Are Communities Investable?

Jul 11, 2021

Startup investments are surging. Last quarter, startups from all around the world raised $156 billion — a new record.

The market is crazy. But is it crazy enough to invest in communities? I've spoken with more investors than I can count about community-driven companies — what excites them, and the reservations they have.

Let's explore: are community-driven companies investable?

  • VCs need to see a path to huge returns to invest in anything
  • Community as a go-to-market is a new approach
  • Having high-leverage members or products is an attractive opportunity
  • Don't take investment if you can't do the napkin math yourself

Specifically, we're talking about a community that's attractive to venture capitalists here.

"Investable" for a VC means that an investor is able to realistically see a path for a company to get big enough for the investment to return a meaningful amount of money to their fund they're investing on behalf of.

VCs have access to the best, most interesting early-stage startups in the world — so these potential outcomes have to be BIG.

So, a community that's looking to raise $1M in a pre-seed round would need to be able to have a compelling story for how it becomes at least a $100M company (some VCs will even need to see a path to $1B or larger before they invest).

Are any communities even that big? It depends how you define community. A few examples:


Reddit is made up of thousands, if not millions, of sub-communities with 52M daily active users. They are the most well-understood community-driven company in the world. In February, they were able to raise funding that doubled their valuation to $6B. The value of digital communities has become more clear to investors.

However, Reddit is a special case because they aggregate communities. They aren't just one singular community.


Peloton makes stationary bikes and other workout equipment, but they have a thriving and devoted rider and instructor community. They went public and brought in $1.8B in revenue last year. Their market cap is around $35B.

Community as a Go-To-Market Strategy

The difference with Peloton is that the community evolved around the business. I would argue that Peloton's main product is actually their community, not their bike, but it didn't start out that way.

What's happening now is that people are starting digital (and in some cases IRL) communities on Slack, Discord, Circle, or elsewhere and then trying to build businesses on top of them. They've flipped the script.

Using community as a go-to-market strategy is a fairly new approach since the infrastructure to launch and support a community is more accessible than ever, and people are craving community more than ever due to the pandemic.

The jury is still out with investors — some see community as a path to an engaged core group of advocates, while others don't see how communities remain tightly knit for the longterm (they're worried about Dunbar's Number).

There are great investors on both sides of the debate.

The core problem is that as a community adds members, it becomes harder to maintain a high quality member experience and create meaningful connections between members.

Even Y Combinator's facing this criticism — their batches keep getting bigger and bigger, and there are signs that some founders may be starting to look elsewhere. They even wrote a blog post a few months ago to try to dispel this notion.

Communities are trying lots of different things to get around this but the best, and easiest, strategy is creating sub-communities / groups as the community gets larger. The challenges then become:

  • Not expanding to too many channels / sub-communities too quickly (you want each one to have lots of member engagement)
  • Picking the things people in your community actually want to create sub-communities around (you can decentralize this but then it's likely people will create too many)
  • Moderating more places than you had to before

The good news is that you don't necessarily need millions of members to create a billion-dollar community. There are (at least) two ways to create enough value with a smaller number of members to make a community interesting to investors:

High Leverage Members

Investors need more than just tackling the challenges above, though. Some types of members can help provide out-sized returns, and having them in your community is interesting to investors. Building niche communities specifically for them is an attractive opportunity.

Two examples are On Deck, and my startup Launch House. Both communities are built around startup founders. Startup founders have incredible opportunities to generate returns for investors. Launch House also builds for creators, since we're bullish on creators as a high-leverage opportunity in the years to come.

Why would an investor invest in 5-10 companies a year when they can have access to a curated community of hundreds, or even thousands, of startup founders? In this case, the investors reap the benefits even if they don't invest in the companies within the community themselves.

High Leverage Products

Let's go back to the Peloton example for a second. What if Peloton had started out a cycling-club that wanted an at-home indoor option for when it rained?

Digital communities should be exploring what types of high-leverage products (digital or physical) they can create specifically for their members. The larger the appeal of these products, the larger the community can become.

Peloton didn't have millions of members when it raised venture capital at a unicorn valuation — only now, 9 years into their business, do they have 4 million members.

Even if you're given the option, taking on investment funding may not be the right choice.

Taking on investment isn't the right move for every business, or community. It's a deeply personal question that also depends on the fundamentals of business / community.

Once you take on outside funding, you're making a promise to your investors to provide them with a return on their investment. With VCs in particular, this promise is very large — you need to shoot for the moon.

You can't be at all unsure about your community's vision. It's irresponsible to investors to sell them a story if you haven't convinced yourself with some napkin math that the community will be able to drive enough revenue to become hugely valuable. Don't take on investment in these cases.

As an exercise, map out how to monetize and grow your community. How many people could join, eventually? How much revenue will each of them generate for you, on average? What will you build to (realistically) increase this?


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