20VC with Harry Stebbings• Mar 28, 2026• 58:25Interview

Why Margins Don't Matter for Early-Stage Startups | Gili Raanan

From 20VC with Harry Stebbings

Gili Raanan•Founder, Cyberstarts & Seed Investor

Executive Summary

The venture capital business model is fundamentally broken for most participants due to misaligned incentives, inflated entry valuations, and a low probability of success, leading to a massive waste of capital.
In cybersecurity, despite 350-400 new startups being funded annually, the likelihood of becoming a unicorn is extremely low (~1%), with 2021 being a significant outlier year that skewed investor perception.
Exceptional startup growth is defined by a rigorous pace of 4x, 4x, 3x, 3x year-over-year growth in *new* Annual Recurring Revenue (ARR) for the first four years of selling.
IPOs should be viewed as strategic branding and marketing events to signal market leadership and stability to customers, rather than as primary financial or liquidity events for founders and employees.

9 quotes

Concerns Raised

The venture capital model is unsustainable for most players due to high valuations and low success rates.
The vast majority of the capital flowing into VC will be wasted.
Public market multiples for tech companies are low, potentially due to expectations of disruption from AI.
The long-term margin profile and unit economics of AI-native businesses are still unknown and a potential risk.

Opportunities Identified

Investing with disciplined, top-tier funds that can navigate the broken VC market.
Backing exceptional cybersecurity companies that can achieve breakout growth despite low industry-wide success rates.
Creating innovative liquidity solutions like dedicated secondary funds for employees of private companies.
Identifying founders with strong pre-existing chemistry and a relentless drive to win.

Key Themes

The Broken Venture Capital Model

Gili Raanan argues that the venture capital industry as a whole is not a functioning market. The massive influx of capital has driven entry prices to unsustainable levels, while the actual number of successful outcomes remains statistically tiny, setting up the ecosystem for a catastrophic loss of capital for most LPs and VCs.

This challenges the prevailing narrative of venture capital as a universally high-return asset class and urges LPs and founders to be highly selective about their partners, as only a very small number of elite firms are likely to succeed.

Cybersecurity Market Realities

The cybersecurity sector sees a steady stream of 350-400 new startups annually, but the hit rate is incredibly low. In recent years (2023-2024), only one or two Israeli cybersecurity companies reached unicorn status annually, highlighting that the probability of success is around 1% and that high entry valuations are not justified by the outcomes.

This provides a data-driven, sobering perspective for investors and founders in the cybersecurity space, emphasizing the need for exceptional execution and differentiation to overcome the low odds of building a category-defining company.

Defining and Measuring Exceptional Growth

The benchmark for an exceptional, top-tier company is achieving a 4x, 4x, 3x, 3x year-over-year growth trajectory in new ARR. This framework provides a clear, quantifiable measure of greatness that transcends market hype and focuses on the fundamental velocity of new business acquisition.

This offers a concrete metric for investors and founders to evaluate early-stage performance, distinguishing true breakout companies like Wiz from the rest of the market and setting a high bar for what constitutes a venture-scale success.

The Strategic Role of IPOs and Liquidity

An IPO is not a liquidity event but a branding and marketing exercise to establish a company as a permanent, stable market leader. True liquidity for employees and early investors must be created through other mechanisms, such as structured secondary programs, which Cyberstarts has implemented via a dedicated employee liquidity fund.

This reframes the purpose of going public and highlights the growing importance of private market liquidity solutions to retain talent and manage stakeholder expectations in a world where companies stay private for longer.

AI Business Models and Unit Economics

There is not yet enough data from healthy, profitable AI businesses to determine the appropriate vital signs or unit economics, particularly regarding gross margins. While high gross margins are essential for a healthy cybersecurity business, it's unclear if the same rules will apply to AI companies due to high ongoing inference costs.

This signals caution for investors evaluating AI startups, suggesting that traditional SaaS metrics may not apply and that the long-term profitability profile of AI-native businesses remains an open question.

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Topics

Venture Capital Cybersecurity Seed Investing Startup Valuations ARR Growth Growth Metrics Unicorns Market Dynamics Founder Psychology Investor Psychology IPOs Liquidity Secondary Markets Portfolio Management Cyberstarts Wiz

Processed Apr 9, 2026 yt-dlp + mlx-whisper + Gemini