Knightsbridge Executive: VC Is in for a Wake-Up Call
- Sophie Brown
- 7 minutes ago
- 3 min read
Tor Martin Flesvik, Partner and Head of Equity Research at Knightsbridge Associates, declares that the venture capital (VC) industry is undergoing a profound and overdue reckoning In his recent writing titled “A Moment of Reckoning for VC,” Flesvik critiques the excesses of the past decade and outlines the systemic challenges now confronting the sector.
The end of easy money
Flesvik attributes the current crisis to the unchecked exuberance of the 2020–2021 period, when an influx of capital led to inflated valuations and a proliferation of so-called “unicorns.” He argues that the core principles of venture investing backing a select few transformative companies while accepting high failure rates were abandoned in favor of indiscriminate growth. This shift was fueled by the entry of non traditional investors, such as hedge funds and mutual funds, who lacked the discipline and long-term perspective essential to venture capital.
“Too many dollars were chasing too few exceptional companies,” Flesvik writes, resulting in a market “overfed and undernourished.” The subsequent rise in interest rates exposed the fragility of many startups, leading to a collapse in liquidity and public market valuations.
“The best firms will be fine,” Flesvik concludes. “The Sequoias, the Bessemer Ventures, the Accels — they’ll adapt. But the industry as a whole must shrink to fit reality.”
The Rise of the “Zombie” Startup
This phenomenon is not isolated. According to a report by NextWave Partners, the number of new unicorns dropped dramatically to just 102 companies in 2024, down from 629 in 2021, reflecting broader systemic challenges in the venture capital ecosystem.
A particularly stark warning in Flesvik’s article concerns the emergence of “zombie” startups companies that secured funding during the boom years but now lack viable paths to profitability or exit. These firms are “too small to scale, too big to wind down,” he notes, and are often sustained only by previous investments made at inflated valuations. With limited prospects for additional funding, many are facing a slow decline.
Flesvik also highlights a significant shift in institutional investor behavior. Limited partners (LPs) are reassessing their allocations to venture capital, drawn by the appeal of safer, higher-yielding investments like government bonds. “Venture is a long-duration, illiquid bet with binary outcomes,” he observes, a proposition that has become less attractive in the current macroeconomic environment.
This retrenchment is leading to a contraction in the venture capital industry. Even top-tier firms are downsizing, and emerging managers are struggling to raise new funds. The model that thrived on abundant capital and rapid exits is being replaced by one that demands greater discipline and selectivity.
A Return to Fundamentals
Despite the challenges, Flesvik sees an opportunity for the venture capital industry to recalibrate and return to its foundational principles. He envisions a more disciplined approach, where capital is allocated to truly transformative companies with sustainable business models. This perspective aligns with broader industry sentiments, as highlighted in a recent Forbes article noting that 2025 is poised to be a significant year for venture investing, with a focus on backing transformative ideas and supporting companies on their journey from startup through scale-up to genuine global impact.
“The best firms will be fine,” Flesvik concludes. “The Sequoias, the Bessemer Ventures, the Accels—they’ll adapt. But the industry as a whole must shrink to fit reality.”
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