Is the VC Middleman on the Way Out?

Why LPs Will Start Investing Direct in Startups/SMEs that have a good Investability Rating For decades, venture capital firms have been the gatekeepers of innovation. Limited Partners (LPs)—the pension funds, endowments, and institutional investors supplying the capital—have relied on VCs to filter the noise and place calculated bets on the next big thing.

But what if that filter is outdated?

What if tomorrow’s investment decisions don’t start off with a pitch-deck and are based on gut instinct or personal introduction—but instead, on a standardised, data-driven investability rating, just as public markets rely on credit ratings and credit reference agencies?

VCs: The Original Middlemen

Venture capital funds were designed to solve a problem: information asymmetry. LPs didn’t have the time, expertise, or networks to evaluate thousands of early-stage startups and growing, small - medium sized businesses (SMEs).

It was not commercially viable and VCs stepped in as middlemen, promising access, insight, and due diligence. But that model comes with major flaws:

• High rejection rates: over 90% of pitchdecks are rejected by VCs

• High failure rates: Over 70% of VC-backed startups fail or underperform.

• Low transparency: Decisions often rely on subjective opinions and pattern-matching.

• Misaligned incentives: VCs chase unicorns for power-law returns, not necessarily sustainable or inclusive innovation.

• High costs: Management fees and carried interest eat into LP returns.

The Rise of Direct Investment

LPs have already started bypassing fund managers in private equity, real estate, and infrastructure. The next domino? Early-stage innovation. And the key enabler? Investability ratings.

An investability rating is an independent, standardised assessment of a business’s likelihood of success—based on validated criteria like team quality, market readiness, product traction, financial model robustness, and operational risk.

Why Investability Ratings Will Change the Game

Investability ratings empower LPs to make data-informed decisions without relying on a VC fund manager. Here’s why that matters:

• ✅ Trustworthy filtering: Ratings offer an impartial, consistent benchmark across applications for investment.

• ✅ Portfolio-level control: LPs can diversify across geographies, sectors, or stages—without handing control to a VC.

• ✅ Cost efficiency: No more "2-and-20" fee structures. More capital flows directly into innovation.

• ✅ Democratisation: Smaller LPs, pensions funds and retail savers will be able to consider potential startup investments that were previously VC-gated.

• ✅ Speed: With trusted ratings, startup selection can be automated, audited, and scaled.

What Will Happens to VCs?

This shift doesn’t mean VCs will disappear—but their role will change and the smartest VCs will embrace ratings, use them to benchmark, improve dealflow quality and partner with LPs in new, transparent ways.

There are approximately 400 million SMEs in the world. While precise startup numbers are harder to pin down, one estimate suggests there are around 150 million. That's 550 milion in total. Startups and SMEs are the backbone of most economies, accounting for a large percentage of firms and employment. AI can now process data in seconds at significantly lower cost. Now is therefore the time for VCs to stop chasing the 1% that become unicorns. Instead they should start funding the 99% in order to drive economic growth, worldwide.

When? A 5–10 Year Horizon

Change won’t happen overnight. Stakeholders need to agree standards. Trust has to be earned. But, just as credit ratings and scores from the likes of Moodys and Experian transformed credit risk assessment, investability ratings will transform venture assessment. Over the next decade, we’ll see:

• Investability rating agencies for startups/SMEs, much like credit rating agencies for bonds and credit reference agencies for small businesses.

• AI/ML powered platforms offering real-time ratings of startups/SMEs and portfolio tracking

• LPs setting automated mandates (e.g., “invest £50K in startups with a AAA rating in climate tech”)

• Entire funds based on rules, not relationships

Conclusion: The Trust Layer of Innovation Capital

VCs were built to solve an information problem. But in a world of big data, AI-powered due diligence, and standardised scoring models, that problem can be solved better—and more fairly. Investability ratings are more than a signal. They’re a trust layer that will unlock direct capital flows into startups and growing SMEs at scale.

Pitchago and Fundability are leading the way on investability assessments and ratings and in the new world, the middleman is no longer mandatory.