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We demonstrate the combined effects of optical scattering loss and surface recombination (or carrier diffusion) on the performance and scalability of etched‐post vertical cavity lasers (VCLs). The size dependence of optical losses and threshold gain are determined from pulsed measurements of external quantum efficiency. Deeper etch depths result in a stronger radial dependence of the threshold gain, which quickly increases the threshold current density. With optical loss accounted for, pulsed threshold current density measurements give the extra information needed for evaluating carrier loss. Surface recombination or carrier diffusion also results in threshold current density increases, but scalability is ultimately limited by the ability of the active region to provide enough gain for smaller size, higher optical loss devices. Even with these losses, three‐quantum‐well VCLs with shallow etches have threshold currents as low as 420 μA. © 1995 American Institute of Physics.