By Andreas Ramos, February 13, 2025
I came to Palo Alto in 1992 and worked in Silicon Valley (SV) at many startups that were funded by venture capital (VC). I built several startups and been on the board or an advisor to many more. I've written books about Silicon Valley and startups. What is the Silicon Valley venture capital (SV VC) business model ? It promises innovation and wealth, but what does it actually do? What are its goals? How does it work? What are the problems?
10X Returns
- The goal of venture capital is exit events (acquisition or IPOs) that produce large returns to investors. This has several steps: A) Raise funding by making wild promises to investors; B) Work with mergers and acquisitions (M&A) and make wild promises to large companies so they buy the startup; C) Appoint a business school buddy as CEO; D) Fire the founders and staff and seize their stock; and E) Do a quick exit (sell the company). Investors get 10X (or more) return on their investments, so they’re happy. Founders are furious and staff is cheated, but who cares?
- SV VC give funding to startups that are likely to produce 10–100x returns on investment (unicorns). Only 0.7% of VC-backed startups reach $1B+ valuations. There is no intention to build sustainable companies.
- Startups burn cash to chase metrics such as user growth or profitability, leading to disasters such as WeWork (collapsed from $47B to $4B) or Theranos (fake products).
- VCs accept a 90% failure rate which wastes talent, capital, and social trust.
- VCs force founders to pivot to chase quick-return ideas, which often leads to failure. Quibi raised $1.75B for short-form video and imploded in 6 months.
- The SV VC business model isn’t broken: it does precisely what it intends: create wealth for large investors.
SV VC: No Innovation
- VCs fund safe bets (SaaS, apps) where they can get large returns.
- VCs give funding to copycats. 35% of 2023 VC funding went to AI/ML startups. 50,000 "AI startups" are trivial ChatGPT wrappers. Investors and subscribers don't realize these are trivial tools.
- Google, Facebook, and similar, along with Silicon Valley marketing, support the SV VC model. They make it possible and promote it.
- VCs ignore hard tech (biotech, energy), which gets less than 10% of VC funding. Major problems such as climate or healthcare are ignored. Only 1.9% of 2022 VC dollars was invested in climate tech, despite the urgency.
SV VC: Bad for Staffers
- The stocks for early staffers is diluted as the VCs do multiple funding rounds. The employees' stock becomes worthless. Employees don't understand this.
- VCs, investors, founders, etc. know this will happen to staffers, but don't warn them. They let staffers believe in future wealth. They are taking advantage of staffers’ misunderstanding of what is really going on.
- 543 startups shut down in 2023 (Crunchbase).
- 60% of unicorns are worth less than their peak valuation.
- Over 260,000 tech workers were fired in 2023 as VCs chased profits.
- Uber raised $25B in funding over 14 years, which enriched VCs while Uber drivers earned poverty wages.
SV VC Goes Global
- Silicon Valley’s playbook has been copy-pasted worldwide, which damages local innovation.
- India’s startup ecosystem is dominated by SV clones (e.g., Flipkart = Amazon, Ola = Uber).
- Africa’s tech hubs focus on solving Silicon Valley’s problems (food delivery apps) instead of local needs (such as clean water, gridless energy, or mobile payments).
Blind Spots
- The SV VC business model externalizes costs, which means, it doesn't pay its costs on society.
- Gig economy companies like Uber, DoorDash and Instacart don't pay minimum wage, benefits, or taxes. Workers have zero-hour countracts and unstable pay.
- When startups crash, staffers lose their stocks. Many have to leave Silicon Valley.
- Startups like Bird (e-scooters) raised $1B+ but filed for bankruptcy in 2023, leaving cities with deal with the e-waste.
- Crypto-mining companies such as like FTX and Terra/Luna waste the energy equivalent of small nations.
- The obsessive focus on potential billions has led many founders and CEOs to break the laws. A long line of CEOs get large fines or hefty prison terms
What to Do
- Silicon Valley's "Get rich quick" doesn’t work. Large institutional investment funds (insurance companies, mutual funds, banks, etc.) and a handful of very wealthy investors get rich and everyone else loses.
- Build a long-term, viable, socially responsible business. Raise funding from friends and family. Avoid VCs. Build the best product or service in your market. Build strong good relations with your team, your customers, your vendors, and society. “Get rich slow” is better.