VC and the marginal-dollar problem
techcrunch.com
techcrunch.com
Many startups, if not all, oversell themselves. Maybe it is for the fear of not getting a funding. What follows is a fat check and pressure to grow.
There is one thing I wish people learn from this article but in a different way.
> After this fundraise, everyone at Fuego agrees to hit the gas, hard. Burn rates jump from $200,000 a month to more than $1 million per month. Experiments that previously were returning $1.50 over time for every dollar invested start to return $1 as money is pumped into scale, but everyone agrees that’s okay. It just means that the customer pays back the cost of acquisition more slowly.
The difference being...Not everything scales. Sometimes you feel you have a "huge" market but the novelty of things will never scale. It is not a VC problem rather market research problem.
> The investors’ goal over the next roughly 24 months is for the company to become worth at least three times the post-money valuation
The investors have promised this goal to their customers (err, "LPs"), or at least need it to get their overall IRR up to what their customers need. So like a jockey they will crop and spur the horse to get it over the finish line faster.
This growth rate is not a problem for some business models (or if it is a problem means indeed the business is not viable). But for others, for example most hardware businesses, it makes little sense.
Everybody wants to be or invest in next Uber, but a lot of business models got limited scalability. Maybe we should learn to appreciate also business that do few mln ARR and they do just fine.