This is a great tweet thread.
Especially because it is also a reflection of the severe lack of understanding of how the 'VC' world functions.
Gross margins matter but not at a certain stage; at seed stage, it is relatively less important to other metrics. Let me elaborate 1/
Especially because it is also a reflection of the severe lack of understanding of how the 'VC' world functions.
Gross margins matter but not at a certain stage; at seed stage, it is relatively less important to other metrics. Let me elaborate 1/
To understand, we first need to grasp that VC isnt a single monolith. It comprises angels -> seed VCs -> Series A -> Late Growth Capital -> Hedge funds (now). Each is a specialist at a certain risk level, and focuses on how they can get the co in 12-18m to the next level 2/
ENIAC Ventures is a seed fund. It is effectively taking a bet anywhere from idea to early customer validation but always pre-product mkt fit. At this stage, you dont want to stress on gross margin unduly. Gross margin matters but not at this stage. What matters here is PMF 3/
So stressing unduly on gross margin at this stage can force you to focus on the wrong things, like not growing, not experimenting, not focusing on engagement, taking product risks. You dont want to climb the wrong hill! 4/
If seed stage VCs drove profitability and gross margins, then we would be undercutting the growth potential of these rocketships by starving them of the experimentation required to identify paths to scale. 5/
LPs or Limited Partners - the folks who give money to funds like us - have clearly demarcated allocations to funds at different stages. So each of us understands our place in the ecosystem and learns to play by the rules of our stage.
For ENIAC (like Blume where i work) the goal is to get a third to half of the primary cheqs to PMF with solid traction and thereby bring on a Series A investor. It is at this point, Series A, that the startup begins to (post PMF & with solid growth), focus on costs. /7
At this stage (Series A), experiments are over, PMF is achieved, and the goal is to use the Series A capital to get to +ve unit economics (gross margin +ve) by reigning costs, ramp up and scale what is working, and set the co to grab late stage growth capital. /8
Just as the seed fund 'gets' risk fo a certain stage, similarly Series A and B,C investors understand risk for their stage. Each of us drives focus on certain metrics needed to get to the next stage. That is the way the industry works, and it works well. /9
In bubbly markets, when you know that fundraising is not tough, you tend to focus far more on growth over other metrics (cash is relatively cheap), but when tough times portend, you start to worry abt what would happen to your portfolio is fundraising started slowing....
And that is why @EniacVC is wisely looking at gross margins and reigning in spends. It is wise to do it now, and would have been stupid to do it earlier. If they had focussed on gross margins last yr or earlier, they would have set their portfolios for failure. /11
It is not that VCs are stupid or dont get it. We understand the rules of financial gravity as well as any do. But we also understand very well what our multiple stakeholders want - founders, LPs, next stage VCs - and optimize the solution as much as we can that satisfices all /12
Perhaps @ArtkoCapital was being sarcastic, maybe not. Either way my objective was to drive greater understanding of each others' roles, and the underlying motivations for our behaviour. I hope through this tweet thread, I have been able to provide that context. Thank you! 13/13
