20VC: The Venture Model is Broken | You Need to be Greedy and Selfish to Win Early Stage Investing | Why Margins Do Not Matter for Early-Stage Startups | The Growth Rate that is Required in a World of AI with Gili Raanan, Founder @ Cyberstarts
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch Podcast Recap
Published:
Duration: 52 min
Guests: Gili Raanan
Summary
Gili Raanan argues that the venture capital model is imbalanced, requiring early-stage investors to be both greedy and selfish. He stresses that growth rates are crucial, while margins are less important for early-stage companies, especially in the rapidly evolving field of AI.
What Happened
Gili Raanan, founder of Cyberstarts, critiques the current state of venture capital, describing it as imbalanced with excessive cash inflows leading to inflated valuations. He cites examples where entry prices for investments soar to $100-$150 million post-money valuations, which could result in wasted capital.
Raanan shares observations from the cybersecurity sector, stating that every year, 350-400 new teams are funded across the US, Israel, and Europe, but only 1-2 out of every 150 companies become unicorns. The year 2021 was an anomaly with seven unicorns emerging, which is not the norm.
He emphasizes the need for early-stage investors to adopt a greedy and selfish mindset to succeed. According to him, the growth trajectory is a more significant indicator than margins for early-stage startups, as rapid growth often ensures continued expansion.
Raanan points to companies like Wiz and Sierra in his portfolio, illustrating how swift growth can lead to substantial success. Wiz, in particular, grew from $1 million to $24 million in a single year, showcasing the importance of a strong growth rate.
Discussing the challenges of engineering growth, Raanan warns against low yield in sales and marketing spend. While gross margins matter for healthy businesses, they are secondary considerations for early-stage companies still finding their footing.
Public market valuations are low, with companies like Monday and Wix trading at minimal multiples. Raanan views going public as a branding event rather than a financial milestone, emphasizing the importance of secondary sales to provide liquidity and retain talent.
Cyberstarts established an Employee Liquidity Fund, conducting its first secondary program with Sierra, involving millions of dollars and hundreds of employees. This strategy helps return capital to limited partners and maintain talent within the firm.
Raanan reflects on the venture capital profession's difficulties, noting that it can take 5-6 years to assess success. He prioritizes investing in strong teams and deals, learning from experiences at Sequoia Capital, and valuing his competitive drive more than the fear of failure.
Key Insights
- The venture capital market is currently flooded with cash, leading to high post-money valuations and potential wastage. Gili Raanan notes that entry prices for some deals can soar as high as $150 million.
- In cybersecurity, despite 350-400 new teams being funded annually, only a small fraction achieve unicorn status. This indicates the sector's competitiveness and the rarity of reaching such valuations.
- Raanan argues that growth rates are more critical than margins for early-stage companies. He cites Wiz's rapid growth from $1 million to $24 million in a year as evidence of how strong growth can lead to continued success.
- Secondary sales and employee liquidity are essential for retaining talent and returning capital to limited partners. Cyberstarts has implemented an Employee Liquidity Fund to provide annual liquidity, akin to public market conditions.
View all The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch recaps