Last week, I was fortunate enough to run into a well-known VC in Bangalore. After some idle chit-chat, we got around to discussing one of his portfolio companies, which was in the market to raise a follow-on round. The VC lamented that the company was comfortably profitable and in his opinion, shouldn’t try to raise a new round of funding at all. To say that I was somewhat bemused on hearing this would be a wild understatement.
The profitability paradox
If profitability is almost a pejorative in the traditional VC parlance, then why are some VCs seeking it in their investees?
Would a VC lament that if a company is comfortably profitable, then it shouldn’t try to raise a new round of funding at all? In the traditional sense, no
Reaching profitability could mean two things, neither of which is desirable for a VC: it could imply that the market is not big enough to provide VC-scale returns or that the market is not attractive enough
If that were so, why are some VCs seeking profitability in their portfolio companies? Is profitability the new black?
For some profitability and growth are not binary choices; instead growth-profitability dynamic is a spectrum. But then, it also depends on whether you are a B2B or a B2C company