Veteran venture capitalist Aileen Lee has highlighted a growing crisis in the startup ecosystem, where unicorn companies are facing unprecedented challenges due to a mass exodus of investors and board members who backed them during the zero-interest-rate policy (ZIRP) era.
Speaking on the StrictlyVC Download podcast, Lee revealed how the recent boom-and-bust cycle has left numerous startups in a precarious position, not only struggling with inflated valuations but also dealing with the departure of their original champions and supporters.
The situation is particularly concerning as many companies that raised substantial funding during the Covid-19 pandemic are now finding themselves “orphaned” by their investors.
Lee pointed out that this abandonment isn’t limited to junior investors who left their firms; even senior general partners who led initial investments have stopped attending board meetings while remaining at their firms.
“All the people who were hired at these venture firms during the ZIRP era made a bunch of crappy investments,” Lee explained, noting that limited partners’ money “basically just got thrown down the drain because the people in the venture jobs didn’t stick around long enough to see if the companies were successful.”
The problem stems from a fundamental breakdown in the traditional venture capital apprenticeship model. During the pandemic-driven investment boom, many new investors received minimal training or mentorship before being given significant investment authority. This lack of proper due diligence and oversight has now created a ripple effect throughout the startup ecosystem.
The consequences of this investor exodus are particularly severe for unicorn companies – private startups valued at over $1 billion. These companies are finding it increasingly difficult to secure follow-on funding or develop exit strategies, largely due to the absence of engaged board members and strategic guidance.
Jason Lemkin, another prominent venture capitalist, raised concerns about the fiduciary responsibilities being neglected. “Millions and millions are invested by pension funds and universities and widows and orphans, and when you don’t do any diligence on the way in, and you don’t do continual diligence at a board meeting, you’re kind of abrogating some of your fiduciary responsibilities to your LPs,” he stated.
The situation has created a complex dynamic where limited partners, who invest in venture capital funds, are hesitant to criticize powerful fund managers for fear of being excluded from future investment opportunities. This silence perpetuates a cycle of inadequate oversight and accountability.
Looking ahead, this crisis could reshape how venture capital firms approach investment decisions and board governance. It also raises important questions about the need for more robust due diligence processes and increased accountability in the venture capital industry.
The current situation serves as a cautionary tale for the startup ecosystem, highlighting the importance of sustainable growth, proper investor engagement, and the need for experienced guidance in building successful companies.
