VC Bloat

We are entering a very intriguing period for many VC-backed companies that grew up in the era of freely flowing capital in the private markets. Many raised too much capital, spent too much capital, had capital-inflated revenues, and then retrenched over the last year+ when capital became scarce. 

Included in that retrenchment for many included a material reduction in sales and marketing expense (S&M). They are now in a period of comping year-over-year revenue growth over periods where S&M expense was still high in an era of free money – so revenue is declining although often S&M expense is declining even further.

Over the coming few quarters, many of these companies will start to comp revenue against quarters with more normalized S&M expense – a truer gauge of the health of the business. Some will continue to experience revenue declines demonstrating at best weakness in their business model and at worst a fundamentally flawed business model. 

Some, however, will return to top line growth, and possibly profitable topline growth on top of that. Their first act defined by inflated capital bases, inflated revenues and inflated valuations – and their second act defined by profitable growth and more durable value creation. My guess is 2024 will be the year that this separation happens one way or another for these companies.