His argument is essentially that VCs, lured by the sirens’ song of hyper-growth, back numerous companies with business models that aren’t ready to scale. VCs bet that, with new venture dollars, these companies will solve their business model issues while they’re scaling. In fact, the reverse is usually true: When VCs pour dollars into companies with mediocre unit economics, the numbers almost always get worse, not better. Why? Because the best sales and marketing ideas have typically already been executed—the marginal idea tends to yield fewer benefits.
Paley suggests that many companies would survive, if not thrive, if VCs had less of a “go big or go home” mentality. VCs shouldn’t throw money at fast-growing companies and hope growth continues or even accelerates. Rather, Paley contends, they should invest enough venture dollars to fund a tight set of growth experiments, carefully monitor how those experiments affect the underlying economics of the business, and double down when experiments show great promise. In Paley’s words: “Money has no insights on how to fix a broken business. Great businesses solve these problems first and then use capital to intelligently scale models that are clearly working.” Read the full blogpost here.