Do Startups Not Need to Be Profitable?

We’re in this really weird era as Silicon Valley creeps out to the rest of the world, in which investors elsewhere, traditional business owners, and the like, keep advising everyone to, “focus on customers,” “it’s all about revenue,” and questions such as this.

Startups never needed to become profitable.

• Venture Capital investors fund EXITS
• Grants fund impact
• Banks and loans finance revenue
• Kickstarters pre-purchase product

The only time when a business is driven by profitability is when the company is public and shares are sold on a public stock exchange. Profitability tends to correlate to Share Holder Value and public companies are fiscally responsible to shareholders… who tend to like profit.

Bottom line, startups never needed to become profitable.

Heck, startups don’t even need to focus on revenue!

Let’s look at each of those capital sources in a startup scenario:

• As a startup seeking investors, the entity must be a Corporation (preferably a Deleware Corp).
  • The Angel or VC earns equity in the startup relative to the amount invested and a bunch of other not-so-secret sauce
  • Equity is ownership, akin precisely to what the founders have. The difference being that the founders, and team, have jobs whereas investors do NOT.
  • Such investors don’t get anything back until the company is acquired or goes public.
  • NOW… why would revenue/profitability matter? Companies get acquired for IP, customers, marketshare, patents, team, or even just to get rid of a competitor. Profitability factors in but rarely is a company acquired at the 20x ROI such investors seek merely because it’s profitable.
• Grants fund impact
  • Profitability has nothing to do with businesses in this situation.
  • The business has a mission to… employ, provide, teach, etc. In accomplishing that, it secures capital
  • Grants don’t get paid back. Revenue and profit is often irrelevant but can be considered in the funding as most sources of such funds will expect the business isn’t just spending money.
• Banks and loans finance revenue
  • Revenue. Cash flow.
  • Any type of business. If you can pay back the money with 4–20% interest… here you go!
• Kickstarters pre-purchase product
  • We want money to make a thing
  • We make the thing
  • You get the thing

Now, what’s missing from our list of capital sources? Business investors. Partners. And indeed, such people tend to want profits so that they can get their money back from the profit sharing, business ownership, or the job that they have as an investor in the business.

But such businesses aren’t startups. And such investors aren’t venture capitalists.

When you’re starting a typical business, you have a proven and established model and methodology with which to work. Venture Capital doesn’t seek such businesses and thus such businesses aren’t called startups; they’re just new businesses.

No one calls the new real estate firm in their neighborhood a startup. Why? Because it’s very well known how that works.

Such businesses tend to need to show profitability because the “Partners” or business investors coming in have every right to expect that the business knows how to make money… just like every other like-business.

Startups have never needed to be profitable.

Doesn’t mean they shouldn’t be and that’s not to say at all that they can’t be nor that they wouldn’t benefit from being so! But “startups” should be investing every hard earned dollar in creating value and new markets… most investors would question why a startup is profitable.

No, rather, most investors would question why a startup is raising capital if it is profitable; rather than first, now, NOT being profitable, to alleviate that RISK in that photo, and then substantiating the opportunity for investment.