August 14, 2023
Boldly, they proclaimed their resilience to such financial calamities and their will to invest even in the worst of times. But as the shadow of the bubble began to darken the whimsical valley, the trees in the lemon drop forest suddenly dropped their balls, and the VCs flew down the rabbit hole faster than Dick Cheney in a terrorist attack.
The startup economy is on life support, its vitality slipping away. The helms of perennially unprofitable ventures tread the desolate corridors of Sand Hill Road, thirsting for sustenance, only to be met with mirages. Convertible notes and stock certificates fall like snowflakes from the sky and accumulate on the tents and RVs of Palo Alto's dystopian hellscape.
Soon enough, though, the frosty venture winter will pass, and the financiers will emerge from their sanctuaries, heralding a renaissance of startup spring. Careful, try not to step on the bones at the bunker door.
With renewed vigor and claims of enlightenment, VCs will profess an evolved mantra. Gone will be the days of funding marginally faster food delivery, surge pricing for funerals, or NFTs. In their new charter, they will swear to pursue genuine value, championing startups with tangible visions and solid foundations, companies that will ultimately change the world.
Then, slowly, the pupils dilate as the mushrooms kick in. A glimmering golden spire emerges over the hills, and it is the unicorn's horn as he leaps forth into the clear blue sky. He is magnificent and frothing at the mouth. He screeches and neighs and shits gold nuggets all over the place. The VCs scramble to get on his back, to cling to his glorious white mane as they try to avoid being trampled by his sharp hooves.
For the veterans of Silicon Valley, witnessing this cycle again is almost ritualistic—the bubble burst is a cue, perhaps, to take a refreshing sabbatical or delve into advanced academic pursuits. At the same time, we wait for the next bubble to inflate. In the calm silence of our meditation retreat, however, one begins to wonder whether we can do it all over again. And more importantly, whether or not we want to.
Will investors snort another line off the mythical beast's rump and fist-pump the dismal performance of venture capital for another decade? We think not. Indeed, as founders who have chased the beast for almost three decades, we will not.
In today's shifting financial landscape, the signs of stagnation in the startup ecosystem are increasingly evident. This dominant "unicorn" investment strategy, which is centered on identifying and backing high-growth startups for exponential returns, is showing signs of wear. An alarming trend underscores this evolution: while late-stage investors garner the bulk of benefits from these ventures, the true innovators—early backers and startup founders—often find themselves on the sidelines.
To comprehend this dynamic, a dive into the history of venture capital investment is crucial. Traditionally, venture capital carved a vital space for itself, providing the essential financial boost for budding businesses. This was especially significant when public markets set high bars in terms of revenue and established track records. The venture capital model that emerged during these times—marked by fixed management fees, enticing incentive fees, and extended lockup periods—was birthed in an era when funds were modest, and initial public offerings (IPOs) were a fast track to liquidity.
However, today's financial realm is a stark contrast to venture's yesteryears. Immense funds now scramble for a diminishing pool of worthy investment opportunities, even as they trail behind passive market benchmarks.
The Cambridge Associates US Venture Capital Index lagged behind, with an average annual yield of just 5.06% between 2000 and 2020, while the S&P 500 outstripped it at 5.91%. This disparity makes us question the efficacy of the traditional venture capitalist's choices.
Furthermore, the number of publicly traded companies has drastically dropped, halving from its zenith in the mid-1990s—sliding from 6,000 to a mere 3,600. IPOs also were not spared, plunging from 700 in 1996 to a paltry 100 by 2017. Contrasting this, capital inflows into startups, particularly in the later stages, have skyrocketed, marking a staggering 2,000% surge since 1992.
This landscape has driven VC firms towards "fund-stacking"—a move powered by the lucrative allure of consistent fees. Yet, this shift, coupled with the lackluster performance of VC funds, fuels broader socio-economic challenges. Notably, it intensifies wealth disparity, given that premium investment avenues are, by legislation, reserved for the elite.
Adding to the woes of the traditional VC setup is the skewed power balance among early-stage investors, founders, and subsequent round investors. While founders and initial investors grapple with immense risks during a company's formative period, their stakes often diminish as firms expand and procure their next funding rounds. This not only disincentivizes daring entrepreneurial pursuits but also erodes the very essence of early-stage investment.
The fallout of these structural challenges is profound. Every year, countless promising investment avenues are sidelined. These are ventures that, in the eyes of the VC world, either lack the immediate allure of a "unicorn" or are perceived as long-term plays. This narrow-sightedness stifles innovation, depriving markets of game-changing breakthroughs.
It is long past time for a new venture capital paradigm.
In the rubble of the post-unicorn era, a new breed of venture emerges, one that is reimagining the very fabric of company building. We recognize that the old ways are unsustainable, with their relentless pursuit of mythical beasts and fleeting fortunes. Our model is not just about providing capital. It's about signing up for the mission.
We see ourselves as co-creators and partners rather than mere financiers. We commit to a startup's vision from inception to fruition, ensuring that every decision aligns with the company's core mission. It's about bringing more than just money to the table by providing expertise, mentorship, and a holistic support system designed to shepherd startups through the treacherous terrains of entrepreneurship. Our approach marks a shift from transactional relationships to transformative partnerships.
Furthermore, by leveraging technology and innovative investment structures, we are opening doors to more investors and investing in a broader range of founders and ideas. Rather than chasing the next unicorn, we prioritize funding startups that address real-world challenges.
Perhaps most importantly, we are redefining success. While traditional VCs are often singularly focused on financial returns, we understand that true success encompasses more. We evaluate startups not only on their potential profitability but also on their ability to effect meaningful change, create jobs, and contribute to societal well-being. In other words, it's up to us to design the future we will all live in.
In the vast tapestry of venture history, moments of true shift are rare but essential. The lingering shadows of past VC practices can no longer dim the luminescence of a brighter, better future. It is a future that Next Wave Partners is already shaping.
We're not just waiting for that future to unfold. We are actively weaving it. We've rejected the old dogmas, the fleeting chases, and the superficial allure. Instead, we've embraced a model that prioritizes partnership, values democratization, and acknowledges the multi-faceted nature of true success. We're not in this for short-lived triumphs. We're here for the enduring impact, the sustainable changes, and the long waves of innovation that transform and uplift society.
The world doesn't need another venture capital firm. It needs a movement. It needs a collective of thinkers, builders, and dreamers committed to creating lasting change. At Next Wave Partners, we've taken up that mantle. We're not just part of the future of venture capital. We're leading it.
To the founders, innovators, and game-changers out there: The future is already here. If you're driven by a vision that transcends mere profitability, and you're fueled by a passion that seeks to reshape landscapes and redefine norms, then you're already one of us.
Join Next Wave Partners. Let's not just chase dreams. Let's actualize them. Together, let's build a world that future generations will be proud to inherit. The dawn has arrived, and with it, a new era of venture capital. Be part of this transformative journey.
Stay tuned because tomorrow, August 15th, 2023, we will reveal the first page.
About the Author
James Thomason is a Managing Partner at Next Wave Partners, a venture studio focused on the next long wave of innovation including AI, augmented reality, data infrastructure, and alternative energy. He is a career technologist and innovator with over 25 years of Silicon Valley experience building and exiting early-stage startup companies. James holds 7 patents in areas of machine learning, cloud computing, virtualization, peer to peer networks, and internet routing. He has written for Forbes, Network World, Information Week, VMBlog, ZDNet, Information Age, and numerous other publications as a thought leader. James has guest lectured on entrepreneurship and innovation at Princeton University's School of Engineering and Applied Science, as well as the United Nations Inter-governmental Consultations Migration, Asylum and Refugees on cyber trafficking and exploitation.
