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Dilution is an enemy of compounding
Why dilution hurts
After an investment is made, if substantial amounts of additional funding are required to grow, the compounding rate of shareholder value is far lower over time. That links capital efficiency to patience: a company that becomes profitable quickly can afford to be patient.
Silicon Valley's usual metrics
Venture capitalists in Silicon Valley often ask how big the opportunity is, whether it can reach $100 million in revenue within five years, and how much money can be put to work, since bigger funds must deploy more capital per deal. Founders chase growth of 100 percent a year or more. Altos Ventures puts less weight on those metrics and has seen thousands of business plans with those projections that read as if they were cut and pasted from the same VC 101 plan.
A longer-lasting engine
The alternative is a growth engine that can last a very long time, built on smart, responsible management, sustainable competitive advantages, and a commitment to long-term value. Companies that burn through capital or play venture lotto produce far lower returns or fail spectacularly. These ideas were written down between 2006 and 2008, before Altos invested in Roblox or Coupang, when they rested on faith.
How does dilution shrink an owner's share?
When a company issues new shares to raise money, every existing shareholder owns a smaller slice of the whole company. The slice is worth more in dollars only if the company's value grows by more than the slice shrinks. Each priced funding round dilutes the owners who came before it. Venture investors track this on a capitalization table that shows ownership after each round.
Why can profitable companies grow without new funding?
Retained earnings let a company reinvest its own profits into growth. Finance textbooks define the sustainable growth rate as return on equity multiplied by the share of earnings kept in the business. A company that can fund its growth this way never needs to sell new shares. Its owners keep their full percentage as the business grows.
How did Roblox and Coupang reach public markets?
Roblox went public through a direct listing on the New York Stock Exchange in March 2021, selling no new shares in the process. Coupang held a traditional IPO on the same exchange that month and raised about 4.6 billion dollars. Both companies were backed by Altos Ventures long before listing. Coupang was founded in Korea in 2010.
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