Shooting Yourself in the Other Foot Too

Investment Note #29 - 11th July 2025

Shooting Yourself in the Other Foot Too

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One of the more consequential shifts in US politics from 2016, when Trump first ran for president, to today has been the political positioning of Silicon Valley. In 2016, most tech entrepreneurs and venture capitalists were committed capital ‘D’ Democrats who openly endorsed Hillary Clinton. In 2024, the change could not have been starker; the rise of the tech-right has been epitomised by Elon Musk, who has not only moved to voting Republican (and maybe founding a new party) but has adopted many of the more unhinged policy positions of the MAGA wing of the Republican party.

Among the unhinged policies the tech-right have embraced has been Trump's assault on US universities. Couched as a drive to root out antisemitism, the administration seems determined to make elite institutions bend the knee, freezing scientific research grants as part of its general anti-science stance.

Harvard University is not alone in being targeted, but so far is the only institution offering any public resistance to Trump’s efforts. In retaliation, the White House has threatened to stop all federal funding the university receives and has asked the IRS to examine its tax-exempt status.

For a White House bursting at the seams with former venture capitalists, from AI tsar David Sacks (Craft Ventures) to Vice President JD Vance himself (Mithril Capital), whose careers are owed to the technological innovation largely created at these universities, cutting off funding for scientific research as retribution for perceived slights is a stunning indication of how much the winds have shifted.

The Public Foundations of American Innovation

You don’t need a major leap of faith to see the causal link between research funding and technological innovation. It wasn’t an accident that in the 1970s the defence tech industry grew in Connecticut, near both MIT and Harvard.

Most famously, Silicon Valley grew up around Stanford University and is much more the product of government funding than the Randian entrepreneurs mythologised by the tech-right. In the 1960s, DARPA, the Department of Defence’s Advanced Research Projects Agency, was responsible for over 70% of all funding for computer technology research in the US and has been at the centre of many major technological innovations, from general-use computers to the internet itself (Source: Nigel Cameron, UnHerd).

Brain Drain

The policy approach is already showing signs of causing a brain drain; applications from China and Europe for graduate and post-doctoral positions in the US have plummeted, while applications for jobs abroad from graduate students in the US have spiked (Source: Nature). Europe and China are both proactively trying to capture this exodus - Ardem Patapoutian, the 2021 Nobel prize winner for Medicine, posted online that his federal research grant had been frozen, within hours he had an offer from China “offering to move his lab to any city, any university with a guarantee of funding for the next 20 years.” (Source: New York Times).

The move against research would maybe not be as calamitous if US startups were generally more successful, but the reality is that, despite large headline figures given in funding rounds, today's startups are much less likely to be profitable than in the past. In the 1980’s 80% of startups were profitable, in 2021 that figure was down to 22% (Source: Jay Ritner, University of Florida).

Unicorns Are Mostly Just Horses

In a 2013 article for TechCrunch, venture capitalist Aileen Lee coined the term ‘Unicorn’ to refer to tech start-ups which had reached a valuation of at least $1bn and were formed in the preceding 10 years. When she wrote the article, Lee had identified 39 US-based companies which fit this description. Of those 39 companies, 62% had “exited” either by going public (Facebook) or by being acquired (YouTube) within that 10-year timeframe. 

Fast forward 10 years, and that number had grown to 532, or 14x the number of unicorns according to Lee’s updated data. Despite that growth, only 35 companies or 7%, have “exited” compared to 62% from the 2013 cohort, and only 14 are now public companies. None of those 14 have been consistently profitable.

Although the data is only one analysis of startups founded in the previous decade, the trend is stark. And while you could point to the rise of private capital or the decade of low interest rates as explanations for the shift in fortunes, it is also true that most of these unicorns have failed to generate meaningful profits and have failed to commercialise breakthrough technologies.

AR/VR, eVTOL, hyperloop, delivery drones, and blockchain are all examples of breakthrough technologies which have seen slow adoption and commercialisation. AI, which has driven markets for the last 2.5 years, has yet to prove its profitability. Fintech has been a mixed bag. Telehealth and online education companies have failed; even Apple couldn’t get VR headsets to take off. mRNA, the technology which created the COVID-19 vaccine, has post-COVID, failed to build on that success. Moderna, the mRNA pure-play pharma company, has lost money every year except 2021 & 2022.

Investors have taken note; in 2022, shares of both public and private speculative technology companies sold off substantially, most have yet to recover.

Summary

In launching a war on American universities, Trump has once again displayed his most enduring quality: coming up with a bad answer to a good question.

The current system of funding high-impact research is clearly in need of reform; the current state of American start-ups is the product of the current system. Serious reform has substantial bipartisan support; In his book ‘Abundance’ with Derek Thompson, Democratic party whisperer Ezra Klein is massively critical of the overly bureaucratic and conservative research funding system.

The importance of private market investment is undeniable; however, despite its flaws, the hand of government has been essential to innovation and economic success. The history of innovation, which has driven the American economy to its pre-eminence, has revolved around a genuine partnership between the market and the government, not one or the other. While the engine of American innovation is sputtering, starving it of fuel is unlikely to bring about positive change.

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Insights from our recent event with Drew Beja of Granahan, Portfolio Manager & Managing Director of Granahan Investment Management:

• Q&A with Drew Beja. A discussion on the impact of tariffs on Granahan's portfolio companies - 8 minutes.

• Full Event Presentation. Tariff Tantrum - managing a US public equity fund in the current environment - 40 minutes.