Bubble, Part 2

It’s always surprising when a new flood of funding and M&A occur in the online media industry. It has happened quite a few times, and it appears as though we’re in the middle of those rising waters once more. VCs are eager to find the next company that has a realistic chance of reaching maturity (and an IPO hopefully). Larger companies have the same excitement for these young companies to help pad their balance sheets and compliment their existing offerings. What is surprising each time this occurs is that most of us don’t seem to learn from our shared history. The same formula seems to apply each time. Take a start up with a funny name, add $10MM-$100MM in funding, increase your user base online, and hope for a large acquisition rooted in inflated valuations. A new start-up bubble has been growing rapidly, and many of these young seed-stage companies haven’t been focusing on generating revenues or profits. I submit that the goal of a start-up should be to generate profit, not funding.

These two ideas are not mutually exclusive — And yes, funding can be required to help fill the gaps with initial cash flow and bring on a solid management team; however most teams seem more interested in what a potential term sheet will look like. We hear these amazing stories like Facebook, and the multitude of mobile and video acquisitions lately. It sounds exciting, but the objective of a company is to generate a unique product or service while attaining profitability for the benefit of the shareholders and employees.

The basic fundamentals of developing a successful business are being missed here. While it’s good that these teams are focusing on product development, only a handful seems concerned with being self-sufficient organizations. Relying on your sales team to generate income in order to attain profitability and a cash flow positive position is difficult. It’s the hard way, but it helps provide opportunities for employees to turn their time and energy into real equity. It allows the entire company to move in the same direction, while avoiding dilution and arguments about true valuation.

We can all relate a multitude of stories surrounding the famous “Dot-Bomb,” however we continue to miss the principles that guide the start up process. It’s contrary to the entrepreneurial spirit — Love building teams, transferring your enthusiasm for your company, team, and product to anyone and everyone. The objective of the business world has become the desire to boost our egos and make money, not the desire to create something better and continued growth for our industries and global economy. I’m looking forward to seeing more companies with a core focus on profitability to ensure their growth, as a new wave of M&A starts.