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.
What about bootstrapped startups? Would they fall under the traditional business model?
ALL startups are bootstrapped. I’m not a fan of the notion that bootstrap is different or better. Every founder bootstraps, until they’re not. https://seobrien.com/lets-get-something-straight-all-entrepreneurs-are-bootstrapping
But… what of them? It’s not a “traditional model,” the fact is that startups should NOT be profitable. Or put it another way, when they are profitable, they’re no longer a startup; they’re a company. Until that happens, profits should be funneled into innovation and marketing. Otherwise, they’re recognizing profits (and paying taxes on them) because…???
I agree – being profitable simply means one accumulates more money than they spend. And free cash is bad just for any business.
Whatcha talking about Willis?!? I needed to read this.
I would have written more! But I wanted to get on to my Aston Martin Bond article!!
https://mediatech.ventures/from-fleming-to-fukunaga-the-bond-of-books-to-films
Profit is not needed for a startup. but its value is generally based on the potential and eventual profit of the business model.
Dear Startup Advisors, Entrepreneur Mentors
The most crucial point at the Startup Dev Phase, is to stretch the dollar as much as possible, while deferring a meeting with the tax man lol (dependent on Nature of the business model and product offerings).
I managed to convert my Solar Vision into a Hardware Deep Tech Creative Engineering Vision, shaped by the exponential state of Tech to defer Temptations and bootstrapped for almost 4 painstaking s from my Bedroom office, in an attempt to consolidate it’s 60 yr old stalled hardware growth (post patented) that is still in its infancy (with just one infra project delivered) to shed light on market penetration but, undeniably, a rich Design Heritage in Western Societies. For the followings, cross all sectors from Edu to Space nd a
– UN SDG Fin Bottleneck resolution and fast track global efforts UN
-Defining Sustainable in measurable my units for UNEP
– Cornerstone Minimal Mass Engr towards Resource Efficiency as upstream sup to Circular Economy
-Anchor “Creative Economy” towards Future Growth Dev Template For UNCTAD CE
– Seed the end of Human Inequality beginning
It is my privilege to share Alvin Toffler’s afsuture Shock has been set in motion. We will prevail =)
Startups need to grow by definition. Once they start making a profit they’re no longer a startup. They become a company.
By this definition there are public companies that are still startups.
Yeah I’d concur, *profit* has nothing to do with the distinction of startup not company; it’s merely a reduction of costs so that revenues exceed them.
It’s a question of proven, competitive, and sustainable, business model, or not.
True, it’s not an black and white definition but I still say that startups do focus on rapid growth as you wouldn’t call a new local bakery a startup. That would be called a small business.