These Investors Are Killing America’s Breakthrough Tech Startups

Authors: Jeffrey Funk and Emmanuel Maggiori

Startups are losing billions, and venture capital’s lack of vision is to blame

Nearly 90% of the 120 publicly traded U.S. “unicorns” — companies valued at $1 billion or more before going public — were unprofitable in 2023.

Venture capital funding for startups exploded in the 2010s and early 2020s. During that time, more than 50,000 startups worldwide have received funding from a venture capital firm, and there are now more than 1,200 unicorns globally — startups valued at $1 billion or more before going public and with a combined valuation of more than $3.8 trillion.

VC funding hit a record $643 billion in 2021, twice as much as the previous year and 10 times more than a decade earlier. But funding volume is down more than 50% in 2022. The number of initial public offerings, or startups offering their shares to public investors, topped 1,000 in 2021. IPO activity is down about 80% in 2022.

These numbers illustrate the rise and fall of the multibillion-dollar “entrepreneurship industry.” Even before its peak, as a 2019 academic paper explains, “the industry, which includes conferences and exhibitions, scholarly books and journals, mass-market books and magazines, television and radio advertising and programming, administrative, legal, and accounting support for startups, training seminars, consulting and advisory services, and entrepreneurship-focused web content and commerce, totaled more than $10 billion annually.” In addition, business schools, with the help of government funding, have expanded the number of entrepreneurship programs to more than 2,000 in recent years from about 16 in 1970, and have also created numerous “innovation centers.”

What was the result? Today’s startups are suffering record losses, both on an annualized and cumulative basis. Nearly 90% of the 120 publicly traded U.S. unicorns—those valued at $1 billion or more before going public—were unprofitable in 2023, and 25 of them had cumulative losses of more than $3 billion. That doesn’t include dozens of young companies that were liquidated or acquired at low prices over the past three years.

Only two of these 120 unicorns are in the top 200 by U.S. market capitalization: Uber Technologies (UBER) and Airbnb (ABNB). Almost 60% of them have cumulative losses that exceed their annual revenues. Many of them have little chance of reaching profitability.

VCs and their investors noticed these problems and responded by cutting startup funding. In 2022, disappointing results and higher interest rates caused VC funding to collapse. Even AI optimism couldn’t make up for the decline in VC funding. VCs invested just $243 billion in startups in 2023, the lowest amount in five years.

Today’s startup world is full of tech enthusiasts and others who know more about raising money than finding good tech deals.

The commoditization of startups is a big part of the problem. Startups used to be founded by nerdy semiconductor engineers and scientists who pursued new ideas. Today, the startup system is filled with tech evangelists and other hypesters who know more about raising money than finding good tech deals.

One reason the quality of opportunities and entrepreneurs has declined so much is that the entrepreneurship industry has effectively turned entrepreneurship into a lifestyle commodity, appealing to people who are unlikely to achieve any significant success in their ventures. By pursuing entrepreneurship as an identity project, entrepreneurship has been transformed from a productive activity into an economy that appears dynamic and entrepreneurial but suffers from inefficiency and lack of significant innovation. This commodification leads to “over-entry” into the field and causes entrepreneurs to “persist on unsuccessful ventures.”

The methods these entrepreneurs and their VC sponsors use to find opportunities bear close scrutiny. A dramatic example of the commodification of startups is the proliferation of VC-run “entrepreneur-in-residence” programs. In these programs, VCs put dozens of aspiring startup founders in a room for a few weeks and have them follow a recipe to try to come up with startup ideas. In this reality-show-like process, VCs try to launch hundreds of new startups in a matter of months.

It’s no wonder that entrepreneur-in-residence programs aren’t delivering the results we’re looking for. We can see this in the startups that have suffered the biggest cumulative losses. Focusing on everyday activities has brought us big losses in ride-hailing (Uber, Lyft (LYFT)), office sharing (WeWork), social media (Snap (SNAP)), virtual doctor visits (Teledoc Health, Bright Healthcare), retail investing (Robinhood Markets (HOOD), Coinbase Global (COIN)), exercise (Peloton Interactive (PTON)), food delivery (DoorDash (DASH)), and homeownership (Opendoor Technologies (OPEN)). None of these unprofitable businesses were profitable in Q1 2024, nor do they offer groundbreaking technology.

The global entrepreneurship industry needs to reinvent itself. It needs to try new approaches, or it will become a losing bet – like many of the startups it funds.

Jeffrey Funk is a retired professor, author of five books, and recipient of the NTT DoCoMo Mobile Science Award. His most recent book is Unicorns, Hype, and Bubbles: A guide to spotting, avoiding, and exploiting investment bubbles in tech (Harriman House, October 2024).

Emmanuel Maggiori is an entrepreneur and author of the book “Siliconned: How the tech industry solves fake problems, hoards idle workers, and makes doomed bets with other people’s money” (Applied Maths, 2024).

More: Harris to propose 10-fold increase in tax incentives for startups to spur small business creation

Also read: Fisker, Invitae, and other failed unicorns are victims of Silicon Valley’s broken venture capital system

-Jeffrey Funk -Emmanuel Maggiori

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09-07-24 1036ET