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.
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.
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.
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.
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.
Keep pulling the thread on Gili Raanan.