The Other Side of Dilution: When Markups Become Real Returns

We've written at length in past issues about how dilution — primarily through new equity issuance and stock-based comp — can severely erode investor returns, making headline "valuation markups" translate to much smaller price-per-share markups and, ultimately, much lower returns for LPs than expected.

But the opposite is also true.

Over the years, we've invested in a handful of companies with exceptional capital efficiency — names like Micro1, OpenArt, and Kraken — where valuation markups have tracked much more closely to actual price-per-share markups. For investors, understanding what makes a business capital efficient is necessary: it's the difference between a markup that looks good on paper and one that actually shows up in your returns.

A quick primer on dilution

For those less familiar with the mechanics: in a "normal" venture path, founders typically sell ~20% of the cap table at Seed, ~15-20% at Series A, ~10–20% at Series B, and ~10-15% at Series C. By late Series B / early Series C, that implies ~70% of fully diluted ownership is in investor hands.

Layer on stock-based comp — employee option pools typically sized at 10–15% post-money at Seed, topped up at Series A, and refreshed again through Series B/C — and you end up with significant cumulative dilution. Capital-intensive, highly competitive businesses (think OpenAI, Anthropic) sit on the severe end of this spectrum.

But on the other side, some businesses exhibit dynamics that produce fast valuation markups and near-proportional price-per-share markups — meaning investors actually capture those marks in their returns.

Here's what that looks like in practice.

Chart 1: Valuation markup vs. per-share markup across funding stages

On a 50× headline markup from Seed to Series C, a typical dilutive path delivers roughly 25× per-share returns to a Seed investor. A capital-efficient path on the same markup delivers ~40× — about 60% more dollar return on the same headline valuation.

What drives capital-efficient outcomes

A few factors tend to show up together in capital-efficient businesses:

Fast growth. Markups require continuous step-ups in valuation, and growth is what drives those step-ups. Without real top-line acceleration, there's nothing for new investors to mark up against — the whole engine stops. Capital-efficient companies still typically need to grow fast; they just don't need to burn as much cash to do it.

Capital efficiency. This usually shows up as very low burn relative to growth, or outright profitability. The mechanical effect on dilution is enormous: a company growing 100% YoY that's cash-flow positive may never need to raise again. Companies like Surge AI and Midjourney are canonical examples here — Midjourney famously scaled to ~$200M in ARR with a tiny team and no venture capital, meaning early insiders kept essentially their entire stake intact while the business compounded. Surge AI has followed a similar playbook, scaling efficiently with minimal outside capital. Compare that to a company growing at the same rate but burning $2 for every $1 increase in ARR — they'll raise many more times to get to the same endpoint, each round adding 15–20% dilution, plus larger option pool refreshes to attract talent at higher valuations. Same top-line outcome, radically different cap tables.

Inexpensive talent relative to the market. If you're hiring foundation model researchers, top talent can command $5–10M+ annual packages loaded with equity — a single top hire can cost 25+ bps of the cap table. If you're building in a less talent-competitive vertical or smaller market, you can generally hire excellent engineers and operators at a fraction of that cost, with correspondingly smaller equity grants. Over a decade of hiring, this difference compounds dramatically.

Veeva: a textbook example

Veeva is probably the cleanest public example of this dynamic, and the numbers are genuinely wild:

• Founded in 2007. Reached $45M in revenue before raising venture capital.

• Raised a $4M Series A from Emergence Capital in 2008. That's the entire venture round. Total capital raised across the life of the company before IPO: $7M, of which they only spent $3M.

• IPO'd in October 2013 and closed its first day over $4.4B valuation 

• At IPO, Emergence Capital still owned 31.1% of the company — a stake worth ~$1.2B, representing a reported ~300× return on their $4M check.

• Today, Veeva is worth approximately $27B.

• Critically, Veeva stayed disciplined after IPO too: modest stock-based comp relative to SaaS peers, active share buybacks to offset SBC dilution, and no dilutive acquisitions. The capital-efficient DNA didn't stop at the public offering.

The reason Emergence got a 300× return at IPO — not the more typical ~100x return you'd see on a company with a similar headline markup — is partly because of the price Emergence paid, but also because of how little dilution happened between the Series A and the public offering. Minimal funding. Less equity comp. Profitable early. Veeva funded growth primarily with cash from operations, not equity.

Chart 2: Veeva vs. typical SaaS Series A investor ownership at IPO

Veeva's Series A investor retained roughly 31% of the company through IPO — almost unheard of for an enterprise software company. A typical SaaS Series A investor, after 4–5 dilutive rounds and multiple option pool refreshes, retains closer to 4%. On the same headline valuation, that's roughly an 8× difference in actual dollar returns.

The companies we mentioned at the top — Micro1, OpenArt, and Kraken — each check several of these boxes. Micro1 has been profitable historically. OpenArt has been profitable much of its life since raising its Seed. Kraken raised just ~$27M across its first decade. In each case, the cap table tells a very different story than a typical venture-funded peer would at the same stage.

How investors should approach this

None of this is to say avoid highly dilutive businesses. Some of the best-performing investments of the last decade have been in capital-intensive, heavily dilutive companies. The point is to underwrite dilution honestly when you're diligencing a deal.

A few heuristics:

• If a company will need to raise billions to succeed, expect significant dilution.

• If it operates in a space where top talent is in extreme demand and expensive (AI foundation models, autonomous robots, etc.), expect significant equity-based comp dilution.

• If there's no near-term path to profitability or sustainability, expect to be diluted through successive rounds.

None of these are dealbreakers on their own — but they should change the bar you use when evaluating a valuation. A 5× markup on a capital-efficient, profitable business is very different from a 5× markup on a company that has raised significant capital and will need to raise hundreds of millions to billions more before it sees profitability or sustainability. The first shows up in your returns; the second shows up too, just much less of it.

Next time you see a big markup announcement, the question worth asking isn't "how much did the valuation go up?" — it's "how much of that actually makes it to the per-share line?" The answer is frequently a lot less than the headline suggests, and occasionally — in the Veeva-like outliers — a lot more.

✍️ Written by Zachary and Alex