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Comment by Ixiaus | Hacker News Reader

Profit is funny for the startup scene. When first starting out building my company, my co-founder and I were often focused heavily on "profit" when talking to VC's and pitching.

At a demo day we had a meeting with a partner from a big fund and pitched him. He turned us down and told us why but was kind enough to have a follow-on meeting with us to talk further about our pitching strategy and general business strategy.

One of the key points I got out of speaking with him was this: VC's (institutional, not necessarily angels) generally want to see high-growth and not high-profit. If you've got revenue coming in and you're "profitable" on it, then you need to be growing more (spending it). To the point that most VC's believe you should grow so fast that you never reach profitability until you exit OR decide to "level out" the business.

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Isn't this a huge burden on the economy as a whole? The vast majority of businesses which follow this strategy will go out of business without ever creating more value than they consumed. A significant percentage of those will over leverage and file bankruptcy, pushing their losses off onto those who helped finance them while driving up interest rates.

How does it pan out long-term for a VC to advocate for this strategy and this strategy alone?

Edit: My gut instinct is that this is an example of a VC valuing short-term gain at the expense of literally everything else. They don't want your business to succeed, they want their business to succeed. They don't want the economy to boom, they want to outpace the economy any way they can. Maybe I just lack experience in this realm (I have nearly zero experience dealing with VCs), and/or this is overly cynical, but this just pisses me off.

They advocate this strategy if you (plan to) take VC money. They are probably not claiming every startup should follow this strategy.

> They advocate this strategy if you (plan to) take VC money.

I understand that for some businesses accepting VC funding means more success than you could have ultimately achieved on your own, or even success where you would have otherwise failed. But to be overly snarky and simplistic, if I wanted to put someone else's benefit ahead of my own I wouldn't have started a [for profit] business.

I say that because most businesses which follow this strategy won't just tank, they'll tank really hard [Edit: that's an assumption, of course, but is this incorrect?]. I wonder if anyone is tracking the impact of this?

Is there anything that says that VCs make less by advocating strategies which promote the success of their entire portfolio? Are there VCs out there that do this?

Your perspective is correct, but the vast majority (99%) of new businesses in the economy will never raise money from a VC (and shouldn't).

Most VC portfolios are structured such that the expectation (at least at the time of investment) is that this company will be able to make up for ALL the inevitable losses I am going to take in the other companies I invest in. Well, not really that cynical, but in reality usually one or two companies in a fund are where all the profits come from, so you can understand why investors push each company to swing for the fences.

Key takeaway for entrepreneurs is just to know when a VC is right for your business and when it's not. The key factor here is how quickly you need to scale. For example most entrepreneurs don't have the goal of a nine figure exit for their business in the next several years, but some do.

Not all VCs invest this way. Here's a good read by Greycroft Partner Ian Sigalow that walks through the economics of how they invest and why: http://www.sigalow.com/2012/01/a-new-take-on-series-a

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