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But what are they going to do with all those dimes when they run out of nickels? Seriously though, it does seem to be possible to buy revenue, buying profit is

But what are they going to do with all those dimes when they run out of nickels? Seriously though, it does seem to be possible to buy revenue, buying profit is another matter. I suspect these companies are all hemorrhaging cash--while they can show strong revenue growth (btw is that growth linear or better with the amount of money invested? i doubt it), they still need the money to stay in business and support all the contracts they're closing. Also, interesting relationship between money and terms. The more money you get, the worse the terms. The argument of "raise money while it's cheap" (IE, because you get better terms) works for what facebook in '07 when they got $240M for 1.6% from MSFT. For most of these big fundraising rounds though, that money is not cheap.

hayd 11y ago
The trick is not to run out of nickels. To me this looks like a ramp up before an IPO: beef up the books and cash out.
tptacek 11y ago
I don't follow this comment at all. What does this have to do with profit and revenue? If I am profitably selling something direct in Chicago, and I have the choice of waiting for enough profits to accumulate to light up an NYC sales office, or I can take $5MM and light up NYC, SF, Atlanta, and London, then I am in fact in a position to "buy profits". Similarly, if I'm doing mass-market promotion limited by budget and have a cost of customer acquisition that's far lower than my customer LTV, I can slowly accumulate enough proceeds from my business to gradually increase my marketing spend, or I can take $5MM to go nuts with it. Again: so long as the metrics stay steady, I am "buying profits". It's not a mystery. There's no law that says that straightforward things you do with VC money can't generate profits. In fact, the premise is the opposite.
- dave_sullivan 11y ago
  Sure, I can be more specific. First I was suggesting that the money printing machine you allude to will sooner or later get too big to support its weight, at which point you'll be left with a bunch of dimes (or rather, companies that need to raise more to live but can't). I also suggested that the popular narrative of "raise a huge round because money is cheap" is misleading and founders in these large rounds are actually giving up large amounts of control. That's more a general, purely anecdotal observation. My point re: buying revenue but not profits... I think I'm more saying "More money will not make your business more profitable. But it can help book sales." If your metrics all work and you really are a profitable business already, that may be be made more scalable by more money. But if you're unprofitable, even accounting for "growth mode", more money isn't going to improve that by itself. My personal opinion is that many companies are showing impressive revenue growth but glossing over core profitability, and these companies will have a tough time fixing that.
  - mbesto 11y ago
    > "raise a huge round because money is cheap" is misleading and founders in these large rounds are actually giving up large amounts of control. When the money is cheap it means they aren't giving up control relative to when money is expensive. There is a phenomenon in tech VC right now, which is the money is beholden to the tech talent and not the other way around. That's not usually the case, historically speaking. Not to mention, some of these rounds are liquidity events for founders who are looking to cash out personally (i.e. look at Groupon's $800m IPO raise and follow the money). > My personal opinion is that many companies are showing impressive revenue growth but glossing over core profitability, and these companies will have a tough time fixing that. I see what you're saying, but don't think it's necessarily true. Branding and network effects are real things. That's why finance is loving tech right now...if you can buy your land grab and then created a castle with a moat over a 5-10 year time period, there are some serious rewards of establishing a new brand with longevity at relatively low risk. There's going to be a time (soon) where profitability does matter, it's just not now.

hayd 11y ago

The trick is not to run out of nickels. To me this looks like a ramp up before an IPO: beef up the books and cash out.

tptacek 11y ago

I don't follow this comment at all. What does this have to do with profit and revenue? If I am profitably selling something direct in Chicago, and I have the choice of waiting for enough profits to accumulate to light up an NYC sales office, or I can take $5MM and light up NYC, SF, Atlanta, and London, then I am in fact in a position to "buy profits". Similarly, if I'm doing mass-market promotion limited by budget and have a cost of customer acquisition that's far lower than my customer LTV, I can slowly accumulate enough proceeds from my business to gradually increase my marketing spend, or I can take $5MM to go nuts with it. Again: so long as the metrics stay steady, I am "buying profits". It's not a mystery. There's no law that says that straightforward things you do with VC money can't generate profits. In fact, the premise is the opposite.

dave_sullivan 11y ago
Sure, I can be more specific. First I was suggesting that the money printing machine you allude to will sooner or later get too big to support its weight, at which point you'll be left with a bunch of dimes (or rather, companies that need to raise more to live but can't). I also suggested that the popular narrative of "raise a huge round because money is cheap" is misleading and founders in these large rounds are actually giving up large amounts of control. That's more a general, purely anecdotal observation. My point re: buying revenue but not profits... I think I'm more saying "More money will not make your business more profitable. But it can help book sales." If your metrics all work and you really are a profitable business already, that may be be made more scalable by more money. But if you're unprofitable, even accounting for "growth mode", more money isn't going to improve that by itself. My personal opinion is that many companies are showing impressive revenue growth but glossing over core profitability, and these companies will have a tough time fixing that.
- mbesto 11y ago
  > "raise a huge round because money is cheap" is misleading and founders in these large rounds are actually giving up large amounts of control. When the money is cheap it means they aren't giving up control relative to when money is expensive. There is a phenomenon in tech VC right now, which is the money is beholden to the tech talent and not the other way around. That's not usually the case, historically speaking. Not to mention, some of these rounds are liquidity events for founders who are looking to cash out personally (i.e. look at Groupon's $800m IPO raise and follow the money). > My personal opinion is that many companies are showing impressive revenue growth but glossing over core profitability, and these companies will have a tough time fixing that. I see what you're saying, but don't think it's necessarily true. Branding and network effects are real things. That's why finance is loving tech right now...if you can buy your land grab and then created a castle with a moat over a 5-10 year time period, there are some serious rewards of establishing a new brand with longevity at relatively low risk. There's going to be a time (soon) where profitability does matter, it's just not now.