Profit · Fundraising

Why is fundraising glamorized over making profits in the tech startup world?

Shingai Samudzi

September 9th, 2016

I'm constantly bombarded with junk email about investor pitch nights, or fundraising 101.  You see founders who proudly list how much their past companies have raised.

But I rarely see anyone in the tech startup world talk about how profitable their company is - not how much revenue, but how profitable.  Profit doesn't even really seem to be pushed as that much of a priority in any of the founder education series that I see.

I have my own theories, but am curious to hear your thoughts about why fundraising is given higher importance in the tech scene than profitability?

Michael Brill Technology startup exec focused on AI-driven products

September 9th, 2016

Open Excel.
Enter the names of the top 25 private technology companies in column A.
In Column B, put a 1 next to the company that achieved profitability in its first 18 months
enter @sum(b1..b25) in b26
make a fist
count fingers on clenched fist
those numbers should be equal

Premature optimization for profit is a recipe for slow growth and virtually guarantees that you'll lose against a competitor who is making massive investments using cheap capital. It's the same logic as parents who send their kids to college instead of off to work at the mill.

Elizabeth Charnock CEO at Chenope

September 10th, 2016

Very simple.  Organic growth almost never gives you a big wad of cash without doing a lot of work, both on the product side and the business side.   It is slow, and you are bound to experience the usual setbacks (e.g. a customer loses their budget) if B2B; getting paying end-consumers is arguably even harder still in a world where so much is presumed to be free, especially from startups. 

Having millions of dollars to spend on nice offices, furniture, PR, trips to ritzy conferences, high salaries etc is glamorous.  It just is.  But it is based on a house of cards rather than truly earned. 

By contrast, having to pay sales calls, negotiate contracts, chase customers to pay receivables, etc is not glamorous at all. But you are *vastly* more likely to build a "real", sustainable business this way, and much less likely to crash and burn because you have built something that has legitimate value.  True, you are less likely to have a gigantic exit, but the vast majority of venture-backed companies don't either.   Plus you and yours still have all the equity, so you profit much more from whatever exit.

Further, if you really have something of value that others can't replicate due to patents,  technical difficulty, or similar, it doesn't matter much how much venture capital others have. (At least not in markets in which the software delivering the promised value actually matters.)

I bootstrapped a company to an 8-figure run rate right in the middle of the valley. Most people locally thought I was crazy, and indeed it was difficult. Building a real business from scratch requires real skills.  But it was real, not a scam. And I learned a tremendous amount from it.   We sold most of it to EY for what was a reasonable exit.   I now have another company, and we are bootstrapping it as well.  If you have the skills and mental strength to do it, I absolutely recommend it. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 10th, 2016

Shingai: A rational approach to be sure but I doubt that there is sufficient data regarding bootstrapped companies. Mary Jo White, the SEC Chairperson gave a speech at Stanford recently where she noted that the average for lifespan for VC funded companies was less than 2 years and that was for firms that had raised an average of $14 million.  A traditional, accepted metric for valuing a public company is p/e (price to earnings). If you go to a business broker to buy a private business in the US you will pay 3 times earnings( more or less depending on the business). A business with no earnings has a dubious value, if any. Is Uber worth $50 billion when its tech could be replicated for under $5 million and its stable of drivers hijacked with a slightly higher payout?  I was around for the tech boom and the tech wreck. There is value and there is hype. Intelligent VCs understand the difference.

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

September 10th, 2016

Venture investing is about rapid growth of ROI from capital gains, not for consistent ordinary income at a low cost (value investing). If you can grow your top line bigger faster by plowing all your potential profits (bottom line)into more growth you stand to gain more valuation. Scott McGregor Entrepreneur, start-up advisor, entrepreneur coach and product innovation consultant in Silicon Valley.,, (408) 505-4123 Every moment we face the choice to do something ordinary or extraordinary. Fill your life with extraordinary choices. Sent from my iPhone

Michael Brill Technology startup exec focused on AI-driven products

September 10th, 2016

Shingai, nobody said that optimizing for revenue growth was the only way to achieve success. Google "jason fried" and read a bunch of well thought-out arguments for a cashflow-driven strategy.

However, the data is pretty clear. The big hits that venture investors rely on come from high revenue growth companies that need lots of cash to fuel their growth. They don't come from companies that optimize for profit in the early days. Logically, this makes all the sense in the world to me (power law and all that). 

As for why people talk about funding instead of business performance, well we all want to use the most compelling evidence available to us to further our goals. If you sold your company for $1b then that's what you'll talk about. If you grew your company to $100m then that's what you'll talk about. But if you're a 12 month old company that's trying to find product market fit, then that $5m financing is what you talk about. 

It's like this... in your one line bio, you mention you're a CMU grad. Why? How does that tell the world about your profit-generating capabilities? It doesn't, but it's the best social proof you have right now and it gets people to pay attention to you. When you sell your billion dollar company then that'll be what's on your one line bio. But until then, flaunt what you got.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 9th, 2016

The answer is that the blind are leading the deaf and dumb.  A company operating at a profit is less likely to fail which is what happens to most startups. During the tech boom someone suggested that market share was more important than profits. You can see how that turned out.  Serious money ends up in serious businesses run by serious people. Can you find an angel group to fund to fund businesses that are losing money? Yes, but the angels will run out of money sooner or later.

Brandon Brown

September 9th, 2016

It is because operating at a loss to drive share price can produce a financial "win" - this thinking is counter-intuitive to most. in venture, value doesn't live doesn't live and die on the bottom line, innovation and the "belief" of huge "future" upside is more important.

It's the reason that uber was able to burn ~$900M in the first half of 2015 while growing their value to ~$50BN. It's why Amazon was able to operate flat from 2012 - 2015 yet triple their share price during the same time.

If an investors shares in your company remain highly valued, they don't care if you lose money. As long as other people are willing to trade cash in exchange for their shares at a higher price than they paid, they make money.

I recently read an interview from 2015 with the CEO of Slack where he was asked if his company was really "worth 3 billion?" and his response was: it is worth 3 billion because people say that it is"

At the simplest level, people are brokering in faith. Faith is maintained by the belief that through innovation, the future value of the company will be worth more tomorrow than it is today.And under this assumption, so long as the faith is maintained, the value of your company will grow regardless of how much cash you burn.

Akram Benmbarek Building & Growing innovative businesses

September 10th, 2016

It is indeed a good observation that several entrepreneurs glamorize raising money over building a long term profitable business. Some because they don't know any better and some because they have a very good reason that stems out of the early factors that gave birth to what is today called " Silicon Valley " and made this place pretty unique in building globally disruptive businesses.

On the latter, the VC community during its early days, which was comprised of successful entrepreneurs from the hardware industry like Kleiner and Perkins who graduated out of Fairchild semiconductor, formed capital to back disruptive ideas that needed heavy non conventional financing to bring those ideas to life and grow them globally. 
That's how the culture of VC funding developed initially, to fund companies Like Compaq computer by Sequoia, and Sun microsystems by Kleiner. Then diversified their investments to new innovative sectors like Telecom equipment ( ie: Cisco), internet startups ( Amazon by Sequoia, and Ebay by Benchmark). Those businesses needed heavy funding to get off the ground and even more funding to scale. Hence the need for entrepreneurs to prioritize funding as the company evolves.

Nowadays, with the technology being commoditized and the cost of building a product becoming more affordable, investors tend to invest big money in validated ideas to help entrepreneurs scale faster. It's all about speed to market. As opposed to Groupon, Uber made sure that its concept doesn't get replicated in different countries, they raised tons of money to scale up and go globally very fast.
In the case of those disruptive ideas that aim to serve a very large market, investors understand that profitability can only be achieved to the detriment of fast scaling.

Therefore speed to market is prioritized, with the idea that profitability will be reached some time later, when growth decelerates.

That said, this is not the route that all entrepreneurs have to pursue. Some entrepreneurs are pursuing business ideas that can grow organically but doesn't need to grow at 4 digits annually.

There's no right or wrong, entrepreneurs need to understand the business they are building, the market potential, the competitive landscape, and decide whether they are developing a disruptive idea that needs to grow fast globally before somebody else copies it, or a business that can be profitable from year one, that his high margin, but it is limited in growth potential and is not susceptible to threatening competition.

Burke Franklin

September 9th, 2016

I was told by a VC many years ago that my biggest problem for funding was that I was profitable! (That was in the pre dot.bomb era.) If I had $0 profit, then there's no way to run a valuation formula since they factor in profits -- no profit, then no formula, then grab a number out of the air! Does that explain the crash?!? What if you could build a business without funding (you may just have to!) I did. Although, over time (27 years) I have borrowed as well as raised a bit here and there, but mostly because I was profitable! There's more to "Mastering the Fundraising Game" -- smart money isn't playing games and they want to see a plan for a sustainable business. If you're interested in that, I have apps and templates that can help!

Jim Scott CFO * Financial Growth Accelerator * Virtual Company Architect

September 11th, 2016

Getting back to the original question, for the same reason home run hitters get the best press in baseball. It is a big event, maybe a game changer, and takes ability, luck and skill to hit a home run and raise funding. The actual playing of the game, the team focus on every pitch and play, awareness, position play, not making errors, drive and team work gets much less coverage. 
If you can boot strap, provide a product that delights customers, and do it profitably from early on, you will likely see much less publicity than a funding mention gets. Not much glamour in really building a business, much more news when folks win the funding lottery.