Why Margins Don't Matter for Early-Stage Startups | Gili Raanan

Market Dynamics and Structural Risks

• Gadi Reinman, founder of CyberStarts, predicts a "serious catastrophe" for many venture capital players due to an unbalanced market where inflated entry prices (100x+ ARR) will cause significant capital waste.
• The venture business, by design, does not work for the majority; returns are not distributed equally, and the expectation of universal success leads to guaranteed disappointment.
• Cybersecurity saw approximately 4,000 new startups in the past decade, with an estimated 4,000 to 5,000 expected in the next decade, yet unicorn creation rates have plummeted to 1–2 companies in 2022, 5 in 2024, and only 6–8 in 2025 globally.
• The 2021 outlier, where 7 cybersecurity unicorns emerged, is viewed as an artificially inflated bubble that has not persisted, skewing investor mindset regarding probabilities.
• In the Israeli cybersecurity market (representing ~40% of the global sector), the success probability for a new company remains a static 1% to 2% (1 or 2 out of 150 funded teams), regardless of rising entry valuations.
• Reinman argues that while mega-companies like CrowdStrike and Palo Alto Networks validate larger outcome sizes, these exceptions do not alter the fundamental probability facts that working against early-stage investors.
• There is a misalignment between increasing fund sizes (e.g., $10B funds) and the ability to generate venture-like economics, as massive capital inflows do not guarantee success when entry prices are inflated.
• Reinman advocates for "selfish" and "greedy" investing strategies for early-stage investors, prioritizing price discipline over the fear of missing out on inflated deals.

Investment Philosophy and Company Growth

• Reinman identifies company growth velocity as the single most critical indicator of a healthy business, noting that once a rapid growth rate becomes part of a company's "DNA," it rarely slows without a significant external event.
• He cites "Zig Zag" growth patterns as common, referencing a portfolio company that hit zero sales for two quarters before recovering to sell $12 million in new business within the following 12 months.
• Two specific portfolio examples contrast market expansion: "No Name" (API security) plateaued because its initial market was a niche segment, whereas "Island" (enterprise browser) achieved a $5B valuation by creating a new market in a sector that initially seemed non-existent.
• Reinman rejects the fear that excessive capital dilutes founder focus, stating he is not in the business of "babysitting founders" and trusts that capable teams can manage large cash cushions effectively.
• Regarding AI and margins, Reinman expresses skepticism about current profitability but maintains that high gross margins remain a vital sign for healthy cybersecurity businesses, though he admits the industry lacks sufficient data on AI's long-term margin profiles.
• He challenges the traditional "Rule of 40" and fixed growth multiples, suggesting that while exceptional companies can grow from 5x to 50x to 200x ARR in two years, the definition of "greatness" remains defined by sustained, high-velocity growth rather than specific multiples.
• Reinman views IPOs primarily as a branding and longevity signal rather than a financial liquidity event, noting that public markets often shackle founders with restrictions that hinder flexibility.
• He predicts that low public market multiples for companies like Monday.com and Wix stem from market expectations that growth will decline due to AI displacement, though he believes these multiples will rebound if growth trajectories remain robust.

Secondary Markets and Talent Retention

• Reinman identifies the extension of private markets and the use of secondary sales as essential mechanisms to solve the "talent retention crisis" caused by long public market timelines.
• In a typical 4-5 year vesting schedule, high-performing employees often become fully vested before the company exits, creating a structural inability to offer competitive equity grants for retention.
• CyberStarts launched an "employee liquidity fund" to provide recurring tender offers to portfolio company employees, allowing them to diversify their wealth while staying with the firm.
• This secondary program, piloted with portfolio company Siyara, involves buying "many millions of dollars" worth of stock for hundreds of employees to maintain competitive compensation packages.
• While Reinman admits regretting an early sale of Wiz shares to generate immediate DPI for LPs, he maintains the decision was correct for the time, noting that early-stage GPs faced pressure to demonstrate liquidity to secure follow-on funding.
• He asserts that secondaries benefit the entire ecosystem by providing liquidity to employees, returning capital to LPs, and creating a more sophisticated market infrastructure.

Personal Evolution and Industry Lessons

• Reinman reflects that the venture profession is uniquely "terrible" because investors often cannot determine their competence for 5–6 years, yet it is "exciting" due to the diversity of people and continuous learning.
• He advises younger investors to learn from established figures but ultimately rely on their own "guts" to make decisions, acknowledging that no framework (like the Rule of 40) is immutable.
• Reinman's investment team at CyberStarts avoids enforcing a single "textbook" operating mode; instead, they leverage the specific relative strengths and weaknesses of each partner to create real alpha.
• He emphasizes that "founders' chemistry" is the most critical factor in his recent decision-making, prioritizing teams with deep personal bonds and proven resilience (e.g., roommates or long-term colleagues) over "spiky" individuals alone.
• Reinman cites his time at Sequoia Capital (15 years) as his primary formation period, crediting mentors like Doug Leone and Michael Moritz for teaching him that success requires "greed and determination" despite daily feelings of inadequacy.
• His hardest day as an investor was the public failure and shutdown of his very first investment, a stark reminder that "you don't win every battle."
• Looking forward, Reinman is most excited about building his own team to grow as an investor and make a lasting impact on the cybersecurity sector over the next decade.