These investors are killing the game-changing tech startups of America

By Jeffrey Funk and Emmanuel Maggiori

Startups lose billions and venture capital’s lack of vision is to blame

Almost 90% of America’s 120 publicly traded unicorns – those valued at $1 billion or more before they went public – were unprofitable in 2023.

Venture capitalists’ funding for startups exploded during the 2010s and early 2020s. In that time, more than 50,000 startups globally received funding from a venture-capital firm, and worldwide there are now more than 1,200 unicorns – startups valued at $1 billion or more before they go public, with a total valuation of more than $3.8 trillion.

VC funding reached a record $643 billion in 2021, twice as much as the year before and a tenfold increase from a decade earlier. But in 2022, fund volume dropped more than 50%. The number of initial public offerings, which are startups making their shares available to public investors, exceeded 1,000 in 2021. In 2022, IPO activity fell about 80%.

These figures show the rise and stumble of a multibillion-dollar “entrepreneurship industry.” Even before the peak, a 2019 academic article explains, “This industry includes conferences and expos, scholarly books and journals, mass audience books and magazines, infomercials and programs for TV and radio, administrative, legal, and accounting support for startups, training seminars , consulting and advisory services, and entrepreneurship-focused web-based content and commerce, representing more than $10 (billion) annually.” In addition, business schools, with the help of government funding, increased the number of entrepreneurship programs to more than 2,000 in recent years from about 16 in 1970, along with creating numerous “innovation hubs.”

What has been the outcome? Today’s startups are incurring record losses both on an annual and cumulative level. Almost 90% of America’s 120 publicly traded unicorns – those valued at $1 billion or more before they went public – were unprofitable in 2023, and 25 of these had cumulative losses greater than $3 billion. This does not count the couple of dozen young companies that were liquidated or acquired for low prices over the past three years.

Just two of these 120 unicorns are in the top 200 in US market capitalization: Uber Technologies (UBER) and Airbnb (ABNB). Almost 60% of them have cumulative losses that exceed their annual revenues. Many have little chance of ever becoming profitable.

The VCs and their investors have noticed these problems, and responded by reducing startup funding. In 2022, due to disappointing results and higher interest rates, VC funding collapsed. Even optimism about artificial intelligence hasn’t been able to make up for the fall in VC funding. VCs invested only $243 billion in startups in 2023, the lowest amount in five years.

The startup system now is filled with technology evangelists and other hypesters who know more about raising money than finding a good technology opportunity.

The commodification of startups is a big part of the problem. Startups once were founded by nerdy semiconductor engineers and scientists who pursued novel ideas. The startup system now is filled with technology evangelists and other hypesters who know more about raising money than finding a good technology opportunity.

One reason why the quality of opportunities and of entrepreneurs has fallen so much is because the entrepreneurship industry has successfully transformed entrepreneurship into a lifestyle commodity, attractive to individuals who are unlikely to enjoy any kind of substantive success with their ventures. By pursuing entrepreneurship as an identity project, entrepreneurship has transformed from a productive activity into an economy that appears dynamic and entrepreneurial but suffers from inefficiencies and a lack of substantive innovation. Such commoditization leads to “over-entry” into the field, and it makes entrepreneurs “persist in failing ventures.”

The methods these entrepreneurs and their sponsoring VCs use to find opportunities bears scrutiny. A dramatic example of start-up commoditization is the proliferation of “entrepreneur in residence” programs run by VCs. In these programs, VCs put dozens of aspiring startup founders in a room for weeks and have them follow a recipe to try to come up with startup ideas. From this process, which resembles a reality TV show, VCs seek to churn out hundreds of new startups in a matter of months.

Not surprisingly, entrepreneur-in-residence programs don’t seem to be yielding the expected results. We can see this in the startups with the biggest cumulative losses. Focusing on day-to day activities have given us big money-losers in Ride hailing (Uber, Lyft (LYFT)), office sharing (WeWork), social media (Snap (SNAP)), virtual doctor’s visits (Teledoc Health, Bright Healthcare ), retail investing (Robinhood Markets (HOOD), Coinbase Global (COIN) ), exercise (Peloton Interactive (PTON)), food delivery (DoorDash (DASH)), and home buying (Opendoor Technologies (OPEN)). None of these money-losers were profitable in the first quarter of 2024, nor do they offer breakthrough technology.

The global entrepreneurship industry must find novel ideas again. It has to try new approaches or it will become a losing bet – like so many of the startups it funds.

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

Emmanuel Maggiori is an entrepreneur and author of “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 tenfold increase of startup tax incentive to spur small-business creation

Also read: Fisker, Invitae and other fallen ‘unicorns’ are casualties of Silicon Valley’s broken venture capital system

-Jeffrey Funk -Emmanuel Maggiori

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09-07-24 1036ET