Yeah, no, most VCs still don’t really care about your path to profitability

“Growth at all costs” was fuel to 2021’s funding fire as venture capitalists poured money into startups spending oodles of cash on everything from overhiring to inefficient customer acquisition. But amid this year’s downturn, venture capitalists decided — to say, at least — that torching cash in the name of growth maybe wasn’t their best idea.

They put out memos, tweeted about it, and spent time telling reporters that maybe they goofed on some of their riskier bets. They said cash preservation and a potential path to profitability was the soup du jour of investing in Q2, while taking big risky bets on cash-burning, fast-growing startups was off the menu. But did their actions align with their words? Not really.

Two investors recently told me that growth-over-everything investing was still largely the only strategy for many VCs despite Twitter threads that probably gave their existing portfolio companies advice whiplash. Angela Lee, a venture capital professor at Columbia University, told TechCrunch she never really believed the change in tune to begin with.

“I don’t think investors were ever prioritizing profitability over growth despite what they were saying,” she said, followed by a laugh.

She said that for many VCs it doesn’t make sense to ever really focus on those bottom-line business fundamentals because they don’t make money based on whether a company is profitable but rather whether they make a good return multiple at the company’s exit, which will be better if the company scales larger regardless of profitability. Lee added that the majority of companies aren’t profitable when they IPO. Statista backed this up, and a fair amount of public companies aren’t profitable, either.

Deena Shakir, a partner at Lux Capital, said that focusing on growth is especially relevant to early-stage investors. For seed- and Series A-stage companies, it is significantly more important for investors to place their bet on how the company is growing, because if they aren’t going to exit for seven to 10 years, how they might scale in the meantime is still largely the most important factor when determining whether to invest.

“We are still venture capital investors,” she told TechCrunch. “We are not doing private equity deals. Our job is to invest in breakthrough innovation; it is literally our job.”

Mike Brown, a general partner at Bowery Capital, said it would be difficult as a pre-seed and seed investor to invest based on underlying unit economics because many of the companies at that stage haven’t been producing monthly recurring revenue long enough, if at all, for an investor to be able to use that data to make an informed decision.

But at the later stages, there has been a slight change in conversation. Shakir, Lee and M13 general partner Latif Peracha said that investors are definitely starting to pay more attention to how startups are managing cash burn, spending on customer acquisition and where companies are spending unnecessarily.

“Certainly investors at the growth stages are trying to ensure that if the hamster wheel of capital stopped, startups would still have sustainable businesses,” Peracha said. “Could you build a business that had software-like gross margins with really good recurring revenue?”

However, while the tides don’t seem to be significantly turning yet, Lee predicted that some investors will start to in the near future. In recent years, an increasing number of venture firms have transitioned from exempt reporting advisers (ERA) to registered investment advisers (RIA), the latter of which allows for more opportunities to hold public stakes.

Because being an RIA allows firms to keep their public holdings, many of these VC firms may start to emphasize how their companies will perform in the long run on the public market if they plan to keep their stake. Sequoia, Andreessen Horowitz, Foundry Group and General Catalyst all are currently RIAs, and Lee predicted more firms will continue to make the transition.

But that’s in the future. For now, most investors are sticking to what they know: growth over everything.