Overview of 20VC: The Venture Model is Broken — Gili Raanan (Cyberstarts)
In this episode Harry Stebbings interviews Gili (Gili Raanan), founder of Cyberstarts and long‑time Sequoia partner, about the current state of venture capital (VC), what works (and what doesn’t) in early‑stage investing, and how founders and investors should adapt — especially in cybersecurity and an AI‑driven world. Gili argues that the venture model is structurally uneven today (high entry prices, big funds, limited winners), that growth velocity is the most important predictor of success, and that investors need to be “selfish and greedy” in early stages while being realistic about margins, talent retention, and liquidity solutions.
Key takeaways
- The venture asset class is uneven by design — a small number of firms capture outsized returns. Expect winners and losers; as a whole, VC “doesn’t work” in the sense that returns are not evenly distributed.
- Entry prices and seed/post‑money valuations have risen dramatically (many deals now $100–$150m post). That increases risk because underlying success rates haven’t meaningfully improved.
- Cybersecurity market dynamics:
- Roughly 350–400 new cybersecurity teams are funded annually across major ecosystems; Israel accounts for a large portion (~40%).
- Likelihood of a breakout (unicorn) from these pools remains low — on the order of ~1–2 out of ~150 in a given country cohort.
- Growth velocity (trajectory, not just size) is the most predictive signal of long‑term success. Exceptional companies compound rapidly; Gili cites frameworks like successive multipliers on new ARR (e.g., 4x,4x,3x,3x) as indicators of great outcomes.
- Margins still matter in cybersecurity — but for very early stage companies they are often deprioritized. Investors focus on product/market fit and growth now, and talk margins later.
- AI is changing cost profiles (e.g., inference costs), but it’s too early to generalize which margin profiles are sustainable across AI businesses.
- Public market multiples reflect expected growth trajectories. If growth is perceived to slow (or be disrupted by automation), multiples compress.
- Extended private markets and secondaries are functional and valuable: they can retain talent (employee liquidity) and provide LPs returns without forcing premature IPOs.
- Investors should be “selfish and greedy” in early stage — that’s not a moral failing but rational given uncertainty. Founders must choose financing partners carefully.
Topics discussed
- State of VC today: large funds, big entry prices, distributional returns
- Cybersecurity funding patterns, market size, and hit rates
- Examples of portfolio outcomes: Wiz (decacorn), Island (enterprise browser) and an API‑security company that exited to Akamai
- Growth as the primary predictor: how and why fast trajectory persists
- Margin dynamics in the age of AI: inference cost, COGS, and difficulty of benchmarking healthy AI businesses
- Public vs private markets: IPO as branding, not liquidity; role of secondaries
- Talent retention: annual secondary/employee liquidity programs
- Partnership building and how to scale a venture firm’s culture
- Lessons learned, regrets (selling early secondary stakes), and personal reflections
Notable quotes & insights
- “The venture business as a whole doesn't work. It doesn't work. It shouldn't work. Returns distribution are not divided equally between players.”
- “We are exercising the science of exceptions.” (Most of VC’s value comes from a small set of outliers.)
- “We need to be selfish and we need to be greedy. Those are good traits for an early‑stage investor.”
- “Trajectory velocity — growth rates — are the most important indicators for a healthy business.”
- “IPO is not a financial event. It’s a branding event.”
- On secondaries: “The antidote for that market built‑in weakness is the secondary… a recurring program where we provide liquidity to their employees every year.”
Actionable advice / Recommendations
For founders
- Pick financing partners carefully — elevated entry prices change probabilities and dilute optionality.
- Prioritize product/market fit and trajectory velocity over early margin optimization, especially in cybersecurity.
- Plan for talent retention early: design equity schedules and consider programs that enable employee liquidity later.
For investors (early stage)
- Be selective and willing to be “selfish” in early rounds — you don’t have full information and must protect downside.
- Focus on growth velocity and whether the growth is engineered or organic; durable high velocity is a strong signal.
- Use secondaries strategically to help portfolio talent retention and to return capital to LPs without forcing exits.
- Allow partners to play to their strengths (don’t force a single mold across the partnership).
For LPs / allocators
- Be realistic about fund size and entry price risks across the managers you back; diversification across vintage and strategy is prudent.
- Understand that secondary programs and extended private markets can be functional tools for liquidity and talent retention.
Quick practical frameworks Gili shared
- Growth velocity lens: evaluate new ARR growth year‑over‑year and look for compounding multipliers (e.g., 4x, 4x, 3x, 3x on new ARR as a heuristic for exceptional companies).
- Talent liquidity program: set up recurring secondary/tender offers for employees annually to reduce attrition as companies mature privately.
- Partnership management: emphasize each partner’s unique strengths rather than constraining everyone to a single operating model.
Quickfire / human highlights
- Biggest regret: selling early secondary shares in some winners (e.g., sold Wiz stock early).
- Hardest day: shutting down the first company he’d invested in.
- Changed view in last 12 months: greater appreciation for founder chemistry — relationships and history between founders matter more than he previously emphasized.
- Motivation: “Thrill of winning” over fear of losing.
- Biggest mentors: the decade at Sequoia and partners there shaped his formation as an investor.
Final perspective
Gili’s view is pragmatic and contrarian: significant opportunities exist (especially in cybersecurity), but capital and price dynamics have skewed probabilities. Success now requires ruthless selection, focus on growth velocity and product‑market fit, sensible use of capital, and operational solutions (like secondaries) to retain talent. Investors should learn from tradition but adapt — be greedy where it counts, and humble in recognizing uncertainty.
(Transcript contains some names/terms that may be transcription artifacts; the summary preserves core arguments and examples discussed.)