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There is no doubt about the incredible impact venture capital has had on the US and global economies over the past decades. A small number of VC investors helped create the most dynamic companies in history, generating incredible returns. But past performances, as they say, are not a guide to future outcomes, and the world is changing rapidly. Is the VC industry trying to burn with “rapid, unplanned disassembly” like the launch of Elon Musk’s latest rocket?
Ilya Strebulaev, a professor of finance at Stanford University School of Business and co-author of the Unicorn Report, dismissed such a lecture, suggesting that the current slowdown in the VC industry is more cyclical than structure. “The reason the US produced so many huge companies like Apple, Facebook, Google and Nvidia is not because the US is more innovative, but because there is a VC industry. That’s causality,” he says.
His recently updated 350-page unicorn report strongly supports his paper. Of all public companies established in the US over the past 50 years, VC-backed companies account for half of those numbers, three-quarters of market value, and 92% of R&D spending.
Of the top 10 most valuable public companies in the United States, the average year was founded in 1946. The rest of the G7 was 1892. The US VC industry remains a scary innovation machine. Supporting hungry entrepreneurs with early stage funding to leverage the latest technology to meet the needs of everyday consumers, business needs remain a promising bet.
That being said, it’s hard to see the VC industry return to its glory days of 2021 anytime soon. This is 478 unicorns cast in the US. The combination of low interest rates, abundant capital, sugary valuations and rush to digital platforms during Covid Lockdown was the industry’s happy hour.
Today’s outlook is even more calm. Investors are currently facing higher interest rates, broken capital markets, geopolitical disruption, increased protectionism and the mass adoption of artificial intelligence. “I don’t think the VC model will die, but it will change,” said investor David Galbraith. “And the big picture is that American models may be under threat.”
In his view, AI is rewriting the rules of technology and investment games. The traditional capital lighting software delivery model (thinking social networks) that has worked very well for VCS has rapidly evolved into one of the capital-heavy hardware production (AI chips and data infrastructure) and is a much more demanding investment area. The leading companies in this transition are the dominant tech giants with collective investments of hundreds of billions of dollars. They also emerged as major supporters of the largest AI startups, including Openai and humanity, taking away the historic role of VCs.
Galbraith predicts that most other small VC-backed AI startups that apply technology across different sectors will fail.
Another major secular change is that technology is now the focus of intense geopolitical rivalry, with all the major forces that are currently talking about the need to assert technological sovereignty. The latest one is Saudi Arabia. Saudi Arabia has just launched a $1 billion VC fund with the aim of becoming a major AI hub.
This geopolitical order calls for deeper cooperation between governments, national corporate champions and dynamic startups, as is common in Northeast Asia. In their book’s emerging capitalism, Robin Klingler Bidra and Ramon Pacheco Paldo claim that China, Japan, Korea and Taiwan are helping China, Japan, Korea and Taiwan learn the lessons of Silicon Valley, update them for a new era, and create companies such as Taiwan’s TSMC, the world’s leading chipmaker. Many of these practices are now permeating the United States in the form of “return spread.”
This week, Europe launched a new initiative to revitalize start-ups, appearing to be stuck in the old Silicon Valley playbook. Although such liberalization initiatives are welcome, they need to be implemented quickly and form part of a more muscular geopolitical strategy. “Adapt to the Northeast Asian model is much more feasible,” Klingra Vidra tells me.
It is forgotten that Silicon Valley itself is a descendant of the US national security country during the Cold War. Geopolitics is now back in vengeance, and like everyone else, the VC world must quickly adapt to that new reality.
john.thornhill@ft.com