At what point should VC firms demand startups turn a profit?

Probably never. In fact, hopefully never.

Venture Capital participates in new business development at a stage when revenues, let alone profitability, are unlikely. Typically Series A stage startups should be focused on competitive advantage, market share, and sustainability, not monetizing customers profitably.

The bubbles aren’t a result of profitability, or lack thereof, they’re a consequence of the substantial capital requirements of innovation and the fact that incredible market shares and capital resources CAN (and do) result in the market makers.

Making those bets is not without risk. Many investments need to be made. Most will be wrong. Thus most burst.

Startup investment is not unlike funding in Films…

  • MOST films bomb. The industry needs ongoing investment because there is more to a film than the customer and revenue.
    • People need experience
    • Creative ideas need to be tried
    • Film schools need cash flow in the industry so people can attend
    • People need to work today so they can work tomorrow
    • Artists and creatives need to be promoted so that they might be a bigger draw in the future
    • Theaters need content or they die and then the outlet dies
  • SOME films do reasonably. Lose a little, break even, or make money.
  • SOME films are blockbusters and bankroll the investors and producers so they can continue.

That is Venture Capital.

Presuming Venture Capital is link a BANK, seeking to be paid back by way of revenues and profitable business, is dangerous to the economy. That’s not their role. Venture Capital takes the risk that other sources of capital won’t/can’t so that we have cash in the industry to fuel the economy – try new ideas, give people experience, fund incubators, pay lawyers (ha!), etc.

Let me correct my first thought, VC Firms should never demand that tech startups turn a profit. Not “probably” – hopefully.

Now, that said, that doesn’t mean Companies don’t reach a point where it’s valid for VCs to expect profitability!   It’s not likely at a Seed or Series A stage by the way; but they can expect it at some point, never demand.  Ultimately, it’s a decision for the company and investors to make together, in the best interest of the stakeholders involved.

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