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Featured Posts, Venture Capital & Investments

Venture Capital : Volume v/s Margins

Which business models are the better ones – those rely on high volume, low margins or those that rely on low transactions and high margins per transaction or a mix of both? And where do the investors see the maximum value? This is often a question that growing enterprises face initially that do they focus on increasing their reach and hence the transactions or they monetize their business model to extract better margins. To find out the answer, we put under the knife some of the most innovative, diverse and popular business models currently in vogue. Analysis is based on data we collected from a myriad of sources and applied reasonable estimations where there was no data available to to fill in the gaps.

We charted below these growing enterprises under four quadrants with four different combinations of margins-low & high and Volume- low & high. We found that enterprises in low transactions volumes quadrant irrespective of where they lay in terms of their profit margins per transaction per transaction quadrant received comparable venture funding.

VC investment-volume-margin

Where do VCs invest more? Enterprises that generate more sales volume or those that generate more margins?

However the ventures with very high transactions volumes or reach irrespective of their profit margins received good large funding. For Spotify the profits may actually be null or negative. We assumed a very nominal profit value based on news reports and internet discussions and therefore even though it may be a guesstimate it doesn’t changes the overall conclusion that it is a venture with high transaction volume receiving investor attention.

Needless to say that the best quadrant to be is the high transaction volume and high margin transaction and that is where Groupon is placed. And that quite obviously shows in the massive funding it has received.

On the other hand Kickstarter has received more funding than some of the business models with both higher transactions and margins. This suggests and quite obviously so that investors are betting on variables that are not captured in the simple transaction-margins equation.

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About yash saxena

In this nothing lies everything

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