In the recent past, the venture capital (VC) ecosystem was dominated by a singular focus: growth at all costs. The era of “blitzscaling” – a term coined by Reid Hoffman to describe the rapid scaling of a company, in an effort to capture first mover advantages and market share as quickly as possible – was in full swing. Fuelled by abundant capital, start-ups were encouraged to grow aggressively, often with little regard for profitability or sustainable business principles. The prevailing wisdom; with enough scale, profitability would eventually follow. However, as the financial landscape shifted, so too have the priorities of investors.
The Blitzscaling Era: Growth Above All Else
During this period, the venture capital world was almost entirely focused on growth metrics. Start-ups were celebrated for their ability to raise successive rounds of funding at increasing valuations, regardless of whether they were turning a profit or even had a clear path to do so. The assumption was that once a company achieved significant scale, it would have the market dominance necessary to dictate terms, and profitability would naturally follow. The goal was to become the next unicorn – a start-up valued at over $1 billion – even if it meant burning through vast amounts of cash to get there. This strategy worked well in an environment of low-interest rates and abundant liquidity, meaning investors were willing to take on more risk in pursuit of outsized returns. However, this focus on growth often came at the expense of building sustainable business models. Many companies were so focused on scaling quickly that they neglected fundamental aspects of business, such as maintaining healthy margins, optimising operational efficiency, or even ensuring that there was a viable market for their products or services in the long term!
The Turning Point: Rising Cost of Capital
As the macroeconomic environment began to change, with interest rates rising and the cost of capital increasing, the cracks in the blitzscaling model began to show. Investors, facing tighter financial conditions and more expensive capital, became less willing to fund companies that could not demonstrate a clear path to profitability. The flow of capital slowed, and many start-ups that had relied on continuous rounds of funding, found themselves in precarious positions. The result was a wave of casualties in the start-up ecosystem. Companies that had been valued highly during the boom times were suddenly faced with down-rounds – raising capital at lower valuations – or even forced to shut operations entirely. The focus shifted from growth at all costs to a more measured approach, where profitability and sustainability took centre-stage.
The New Investment Focus: Path to Profitability
Today, venture capitalists are much more discerning. While growth is still important, it is no longer the sole criteria for investment. Investors are now placing a premium on start-ups that can demonstrate a clear and achievable path to profitability. This shift has led to a more disciplined approach to investing and reflects a broader recognition that sustainable businesses are more likely to succeed in the long term. Start-ups must prove a clear value proposition and that they can efficiently manage operations, to generate healthy revenue and ultimately turn a profit. This does not mean that growth is no longer valued, but rather that it must be balanced with a focus on building a viable and sustainable business model.
The potential Downside: Impact on Transformational Ideas
While this shift in focus has brought greater financial discipline to the start-up ecosystem, it has also created challenges, particularly for entrepreneurs working on transformational ideas that require significant upfront capital and long development timelines. These ventures often involve high levels of risk and may not show profitability for many years, if at all. Historically, these types of projects have been funded by venture capital because of their potential to create significant impact and generate outsized returns. However, in the current environment, these entrepreneurs are typically struggling to secure the funding they need, as most investors are reluctant to support ventures that do not offer a clear and immediate path to profitability.
Striking a Balance: The Role of Venture Capital
The key challenge for the venture capital community is finding a balance between financial discipline and the willingness to take risks on innovative, potentially transformative ideas. While it is essential to support businesses that can demonstrate sustainability and profitability, venture capitalists must also remember their role in fostering innovation and driving progress.
This means making calculated investments in companies that may not be immediately profitable but are working on solving big, global problems – whether in technology, healthcare, clean energy, or other critical areas. These investments require patience and a long-term perspective, but they are also the ones that have the potential to generate outsized returns and make a significant impact on the world.
The future of venture capital lies in striking a balance between backing sustainable businesses and taking calculated risks on ventures and entrepreneurs that have the potential to change the world. Although hard to strike this balance right, by doing so, investors can continue to drive innovation while ensuring the long-term viability of the companies they support.
