Should Startups Care About Profitability?
Mark Suster
62429

Good article but I want to promote a few ideas that my be slightly “different”:

  1. “slow” growth (defined as sub 30% y/y isn’t always bad). it depends on the type of business and other metrics need to be considered (often these are better indicators of long term sales growth and sustainability). a great example is ancestry.com. when ancestry went private the revenue growth rate was less than 20%. however, this is only part of the story. consideration should be given to average monthly revenue per subscriber and lifetime value. for other businesses the concept is the same — how do you value the customer over tenure?
  2. operators need to take into consideration how many unknown variables come into play when you are betting on a future captial raise to it is hoped get you one step closer to receiving a premium on the equity value of the enterprise. capital markets often change/tank and/or investors may drastically change the way the company is perceived in the capital markets. this impacts how expensive the capital will be and directly impacts your liquidity event. these are variables the company can’t control unless they put in place certain future-based “mini agreements” to pre-negotiate some of the terms of a capital raise. further, some investors are honest and some are not. the bad ones look at entry point into a company as a zero sum game where they win while the operator/founder loses. bottom line — chasing growth to, it is hoped, maximize equity value comes with a large set up risks/uncertainties, many of which you can’t control.
  3. stock options and other equity and equity like consideration should be expensed (versus putting these costs below the operating lines, spreading out over many years). this distorts the “growth trajectory” when true costs are not considered. basic cost accounting is key to understand what specifically, from an activity and cost perspective, is driving sales. this is just incorrect. not sure how/why the accouting profession let this happen but it doesn’t make common sense.