The Evolution of the Startup Ecosystem: Riding the Waves of Capital and Innovation
By: Sean Maier, Senior Associate, WestRiver Group
“Adapt or perish, now as ever, is nature’s inexorable imperative."
- HG Wells
This is the first of a three installment education series by WestRiver Senior Associate Sean Maier.
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The past four decades of technological innovation have given us PCs, internet, mobile, cloud, and now, AI. The confluence of these transformative “waves” or “platform shifts” has resulted in an accelerated adoption curve— the world wide web needed 7 years to reach 100M users in the 90s, but ChatGPT only needed 2 months in 2022. This acceleration marks a fundamental shift in how new technology permeates our lives and reshapes industries.
This rapid evolution, coupled with globalization and remote work, has significantly reduced the cost of starting and scaling software companies. The democratization of technology has lowered barriers to entry, allowing more diverse founders to bring their ideas to life. While these platform shifts were happening, the U.S. experienced an extended period of declining interest rates and federal stimulus, which led to an explosion in the number of venture-backed startups and accompanying investment dollars.
By the end of 2023, there were 54,000 venture-backed U.S. startups, a 4.3x increase from 12,522 in 2010. Funding grew as well, with U.S. venture deal value reaching $345.45B in 2021 before coming back down to $170.6B in 2023, an increase of 10.6x and 5.3x, respectively, relative to $32.45B in 2010.
During COVID, we saw near-zero interest rates (ZIRP) and extraordinary levels of federal stimulus that created an environment bursting with incredibly cheap capital. Technology companies also became essential to the continuity of businesses and our lives, which led to a surge in covid-driven demand and rapid growth, that many believed would continue for the foreseeable future. However, when discount rates are zero it becomes virtually impossible to understand the intrinsic value of a company because the value of highly uncertain future cash flows are at parity with the value of cash flows today. This undiscounted extrapolation of rapid growth drove valuation multiples to distorted heights, which incentivized companies to prioritize growth above all else.
The valuation distortion within the private market is evident in the historical count of unicorns (startups valued at $1B+). The number of unicorns grew from 39 in 2013 to 532 in 2023. Yet, only 7% have exited at a $1B+ valuation, and ~60% were last valued during the 2020-2022 period. This disconnect from reality is now creating challenges for many startups and investors.
The lessons from this historical context are highly instructive and underscore the importance of grounding oneself in the fundamentals of building a strong business capable of weathering macroeconomic storms. This means creating an environment with enough constraints to force rapid iteration, focus, and testing central to finding product market fit before investing in growth. Too much capital too soon can be antithetical to that endeavor, while also masking unsustainable growth and/or poor unit economics.
This capital market shift does not and will not slow the pace of innovation. Instead, it may lead to more thoughtful, impactful startups that solve real problems and create durable, long-term value. The next wave of successful companies will be those that adapt to this new reality and strategize accordingly.