Profit is Back! Why Did it Go?

 

Profit is Back - Why Did it Go? - MichaelMaloof.com
Profit is Back – Why Did it Go? – MichaelMaloof.com

Bloomberg reported last year that tech startups were seeking creative ways to define profitability, and that included fun concepts like “our product is profitable if you don’t count the cost of running the business.” I wish I were joking.

As amusing as it is to see startups struggle with the definition of profitable, I’m encouraged to see venture capitalist finally asking the question, “When will you be profitable?”

Startups should be pressed to answer this question, and business development plans should focus on reaching this point as quickly as possible. I believe there would be far fewer spectacular startup failures and wasted investment dollars, if more attention was given to business fundamentals.

There will always be pathfinders – the startups that are so unique and compelling, that the investment is pure speculation. Those unicorns are rare, and I applaud the hearty souls that seek them out. Like all true adventurers and treasure hunters, the gold and the glory keep them going; in spite of the withering skeletons, they pass along the way.

Most startups, worthy of investment, should be capable of demonstrating market need and product viability. They should be held to a higher business standard, and articulate their plan for profitability. Throwing money at startups without expecting them to build functional businesses does everyone a disservice.

I believe the term “vulture capitalist” owes its origin, at least in part, to the practice of investing in a block of startups, pushing each to spend and grow as fast as possible, while hoping that at least one hits big enough to cover the many failures. The entrepreneurs at these firms, pressed by the VC members on their board, bet heavily on visibility – hiring with abandon and spending lavishly to attract media attention and accolades, often at the expense of product viability, market development, and customer care. Profitability was never even on the table.

I hope those days are gone, but I won't hold my breath.

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