Beyond Unicorns: A Smarter VC Model

Venture capital is the engine of modern innovation. From artificial intelligence to biotechnology, venture-backed companies have created trillions of dollars in value, redefined industries, and fundamentally changed how we live and work. For decades, the VC model – making concentrated bets on high-growth startups in the hope of finding a generational outlier – has been brilliantly effective at creating giants.

High risks, low returns

But for all its success, a stark reality lurks beneath the surface. The model is structurally a high-stakes, high-variance game, and recent data reveals the structural challenges this creates for investors, founders, and the broader ecosystem. According to Carta's Q2 2025 performance report, the venture landscape is defined by extreme outcomes and long-delayed returns.

For funds raised in 2018/19 – now relatively mature 6~7 year-old vintages – the median funds have returned 6.8~8.8% IRR, their total portfolio value range at 1.3~1.48x of invested capital (TVPI), and the actuals distributions paid back to LPs are at 0~5 cents for every dollar invested (DPI).

Although leading funds deliver outstanding returns—often exceeding the 25% benchmark reflective of their associated risk profiles—the average fund frequently fails to surpass public market performance, resulting in extended periods, sometimes over a decade, before Limited Partners (LPs) achieve significant liquidity.

The venture capital model is not broken; it is structurally narrow. Its focus on unicorn-level outcomes leaves a vast landscape of viable, sustainable businesses underfunded and forces even promising companies onto a hypergrowth path that can often prove unhealthy. The challenge for forward-thinking investors is not to replace this powerful engine but to complement it – to expand the playbook with tools that balance risk, accelerate liquidity, and build more resilient companies.

The Winner-Take-All Problem

The dynamics of venture capital are rooted in its fundamental structure, which leads to three core challenges: outlier-driven success, chronic illiquidity, and a tightening market.

1. Outlier-Driven Success

A single blockbuster investment is expected to return the entire fund, covering the losses of the other 90% of the portfolio. This power-law dynamic means value is intensely concentrated. The Carta Q2 2025 data makes this plain: for the 2017 vintage, which is the best vintage in the dataset, the top 10% of funds generated a net Total Value to Paid-In (TVPI) multiple of 4.35x or higher, probably driven by just a couple of “lucky” bets in their portfolios. The median fund, however, achieved a more modest 2.00x in 2017, while the more recent vintages at near or below 1.0x. This enormous gap between the median and the top decile highlights the immense pressure on fund managers to chase unicorns, often at the expense of other sound, mid-sized opportunities.

2. Chronic Illiquidity

The second structural challenge is the long and uncertain wait for returns. LPs commit capital for a decade or more, and cash distributions are often the last step in a long journey. This liquidity crunch has become more acute. With IPOs and large-scale M&A markets drying up in recent years, VCs have struggled to return capital to their LPs.

The data is sobering. Even for the 2017 vintage – now eight years old – the median fund has only distributed $0.30 for every dollar paid in (0.30x DPI). For the 2019 vintage, the median DPI is still zero. While VCs have recently felt the pressure to increase liquidity – with a noticeable Q2 2025 jump in the percentage of funds returning capital – the fundamental timeline remains stretched. This forces LPs to wait, tying up capital that could be reinvested into new funds and, by extension, new startups.

3. A Market Under Strain

The pressure of the current environment is visible in startup financing trends. In the first half of 2025, 38% of Series A rounds and 32% of Series B rounds were bridge rounds – stopgap financing measures rather than new primary rounds. This, coupled with the fact that the median time between primary funding rounds has been steadily increasing for years, points to a system where companies are struggling to hit the milestones needed for their next priced round.

Simultaneously, down rounds have become far more common. After peaking at over 20% through 2023 and 2024, the rate of priced rounds occurring at a lower valuation than the previous one was still a high 17.4% in Q2 2025. Historically, this figure is closer to 10%. This trend puts significant pressure on founders and can dilute early investors, further complicating the path to a positive return.

A New Tool for a New Era: The FlexUp Model

To address these structural issues, investors need a complementary model that broadens the definition of success. It must be one that reduces risk concentration, provides earlier liquidity, and expands the funnel of investable companies.

The FlexUp model, an economic and business platform, is designed to do just that by fundamentally realigning stakeholder interests from the outset. FlexUp operates on a simple but powerful principle of non-discrimination. This means shared risk, shared reward for all stakeholders, not just shareholders. It creates a framework where founders, employees, suppliers, clients, and investors call all participate in the same flexible remuneration system. And all forms of contributions (works, capital, products & services) are rewarded according to the same mechanism, based on the actual level of risk taken (on the salary, investment, or remuneration).

This works through three core mechanisms:

Structural Alignment

• Every participant in a project, from founders and employees, clients, and suppliers can have part of their compensation tied to the project's success. 
• Remuneration is distributed across multiple tranches; each assigned a distinct priority level:
• • “Firm” a guaranteed  payment,
  • “Flex” paid monthly, conditional to cash availability after paying the Firm,
  • “Credits”, paid annually, conditional to cash availability after paying the Firm and Flex
• Each stakeholder can split their remuneration across these different risk levels depending on their personal situation. Investors will generally invest in the “Credit” tranche, on exactly the same terms as the Credits invested by the other stakeholders.
• This structurally aligns incentives, transforming transactional relationships into collaborative partnerships. When everyone has a stake, the collective focus shifts from zero-sum negotiation to growing the overall pie.

Inherent Resilience

• By converting a significant portion of fixed costs into flexible ones, FlexUp makes companies resilient by design. In a downturn, instead of facing insolvency, a FlexUp company can reschedule its flexible commitments – preserving cash and giving it the runway to survive without emergency financing. 
• This provides a powerful alternative to the bridge rounds and down rounds that have become so prevalent.

Capital Efficiency

• Because suppliers and employees share risk and co-finance the business, the upfront capital required from investors to launch and scale a venture is drastically reduced. 
• This allows VCs to make a bigger impact with smaller checks, enabling them to build larger, more diversified portfolios and reduce the risk concentrated in any single investment. 
• Since the parties actually running the show are taking risks on the same terms, and since tickets sizes can be reduced, there is also a option to reduce the level of due diligence required, this reducing process cost & time, and increasing the number of companies the VCs can invest in, further increasing diversification and reducing risks.

How FlexUp Expands the Venture Playbook

FlexUp is not a replacement for venture capital; it is an enhancement that addresses VC's structural weaknesses. For VCs and their LPs, integrating the FlexUp model in their investment strategy offers four distinct advantages:

• Lower Downside Risk. By distributing risk across a wider network of stakeholders, the financial burden on the investor is lessened. The inherent resilience of the model also increases the survival rate of portfolio companies, improving the odds that they will live to see an exit or achieve profitability. This creates a healthier portfolio with fewer "zeros."
• Earlier and More Regular Liquidity. A core feature of the FlexUp model is its system of regular distributions from available cash flow. Unlike the traditional VC model, which relies on a distant exit, FlexUp provides a mechanism for investors to receive cash returns far earlier in a company’s lifecycle. For LPs grappling with the industry's DPI problem, this is a game-changer.
• An Expanded Investment Funnel. The VC model is optimized for companies that can potentially generate 100x returns. This excludes a vast number of businesses that are capable of becoming highly profitable and impactful but may not fit the unicorn mould. FlexUp makes these companies investable. It provides a path to generate strong, risk-adjusted returns from mid-sized ventures, allowing VCs to build a more balanced portfolio that combines high-risk/high-reward unicorn bets with more resilient, cash-generative investments.
• Preserved Upside. While de-risking the downside, FlexUp still allows investors to capture significant upside through profit-sharing and token distributions when a company succeeds. The model ensures that when a company in the portfolio does achieve breakout success, the VC and its LPs are rewarded accordingly, alongside the other stakeholders that made it possible: founders, employees and strategic partners (key suppliers & clients).

Conclusion: Making Bolder, Smarter Bets

Venture capital has always been defined by bold bets on the future. The challenge today is not to be less bold but to be smarter about how those bets are constructed. The data is clear: the current model creates immense value but does so with a high degree of risk, concentrated outcomes, and extended periods of illiquidity.

By aligning interests, lowering capital requirements, and building resilience at the foundational level, the FlexUp model offers a powerful way to augment the venture playbook. It enables investors to participate in a wider range of opportunities, achieve better risk-adjusted returns for their LPs, and foster a more collaborative and sustainable startup ecosystem.

Venture capital built the giants of the last 50 years. A more inclusive, resilient approach can help build the broader ecosystem for the next 50.

Glossary:

• IRR – Internal Rate of Return
• DPI - distributions to paid-in capital
• TVPI - total value to paid-in capital