Doesn't a VC make money from valuation, not profitability. A profitable business has either reached market potential, or isn't spending enough on growth. Anecdotally I can think of many more examples of unprofitable businesses getting VC money.
> Doesn't a VC make money from valuation, not profitability
Sure, but if the business is profitable that means it works. Now the investment can be spent on bending the curve up (e.g. hire more salespeople that could have been afforded from the company’s revenue alone) rather than the more risky approach of spending the money to see if the product will make it at all.
> A profitable business has either reached market potential, or isn't spending enough on growth.
This is a naïve view from the SaaS era propagated by SaaS and consumer app investors. Does not apply to most businesses and applied to none of the biggest companies today like Microsoft, Apple, NVIDIA, Google, et al.
Look at google: no, it wasn’t profitable (no revenue or even revenue model) but had huge uptake by the nerds without any effort to market it.
> Anecdotally I can think of many more examples of unprofitable businesses getting VC money.
Sure, several of my own companies were funded in this mode. But that capital was more expensive because it was used figuring out if the tech would work and if there were actually customers for the product.
> A profitable business has either reached market potential, or isn't spending enough on growth.
Yes, but spending money on growth is probably the number one thing VCs like to invest in. If you happen to be profitable, but also can demonstrate a clear path to growth, then VCs will lean in.
Not counting their 2% annual maintenance fee, a VC makes money from buying shares low, selling them high, and keeping 20% of the high price minus the low price. So yes, they make money if the valuation is higher than the when they bought it.
