The latest Carta report, along with Warren Buffett’s significant warning about the stock market valuation exceeding 200% of the US GDP, raises serious concerns about the future of the venture capital (VC) industry.

It’s becoming increasingly evident that the VC industry, as it currently operates, may not endure much longer. This isn’t just about the Carta report’s findings—I actually disagree with their methodology. The J-curve clearly shows that to accurately assess VC returns, one needs a study period of at least 6 years, ideally 8-10 years, to capture the full picture.

However, this discussion is about the foundational principles of the VC industry, which is fundamentally a game of mathematics and numbers—areas where AI increasingly outperforms human capabilities. This technological shift threatens to render traditional VC professionals obsolete.

Moreover, I’m skeptical of the indexed investment approach that has become an industry standard, largely popularized by entities like Y Combinator. This approach has inflated market valuations and attracted participants who lack the necessary skills and resilience to build successful companies. The global innovation ecosystem is now flooded with mediocre entrepreneurs, and the widespread adoption of indexed investing has only exacerbated this problem, leading to its failure for the majority of the VC industry.

Investing in this manner might be easier and less labor-intensive, but who ever said that venture capital should be an easy, high-return industry based on an indexed approach? The truth is, it’s a high-return business only for those who adhere to certain principles:

• Invest in industries where you possess deep expertise.
• Invest where you have a robust global support network.
• Invest where you and your network can add significant value.
• Invest where you can secure the next rounds of investment.
• Invest where you have access to strategic investors and M&A opportunities.

While junior experts might execute indexed investments, the true transformative power of VCs lies in their knowledge, experience, and networks. This is what’s currently missing in the industry.

The proliferation of VCs, driven by an indexed approach, has pushed valuations to unsustainable heights, and we’re now facing the consequences of this ill-considered strategy. Limited partners (LPs) are wary but continue to back the same players who led us into this predicament—a scenario akin to a “Stockholm syndrome” in VC, where money remains tied up with the very causes of its underperformance.

Many VCs have shifted from being true value providers to mere commissioners, and LPs continue to invest in these funds, despite evidence that an indexed approach is ill-suited to the startup world. Unlike capital markets, where companies that reach IPO level have proven success stories, startups often don’t have this track record, making an indexed approach risky and often ineffective.

This is why we founded the Founders Games (www.foundersgames.org) 15 years ago, as a counterpoint to the “indexed approach.” Out of 3,000 to 5,000 growth-stage applications each year, only 12 make it to the finals, representing just 0.2% to 0.3% of all applicants. These numbers underscore the importance of prioritizing value over volume, even at A and B investment rounds. We’ve proven this approach works, with a 15-year track record of success.

The current economic climate may briefly allow indexed investments to succeed due to the decreasing number of startups being founded. But don’t be fooled—the industry requires a complete reset, with a renewed focus on creating true value for both LPs and founders. VCs should not operate like bankers or hedge fund managers, indexing their way through investments. Instead, they need the skills, commitment, and dedication to grow companies from scratch to a potential IPO or M&A, with money being just one of many necessary ingredients.

Key factors for success include:

• Access to top talent worldwide.
• A strong reputation and track record for supporting portfolio companies.
• A deep network within specific industries and among family offices with expertise in those industries.
• A network of industry-specific investors who can participate in subsequent investment rounds.
• Access to data for benchmarking. AI is increasingly turning industry verticals into platform businesses where the winner takes all. Identifying talent is not enough; it’s crucial to ensure that a company has the potential to become the dominant player. The lack of global benchmarking data can lead to misguided investments that might fail when a global market leader enters the scene.

As an LP, I’m acutely aware of these trends and make investment decisions accordingly. As Managing Director of a publicly listed investment company focused on high-growth (A, B rounds) companies, we only invest in a select few winners from the Founders Games. We ensure that we choose the best of the best, who are not only financially successful but also driving social and environmental change. This focus on impact provides an additional layer of security, as impact-driven companies tend to attract more capital when other factors are equal.

Dr. Plamen Russev
LP/VC, Founder Webit Investmet Network (BSE: WIN) 

About Dr. Plamen Russev

Dr. Plamen Russev (www.russev.com) is a seasoned technology and investment expert with over three decades of experience. He is the visionary founder of the Webit global community and events.

Each year, coinciding with the World Economic Forum in Davos, Dr. Russev awards $6 million at the Grand Finale of the Founders Games (www.FoundersGames.org), the world’s most competitive growth-stage program for companies that drive social and environmental impact alongside business success.

Committed to democratizing investments in high-growth impact companies, Dr. Russev publicly listed the Webit Investment Network (WIN). WIN is an evergreen investment company with a Right of First Refusal (ROFR) of up to $6 million to invest in each semi-finalist and finalist of the Founders Games.

Currently, WIN’s portfolio includes six impact-driven companies. It offers a unique opportunity for Limited Partners (LPs) to invest in a global portfolio of top-performing, high-growth companies. Investors benefit from the liquidity provided by the stock exchange and receive dividends from every exit event within the WIN portfolio.

WIN is announcing its next capital increase call in order to invest in the next batch of Founders Games winners. 

Among the portfolio so far are some of the most impactful companies in methane reduction (CH4 Global), the worlds biggest precise pollination company (BeeHero), the leading hearth digital twin company (InHeart), the new material company (Elephant in a Box), the leading 360 degree immersive content company (VUZ), the leader in AI education in Middle East (ISchool).