don’t get discouraged by it.
Customers don’t buy VC credentials
The job of a VC is to distill signal from noise while working with limited information. VCs tend to anchor on credentials or status signaling when underwriting a founder because it feels like a shortcut to quality when you don’t have much more to analyze. The big mistake is projecting that same logic onto customers.
Most customers do not care whether a product was funded by Andreessen or Sequoia or how much it has raised; they care about outcomes, reliability, and something that works inside their workflow.
It’s easy to counterproof it
Looking at the largest venture outcomes in Brazil and globally, they in fact were the ones that raised the most capital7. Many people stop there and treat it as evidence that capital is the ultimate competitive advantage. The pattern is real, but the conclusion is wrong.
Not every large raise leads to a large outcome, we all know plenty of overfunded disappointments. As markets become more competitive, and more firms are searching for the few potential decacorns in a category, capital concentrates around the companies that are already showing real momentum. In other words, success often brings money, money doesn’t necessarily create success.
SoftBank’s $7.6B Latin America Fund is a useful real-world stress test of this idea. A single vehicle, roughly equal in size to the total venture deployment in Latam across 2024/25, had enough scale, brand and access to back perceived category winners early and repeatedly. Yet, according to public data8, the 2019 fund will only generate modest returns to its investors, even with meaningful wins in its portfolio.
It is the cleanest reminder that capital is only one of the successful inputs needed for a great outcome.
The SaaSholic approach
We think the easiest, but most long-term harmful path in venture is to raise very large funds, writing very large checks into consensus “hot deals.” In the short term, this would mean more management fees, more logos and external validation. In the longer run, however, it would probably mean mediocre returns.
We decided to follow a different path. Smaller funds, fewer companies, investing early and staying very close to founders. We focus less on trying to buy speed with burn, and more on helping teams get the fundamentals right. It may take longer to look like a winner, but it reduces the number of avoidable deaths in the portfolio. Fewer deaths help drive higher hit rates and better returns.
We prefer to play the positive-sum game of helping create opportunities than the zero-sum game of fighting for the allocation on hot opportunities.
For Founders, some practical advice
Money is a weaker advantage than it looks. Don’t get discouraged because a competitor raised big, and don’t get deluded because you did. The journey is far from over!
When deciding whether to take a term sheet, we agree with Paul Graham’s advice to YC founders9:
“We advise founders who go on to seek VC money to take the first reasonable deal they get. If you get an offer from a reputable firm at a reasonable valuation with no unusually onerous terms, just take it and get on with building the company. Who cares if you could get a 30% better deal elsewhere? Economically, startups are an all-or-nothing game. Bargain-hunting among investors is a waste of time.”
The nuance is that taking a “reasonable deal” requires a lot of work. Spend your time on the part that matters most, who you are adding to your cap table. Make sure you choose investors that will help even if the story gets messy.
Ho Nam from Altos Ventures has a practical way to reference-check that most founders skip10. VC reputations are shaped by a tiny handful of winners, and if you only talk to the home runs you will get a skewed picture. Talk to the long tail. Ask founders in the struggling or average outcomes how the firm showed up and what support looked like during bad times.
If you end up receiving a kingmaker offer and conclude that the partner is truly worth having on your cap table, the best advice may be to take the money but pretend you didn’t. Don’t increase burn just because the bank account is bigger, even if that creates pressure to “move faster.”
Founders, Apply for Funding!
If this perspective matches how you want to build, we’re deploying Fund III. If you want an early, hands-on partner who stays close even when the work gets hard, apply here!
As articulated in Altos Ventures’ blog post “Venture Lotto”: “Microsoft took 11 years to go public. They were also profitable by the time they took venture funding, as was the case at Oracle, Cisco, Intuit, eBay and many others. Companies such as Adobe, Autodesk, Broadcom, Dell, EMC, HP, IBM, Motorola, Paychex, Qualcomm, SAP, and SAS never raised traditional venture funding.” In Brazil, a similar pattern holds, TOTVS, Locaweb, Sinqia, and Stefanini, among others, followed durable paths without relying on early venture financing.
The “missionaries vs. mercenaries” framing is widely credited to John Doerr of Kleiner Perkins.”
The famous management mantra popularized by former Intel CEO Andrew S. Grove in his book “Only the Paranoid Survive” (1996)
Check the full podcast here: Harvey CEO Winston Weinberg: How to Make Mega Deals, 20VC
Extracted from “Zero to One: Notes on Startups, or How to Build the Future (2014)”, Peter Thiel
Extracted from Yuechen Zhao’s Linkedin Post
O Power Law do Vintage 2014-2016 de Early-Stage no Brasil, DealflowBR, Guilherme Lima
The 18 Mistakes that Kill Startups, Paul Graham
Paradox of the Power Law in Venture Capital, Altos Ventures