What do angels and VCs view as a more valuable asset for a startup: profitability or a large user base?

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JASON LEMKIN

Profitability is nice, but it isn’t that interesting to VCs unless you are at scale.

And if it’s at the expense of growth, it’s anti-interesting.

Capital efficiency though is the more important, more meta metric.

Do VCs care if you are capital efficient? Yes — but the question is when. And if varies a lot by the type, really the size, of the VC.

VCs in an ideal world would prefer capital efficiency at all stages, if for no other reason that subsequent venture rounds are dilutive. Even if you do your pro rata, that has the net effect of driving up your blended basis, and thus, raising the price you paid. If you don’t do your pro rata, your ownership shrinks, therefore the effective price “per percent” you paid also goes up.

Having said that, the bigger the fund, the less important capital efficiency is to them other than in the earliest days (pre product-market fit) and the later days (getting ready to IPO). At least, on a relative basis:

  • The bigger the fund, the bigger the outcome they are looking for (exit size). Unicorns in every deal, once the fund is bigger than a few hundred million in size. More on why that is here: Why VCs Need Unicorns Just to Survive
  • The bigger the fund, the more they are looking to deploy more capital per deal, often in the $50m-$60m per company, over time. So capital efficiency per se isn’t as critical as long as growth is there and the unit economics at scale make sense.
  • The bigger the fund, the more they have the capital to deploy more and earlier, to try to win a space by sheer force. This does work some time.

However, at some point, you have to pay the piper. You have to become capital efficient to IPO, at least.

But bigger VCs don’t care too much if you burn a fair amount on the way to a cash-flow positive decacorn.

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Published on October 23, 2016
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