Before I wrote a single line of code for Goldsky, and before we hit hyper-growth, I knew little about venture capital aside from what I’d read on Hacker News. Sometimes it felt like a time-traveling council of prophets peeking 10 years into the future, other times a crowd of frenzied tulip speculators.
Reality is less fantastical - VC is ultimately a business that itself buys and sells other new businesses. Smart investors know they can compound money annually 5%+ through treasury bills and index funds. The promise of top funds is that they can consistently beat the house.
That means a startup that grows revenue by the same $50k, $500k, or even $5M every year is paradoxically a failure. Revenue has to grow quadratically or better to compound. And if economies of scale are in play, costs should grow linearly.
Revenue
Costs
High-conviction funds are prepared to lose money in the first few years after investing in a startup. Losses start off steep, but fundamentally sound winners will triple and double up annually following T2D3. Profit margin, as a function of revenue and costs, grows via increasing exponential decay.
Net Loss
Margin
Runway is a function of net loss and funding. Even when everything goes to plan, runway will shrink faster when net loss is higher and shrink slower when net loss is lower.
At break even, a startup has infinite runway. But before that milestone, a strange thing will happen - runway will bottom out, then aggressively start growing as revenue keeps accelerating and net loss shrinks faster than runway. I call this default sustainable, a halfway step between default alive and profitable.
Runway
And something magical happens when you apply this shape theory in reverse via regression - it’s surprisingly accurate. In practice, I’ve found shape-derived goals consistently come within 5% of reality both quarterly and annually. And helpfully, they also double as early warnings:
- If your margin curve is off, look into the shape of your revenue and costs.
- If your runway curve is off, look into the shape of your net loss or plan to raise more funding.