Book Review: "Unicorns, Hype, and Bubbles" by Jeffrey Funk

What if everything we’ve been told about startup success is wrong?

In my work, I spend more than half of my time analyzing climate tech startups for their ability to scale, and I often find myself at odds with investors, especially VCs. This has puzzled me for a time, but after taking a course in VC investment, speaking to several investors, and hearing them speak at events, I finally got it. When I look at a scale-up, I try to understand the challenges it has to manage to get to profit. When investors look at the same companies, they are often looking to see whether they fit the latest hyped-up narrative.

You can see it in the movement of venture capital. Last year, investments in one of the most pressing problems facing humanity - climate change dipped, while investments in AI surged. In the past, investments in other “micro-bubbles” like blockchain, NFTs, big data, IOT, drone delivery, and VTOL aircraft followed the same pattern. Massive amounts of cash were burned on spurious technologies, while real-world problems went ignored.

I got confirmation of my ideas after reading a book, “Unicorns, Hype And Bubbles: A Guide To Spotting, Avoiding And Exploiting Investment Bubbles In Tech” by Dr. Jeffrey Funk. I’ve run into Dr. Funk's posts on LinkedIn first. These days, it is very hard to avoid posts either singing praises for AI or scaremongering about it. Both types of posts were really pissing me off, so when I saw a post by Dr. Funk, it was, as we say in LinkedInese, a “change of perspective”, or that “aha” moment.

After reading his posts for a while, I bought the book. I recommend you do the same - read the posts and get the book. Dr. Funk names and deconstructs myths of modern techno-optimism and exposes its dangers. Being no Luddite though, Dr. Funk suggests principles of separating hype from real breakthrough technologies, or “killer applications” as he calls them. I’ll go over the myths, dangers, and frameworks that resonated most with me. This list is not exhaustive, and barely covers some of the key arguments. But it should give you a feel for the character of the book.

The Myths of the Unicorns

Musée de Cluny is one of my favorites in Paris. It’s famous for hosting a series of six tapestries, The Lady and the Unicorn, woven in Flanders around the 16th century. Human fascination with unicorns dates back millennia, and the elegant tapestries are one well-known symbol of this fascination with the myth. Another one is startup culture.

The first, and maybe the biggest one, is that startups are central to economic growth. VCs peddle this myth to other investors, bureaucrats, and the media. Economic growth depends on increasing productivity and on investments that bring value, i.e., profits to investors. Currently, though, startups that are touted as successes are not the ones that are profitable or deliver extreme customer value, but those that raise the most funds. This is akin to putting a wagon before a horse, confusing inputs with outputs. Yet, the media and social networks are full of it.

If we look back to the last century, when real breakthrough technologies emerged, like electricity, the microprocessor, and LED displays, the vibe was different. Here is a quote from the book, comparing startups across the two centuries: “the percentage of startups profitable in the year before their IPO fell from 90% in 1980 to 12% in 2022. Of the 278 biggest, costliest startup failures of all time identified by CB Insights in August 2023, only three that went bankrupt before 2018 had greater than $ 500m in VC; those were Solyndra with $ 1.7bn in 2011, Better Place with $ 675m in 2013, and Abound Solar with $ 614m in 2012.21 Already nine recent startups with more than $ 500m in VC funding have gone bankrupt since 2018”. It’s common to hear now that we live in the age of unparalleled innovation and progress. Looking at the data like this has a much-needed cooling effect.

The dangers of mythical creatures

Hype is nothing new, it even has its own graph - the famous Gartner curve. The danger with this representation is that it implicitly assumes that ALL technologies follow this curve. Reality is not so forgiving, as many technologies that do not bring profits or productivity increases eventually die. Appealing to the Gartner curve, however, can extend the life of these zombie technologies for very long times.

This is the key danger of hype. It draws our attention to superficial and trendy, by feeding on FOMO. Meanwhile, real problems and real solutions get less interest and investment. I’ve started this review with how the AI bubble drives capital away from real climate solutions. But even in the climate space, we have micro-bubbles and zombie industries like hydrogen-powered flight, DAC, and the most recent hype - water startups. These draw away capital from credible solutions such as heat pumps, batteries, and practical applications of green hydrogen.

The hype is pushed by the people profiting from it. VCs are the main culprits, as they benefit from new investors down the line, fixed fees, and general unaccountability. Hype is central to getting next investors, in the worst cases, consciously passing it to “the next idiot”. But at least this approach requires guts to stick to the same story for 10+ years.

Consultants, on the other hand, are always the first to profit from a new hype. They have zero sunk costs and are there with their slide decks, when exasperated managers call them, after being bombarded with bogus requests from their investors and boards on how they are going to navigate the next wave of big data/AI/3D-printing/other “hopium”. Finally, the real sharks, circling the hype cycles, are established investors who see through the hype and wait for the right moment to short-sell their stock at volume, burning retail and institutional investors.

Myth-busting frameworks in Unicorns, Hype, and Bubbles

Dr Funk does not provide any ready-to-use frameworks or tools to separate hype from reality. Instead, he pushes us to question the narratives pushed by startups, VCs, consultants, and media along two lines of thought.

First, look for a “killer application” technology - a technology so good that users will eventually flock to it. This means that the technology should deliver clear benefits for the users, and at the same time, be able to generate sufficient profits quickly for the technology owner. In the author’s own words, “progress in the form of higher performance or lower cost over time is an important driver of new technologies and their diffusion.”

Second, evaluate productivity gains at the systems level. A good example of this is ride-hailing tech. Uber did not invent a taxi. It made it easier and more convenient to book one, and easier for new drivers to start offering taxi services. What it failed to foresee is that as more taxis get on the road and more people order taxis, they create congestion, speed slows to a crawl, and finally, you are not getting anywhere in your Uber.

Finally, I’ve found it insightful and fascinating how D. Funk integrates and references recent research and books by my favorite authors, Daron Acemoglu, Vaclav Smil, and Clayton Christensen. In the Christensen case, Dr. Funk sees the problem with his theory as being taken further than its core proposition, that incumbents find it hard to innovate in the niche, low-margin markets. It was assumed a law that low-end innovation would eventually displace mainstream products. That’s clearly not happening across the range of products and services. You can read my reviews of books by these authors here (Christensen, Acemoglu, Smil)

For anyone involved in evaluating early-stage technology—especially in capital-intensive sectors like climate, energy, or hardware - “Unicorns, Hype, and Bubbles” is a reminder to stay grounded. The work of building real companies still relies on solving real problems for real customers, at a cost they are willing to pay.

And that should never go out of fashion.