Thegende Glenn.Channel Profits Mean More for VC Than Match Metrics

In the realm of venture capital (VC), metrics like user growth, customer acquisition cost (CAC), and monthly recurring revenue (MRR) often dominate conversations. These KPIs are undeniably important, but they only tell part of the story. As the VC landscape evolves, a new metric is emerging as a game-changer: channel profits.

Channel profits refer to the profitability generated by a specific channel or segment of a business. Unlike traditional metrics that focus on growth or top-line revenue, channel profits provide a clearer picture of a company’s ability to generate sustainable, profitable growth. For investors, this means understanding not just how much revenue a startup is generating, but how much of that revenue is actually falling to the bottom line.

Why Are VCs Shifting Their Focus to Channel Profits?

The rise of channel profits as a critical metric is driven by a fundamental shift in how investors evaluate startups. In the past, VC firms were willing to overlook profitability in favor of rapid growth and market dominance. However, the recent challenges faced by many high-profile startups—think WeWork, Theranos, and even some unicorns—have forced investors to rethink their strategies.

Startups that prioritize growth at the expense of profitability often find themselves in a rut. Without a clear path to profitability, these companies are at risk of running out of funding and failing to deliver returns to investors. By focusing on channel profits, VCs can identify startups that not only grow but also generate meaningful, sustainable profits.

How Channel Profits Drive Long-Term Success

Channel profits provide a more nuanced view of a company’s financial health. For example, consider a SaaS startup that reports impressive MRR but lacks profitability in its core product. While the MRR numbers might look promising, the lack of profitability in the main channel signals underlying issues that could derail long-term success.

In contrast, a startup with strong channel profits in its primary business line is more likely to weather challenges and maintain growth over time. Profitable channels also enable companies to reinvest in innovation and expansion without relying solely on external funding. This self-sustainability is a key indicator of resilience and scalability.

Real-World Examples: Startups Excelling in Channel Profits

One notable example of a startup excelling in channel profits is Shopify. While many e-commerce platforms focused on acquiring as many stores as possible, Shopify prioritized building a robust, profitable ecosystem around its core platform. By focusing on channel profits, Shopify not only achieved strong growth but also built a loyal customer base and a recurring revenue stream that continues to drive its success.

Another example is Slack, which achieved profitability in its core messaging platform early on. This focus on channel profits allowed Slack to explore new features and markets without being beholden to external funding, ultimately leading to a successful IPO.

These success stories highlight the importance of prioritizing channel profits over mere growth metrics. For VCs, supporting startups that already demonstrate a path to profitability is not just a safer bet—it’s a smarter one.

How to Evaluate Channel Profits and Build a Sustainable Startup

Understanding the importance of channel profits is one thing, but evaluating them effectively is another. For VCs and entrepreneurs alike, mastering the art of evaluating channel profits is crucial to building sustainable, long-term success.

Metrics to Measure Channel Profits

To accurately assess channel profits, investors and founders need to look beyond traditional metrics like MRR and CAC. Instead, they should focus on the following key metrics:

• Net Profit Margin (NPM): This metric measures the percentage of revenue that remains after all expenses are deducted. A high NPM indicates strong profitability in a specific channel.
• Customer Lifetime Value (CLTV): A high CLTV relative to CAC is a strong indicator of profitable customer channels.
• Gross Margins by Channel: Examining gross margins for each channel can reveal which segments are driving true profitability.

By analyzing these metrics, investors can gain a deeper understanding of a startup’s financial health and identify areas for improvement.

Building a Startup with Channel Profits in Mind

For founders, focusing on channel profits from day one is essential. This means prioritizing the development of a niche market or product line that can achieve profitability early on.

Take the example of GitLab, a popular open-source software company. GitLab prioritized building a self-service model that allowed customers to adopt its product with minimal overhead. This approach not only reduced customer acquisition costs but also ensured that early channels were highly profitable.

Another strategy is to leverage customer feedback to refine and optimize profitable channels. For instance, Asana, a project management tool, continuously gathers feedback from its most profitable customers to enhance its core product and expand into adjacent markets.

The Future of VC: A Focus on Sustainable Growth

As the VC industry matures, the emphasis on sustainable growth is likely to evolve further. Investors will increasingly prioritize startups that can demonstrate a clear path to profitability, rather than those that rely solely on aggressive growth strategies.

This shift doesn’t mean that growth metrics are irrelevant—it simply means that growth must be paired with profitability. Startups that can achieve both will be better positioned to attract investment, scale successfully, and deliver long-term value to shareholders.

The VC world is playing change, with channel profits emerging as a critical metric for evaluating startup potential. By focusing on sustainable profitability, investors can identify startups with the resilience and scalability to thrive in the long run. For founders, prioritizing channel profits from inception is the key to building a startup that not only grows but also generates meaningful returns for its investors.

In a world where unicorns and buzzwords dominate the headlines, it’s the quiet, steady pursuit of channel profits that will ultimately define success in venture capital. As the industry evolves, those who prioritize profitability over growth alone will emerge as the true winners in this game.