The Tragedy of the Common: How AI Will Restore Value to Startup Equity

Every major wave of innovation comes with a familiar prediction: “venture is dead,” or in this wave, “venture is irrelevant.” I’ve heard it in Web 1.0, Web 2.0, crowdfunding, crypto, and now again over this summer with AI. The argument is that AI’s capital efficiency will make venture capital obsolete. Who needs VC when one person can build a $1 billion unicorn?

I believe the opposite. AI won’t just save venture with another epic vintage; it will redistribute value to the entire startup economy. AI has the power to restore the promise and the value of common stock—a most vital resource in our ecosystem, and the one (sadly) that has been least talked about.

This dynamic reminds me of Garrett Hardin’s famous essay, “The Tragedy of the Commons,” published in 1968, which describes how shared resources are depleted when individuals pursue their own self-interest. It was written in the context of the 1960s awakening to society’s impact on the environment: air, land, and water. As an avid outdoorsman who spends a lot of time in our National Park system, this essay left a mark. In the startup world, we’ve experienced our own version of this: the tragedy of the common stockholder. Just like the metaphorical common, when the value of common stock erodes, our entire system falters.

The ZIRP Years: Startup and Cap Table Distortion

From 2019 to 2022, during the zero interest rate policy (ZIRP) years, late-stage capital flooded into startups. The rise of the mega-funds, crossovers, sovereign wealth funds, and a voracious appetite for private market growth companies fueled a mega boom. The numbers were staggering: in 2021 alone, startups raised more than $600 billion—nearly double 2020’s total.

Much has been discussed and written about this overfunding, and to be clear, the problem wasn’t just the supply of capital, it was the “demand.” Founders and VCs alike tapped huge amounts of private capital to “blitzscale.” A company was deemed a “success” if it raised a mega round at a mega price.

The consequences of these choices run deep. This flood of capital structurally redesigned startups for the worse. Instead of being built for flexibility, profitability, and multiple exit paths, they were designed for growth at all costs, which meant raising the next mega-round of private capital.

Each of these rounds stacked more preferred stock on top of common stock, or in venture speak, “more pref.” Many added debt on top of this preference. Founders and a handful of early executives may have received some liquidity through “selective” secondaries, but the broad base of employees—the builders of these companies—were stranded “beneath the stack,” holding common stock. And they still are: the preference (and debt) overhang is so heavy that many of these companies are effectively unfundable by any mechanism.

Bill Gurley dives deep into this problem in an “Invest Like The Best” episode, in which he coins the term “zombie unicorns:” alive on paper, but unable to produce real returns for any of their shareholders, preferred or common. It’s a must-listen if you want to understand where we are as an industry post-ZIRP. Most staggering is Bill’s estimate that some $3 trillion of venture/LP capital is tied up in these preference stacks.

AI and Return of the Fertile Common

This liquidity crunch and overscale funding hurts many aspects of the system. While venture is in a crisis of confidence and LPs are stuck in this overhang, we are professional investors with diversified portfolios. Common shareholders are typically not diversified. They are the Founders and early employees who bet it all on one company: theirs. These are the visionaries, the dreamers, the risk-takers, and the builders. These are the people who dared to take the startup job instead of the safe path. These are the creators of all the value in our ecosystem. In this past wave, they were stuck stranded and illiquid, underneath mountains of preference.

Simple math says that if there’s $3 trillion of preference in zombies, there’s about $1 trillion to $2 trillion in “once expected value” in the common stack. A trillion dollars or so of Founder and employee hoped for liquidity and compensation. A trillion dollars of plans and dreams. It’s impossible to know what this value may be worth long term. Some may make it, some may have carve-outs, but this much is for sure: much of this common value goes to zero.

Historically, when startups exited—through IPOs or M&A—the liquidity spread widely due to lower preference stacks. Founders, employees, and early investors saw their common stock convert into meaningful value. That liquidity recycled into new startups, angel investments, venture funds, and into a vibrant cycle of creation. I’ve seen it thousands of times in my career: a young engineer with an exit under their belt can take a bolder bet on their next project. They can use those winnings to start their own company, take a riskier job offer, angel-invest in their friend’s new company, and certainly pass on the “safe” job at a large company. This dynamic is the root of our culture here in Silicon Valley. This is subtle, but it is also crucial for a vibrant startup ecosystem.

Which brings me to AI. AI’s capital efficiency at the app layer is what breaks us out of this spiral and might just restore some balance.

Thanks to enormous foundational AI investments, a powerful compute infrastructure stack has been unleashed. Application-level AI is enormously capital efficient, which gives Founders renewed power to challenge incumbents and create entirely new behaviors and products. This means more markets open for disruption, more TAM up for grabs, and more value for Founders to create, all with less capital needed.

More venture, less capital.

AI enables startups to reach scale and profitability much faster, with far less growth capital. Sure, some may still choose to load up the preference stack, and in this transition period, many indeed have, but over time, and across the application layer, talented Founders can and will choose to build for resilience and degrees of freedom. Higher profitability plus smaller preference stacks equals more exit opportunities. In any outcome with a lower preference stack, common stock once again becomes very valuable.

That matters. It means more value flows back to Founders, employees, and early investors. It means liquidity comes back to the true builders of the ecosystem, where it belongs. It means a healthier, more sustainable innovation economy where risk is rewarded across the stack.

When Founders and employees do better, startups flourish and the “common” thrives.

When Founders win, venture capital wins.

Higher capital efficiency and faster paths to profitability? Yes.

AI making venture irrelevant? No.

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