Founder First, Unicorn Second: Fixing the Broken Model of Venture Capital

A data-driven approach to why investing in founders creates better outcomes than chasing unicorns.

Photo by Markus Winkler on Unsplash

Beyond the Power Law Problem

Nine out of ten venture-backed startups fail to deliver promised returns. Yet, in 2024, VCs deployed $170.6 billion chasing unicorns—feeding a system defined by hypergrowth obsession, massive failure rates, and pressure to become the next billion-dollar startup. Despite criticism of this model, it endures. Why?

It's not just inertia or greed. Investors are humans, too. They chase prestige, driven by ego, and signal status by betting on startups likely to succeed. The incentives favor swinging big—even if it means most swings miss. This model doesn't serve most founders.

To disrupt venture investing, we must redefine success beyond unicorn valuations. Sustainable, founder-centric outcomes are essential for a healthier innovation ecosystem. The current system stifles diverse approaches, wastes entrepreneurial talent, and damages the broader landscape by funneling resources to a narrow band of companies that fit an outdated mold.

The Power Law Reality — And Why It Persists

The Power Law dominates venture capital. Recent Y Combinator stats reveal 75% of returns come from 5% of investments. A 2023 Pitchbook analysis found only 1.3% of venture-backed startups reach valuations above $1 billion. This model emerged when Silicon Valley legends like Intel and Apple flourished from significant bets, but it persists due to subtle biases and entrenched incentives.

Consider investor ego. A big win is intoxicating, and investors become addicted to it. Herd mentality makes VCs pile onto trendy sectors, amplifying hype but ignoring quieter opportunities. Rarely discussed is the fear among them—fear of missing the next Airbnb—even though chasing that fear blinds them to profitable, stable ventures.

The structural problem runs deeper. Limited partners (LPs) who fund VCs reinforce these dynamics by expecting significant returns, creating a cycle where sustainable but modest growth is undervalued. Cambridge Associates data shows that between 2010-2020, only 15% of VC funds generated IRRs above 20%, yet this performance remains the standard expectation.

The Quiet Revolution in Startups

While Silicon Valley chases unicorns, a revolution brews elsewhere. Take Freshworks, a SaaS giant launched not by dropout coders, but seasoned industry professionals in Chennai, India. They built methodically, reaching $100 million ARR in 2018 with $150 million in funding—a capital efficiency ratio surpassing most Silicon Valley companies. They maintained 40%+ year-over-year growth while achieving profitability years before their IPO.

Meanwhile, startup hubs like Lagos, Nigeria are thriving. By 2022, Flutterwave processed over $16 billion in transactions and reached profitability in three major markets while maintaining over 200% year-over-year growth. Its $3 billion valuation is based on real economic value generated across 33 African countries.

Startup economics have transformed modern tools. Stripe Atlas has democratized global company formation, launching over 50,000 since its inception, with incorporation costs reduced from thousands to hundreds of dollars. No-code platforms enable non-technical founders to create viable products at a fraction of traditional costs. Webflow-built businesses generated over $4 billion in revenue in 2023, with many achieving profitability without traditional VC backing.

Comparing Models: Going Beyond Generalizations

Yes, the Power Law model still works—but for fewer startups. Recent CB Insights studies indicate nearly 90% of VC-backed ventures fail to achieve desired returns—a statistic that undermines the traditional model. When nine out of ten funded ones fail, we're not witnessing a functioning system with acceptable losses, but a fundamentally flawed approach that needs reimagining.

Enter the Founder-First Model. Instead of aiming for billion-dollar exits, founder-first investors focus on revenue stability, founder control, and profitability. A striking case is Mailchimp—bootstrapped to a $12 billion acquisition by Intuit without venture funding, growing to $800+ million in annual revenue while maintaining profitability throughout its 20-year journey. This contrasts WeWork's hype-driven implosion under traditional VC pressure, which burned through $11 billion before its collapse.

Critics say the founder-first model sacrifices upside potential. Evidence shows sustainable, aligned incentives produce consistent returns, better mental health, and lasting businesses. Data supports this: First Round Capital's analysis found diverse founding teams delivered 63% better returns than all-male teams, with slower but sustainable growth correlating with long-term success.

Creating a More Aligned VC Ecosystem

Sustainable growth isn't theoretical. Patagonia reached $1.5 billion in annual revenue by prioritizing longevity over quick wins while maintaining profit margins above 10%, opposed to hypergrowth. Alternative funding platforms, like TinySeed and Earnest Capital, are thriving by aligning investor and founder interests—TinySeed's first fund has seen 85% of portfolio companies grow revenue, with an average growth rate of 65% annually.

New success metrics must replace vanity metrics. Consider revenue per employee (Shopify maintains ~$2 million/employee), net promoter scores (sustainable businesses typically have 40+ NPS), and founder satisfaction indices. These better reflect long-term sustainability and impact.

The Shared Earnings Agreement by Calm Company Fund illustrates practical incentive alignment. It allows founders to keep control while investors share returns through profits rather than exits. Their portfolio companies deliver an average of 20% annual returns through profit sharing, without requiring founders to sell. Similarly, steward-ownership models that protect company mission regardless of investor pressure are gaining traction among purpose-driven founders. Zeiss and Bosch have demonstrated this model's viability at scale for decades.

Action Items: Recommendations for Industry Transition

This section provides strategies for both sides of the startup equation to foster a healthier ecosystem moving forward:

For Founders:

• Evaluate investors by their alignment with your vision, not just valuation. Request references from past investments that didn't become successful.

• Prioritize sustainability. A loyal customer base is more valuable than hypergrowth metrics.

• Basecamp achieved $25+ million in annual revenue without external funding by focusing on customer satisfaction, with 50 employees.

• Consider revenue-based financing or crowdfunding that do not require giving up control.

• Join communities focused on sustainable growth (Indie Hackers, MicroConf) to build networks outside traditional VC circles.

For Investors:

• Build portfolios that don't rely solely on outliers. Invest broadly in stable, consistently growing ventures.

• Develop due diligence that values founder health, team cohesion, and sustainable unit economics.

• Embrace patient capital. Atlassian’s success under investment terms and $2.8 billion revenue without rapid growth highlight its efficacy.

• Structure alternative financial agreements like profit-sharing or revenue-based financing that align interests without demanding rapid growth.

• Challenge your biases by evaluating founders from diverse backgrounds and unconventional startup hubs.

Addressing Common Concerns

"But what about the next Google or Facebook?"

These outliers represent less than 0.1% of startups. Building a system around extreme ones makes little sense for the ecosystem. Many tech giants like Microsoft and Apple achieved scale with modest initial investment—Microsoft's only venture round was $1 million from David Marquardt in 1981. A balanced approach doesn't eliminate moonshot potential; it doesn't sacrifice the other 99.9% of companies to pursue it.

"Don't traditional VCs provide valuable expertise and connections?"

Value-add is real but increasingly democratized. Today's founders access global mentor networks, online communities, and specialized expertise without traditional VC relationships. Companies like GitLab have shown that distributed, community-oriented growth can scale effectively without centralized networks.

"Can these alternative models generate adequate returns?"

The data suggests yes. Between 2015-2023, bootstrapped companies acquired delivered an average 5.2x return to founders, compared to the average venture-backed exit of 3.9x for investors (factoring in dilution). While the founder-first model lacks occasional 100x returns, it produces more consistent winners and fewer losses—better overall portfolio performance with reduced risk.

Emerging Trends Driving the Shift

Several developments suggest this transition is speeding up:

1. Changing LP Attitudes: Sovereign wealth funds like Singapore's Temasek and institutional investors like BlackRock prioritize sustainable growth and governance in venture capital allocation. Since 2020, ESG-aligned investment has grown 28% annually.

2. Remote Work Transformation: The post-pandemic normalization of distributed teams has reduced startup operating costs and expanded talent pools. GitLab's successful IPO as a fully remote company demonstrated this model's viability at scale.

3. AI Democratization: As AI tools reduce development costs and accelerate product creation, startup capital efficiency is improving. Companies can reach product-market fit with 40-60% less initial investment than five years ago.

4. Rise of Operator Investors: Successful founders returning as investors show greater patience and operational focus than traditional VCs. Their funds (Founder Collective, Initialized Capital) back capital-efficient companies with achievable growth trajectories.

Conclusion: Vision and Immediate Steps for an Improved VC Future

Imagine a venture ecosystem where sustainable innovation thrives alongside unicorns. In this environment, founders aren't forced onto unrealistic trajectories, and stable, impactful companies succeed.

Founders must demand aligned funding structures. Investors need to shift incentives toward sustainable returns. Accelerators and incubators should redesign programs for diverse business models. Media outlets and thought leaders must celebrate success stories as enthusiastically as unicorns.

All stakeholders—not just founders or investors—share responsibility. By challenging outdated assumptions, we can create a startup environment that encourages sustainability, founder wellbeing, and genuine value creation.

I've witnessed this transformation firsthand. I've seen the relief and renewed creativity when dozens of founders who felt trapped in the unicorn-or-bust mindset discover pathways to build on their own terms. The financial and human outcomes are clear: sustainable growth produces more value and less burnout.

In ten years, we will transform our innovation landscape from unicorn-obsessed factory hubs into diverse, globally distributed communities where startups of all sizes create lasting impact, generate sustainable returns, and drive progress across sectors and regions.

______

Did this post resonate with you? If you found value in these insights, let us know! Hit the 'like' button or share your thoughts in the comments. Your feedback not only motivates us but also helps shape future content. Together, we can build a community that empowers entrepreneurs to thrive. What was your biggest takeaway? We'd love to hear from you!

If you're a software founder looking to turn your idea into a successful startup, Wildfire Labs can help you get there in just 6 months. Check out our program at https://wildfirelabs.io to learn more about our proven process, expert mentors, and the development resources we provide to help you build and scale your company. If you have any questions or need assistance with your startup, don't hesitate to reach out to us at info@wildfirelabs.io.