The Pendulum Shift in Investor Preferences: Growth vs. Profitability
As the public market continued to decline from its 2021 peak, venture investors made a strategic decision to pivot and adapt to the changing landscape. They advised their portfolio companies to focus on cost-cutting and conserving cash, effectively putting off fundraising to give them more time to increase revenue and wait for tech valuations to recover.
Why Cost-Cutting?
Conservating cash is an easy way for startups to postpone fundraising, allowing them to potentially increase their revenue and wait for tech valuations to recover. This approach was a necessary response to the sudden change in capital availability, making it expensive for startups to raise funds.
The Evolution of Investor Preferences
However, new data indicates that investor preferences are shifting once again, swinging from a ‘growth at any cost’ mindset to prioritizing profitability and low-cost growth. The pendulum is now moving towards growth, with investors looking for startups to increase revenue and potentially wait for tech valuations to recover.
What the Data Says
The cloud team at Bessemer has released their yearly report, which provides valuable insights into the changing landscape of investor preferences. One of the most interesting pieces of data compares the relative value of 1% of revenue growth with a 1% improvement in free cash flow.
Free cash flow is a metric used to measure profitability, and it’s useful for startups that need to estimate their life expectancy in terms of months left until cash runs out. The report shows that the market is rewarding profits over high-burn growth, making it essential for startups to focus on generating returns on capital rather than burning through funds.
The 2:1 Bias Towards Growth
The data suggests that there’s a growing bias towards growth, with investors looking for startups to increase revenue and generate investor surplus through rapid expansion. A 2:1 bias towards growth over profitability means that the market is rewarding high-growth companies, making it an ideal time for startups to raise capital and expand their operations.
The Directional Shift
While a 2:1 bias towards growth may not be enough to let startups breathe easy, it’s a significant directional shift that will create an environment where the startup-venture model can thrive. As Mark Suster noted in his 2014 article, a startup founder’s value creation must be at least 3x the amount of cash they’re burning or they’re wasting investor value.
The Growth:Profits Pendulum
The pendulum is swinging towards growth, and it’s essential for startups to adapt to this new landscape. With a growing bias towards high-growth companies, investors are looking for startups that can generate returns on capital rather than burning through funds. This shift will create an environment where the startup-venture model can once again create value through expensive growth.
Topics
- Bessemer Venture Partners
- EC News Analysis
- EC venture capital
- Fundraising
- Investment trends
- Startup fundraising
- Startups
- The Exchange
- Venture
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