10 ms·

Tech Startups Come Up with Some Creative Definitions for ‘Profitable’

137 points by chang2301 10y ago

mdorazio 10y ago
To be fair, so do "real" companies like Tesla, which like to use alternate accounting systems to report profitability while being unprofitable in accordance with GAAP. I like to think that investors who actually do their homework can see through the nonsense in both cases.
- kordless 10y ago
  Or maybe the investors are part of the problem.
  - quaunaut 10y ago
    You can't really just drop a statement like that and walk off. No one knows what you're talking about.
    - kordless 10y ago
      Investors change the game theory in company's model. A company without VC doing the exact same thing as with VC will perform and act differently. Pretty much all we hear about in the news is that VC money is good for startups, founders, employees, the scene in general here and the tech economy. In reality, I doubt that's true long term. My rationale is that the WHOLE game is significantly altered when people who have stored trust get involved in a big way. Stored trust being capital, money or stored work. The game being the market we entrepreneurs look to game in moving forward. The effects of these consolidated investment cycles result in bubbles. The more stored trust involved, and the more systems put in place to bring more stored trust to bear on an idea, market, company, etc., the more disruption there will be on the changes in the cycles. Cycles are a thing with technology, probably due to the discovery phases of market bubbles. All theory, of course. I'd like to see it put to analysis though. Better?
  - samsonradu 10y ago
    Probably as in the investors want to create a Ponzi-like scheme and make profit regardless of the future of the company? (which makes sense IMO)
    - maxxxxx 10y ago
      There are investors and then there are investors. Seems a lot of VC type investors are happy to go along with that nonsense as long as they can get out early and dump their stuff on another investor, often the retail investor.
- philrapo 10y ago
  It is much harder for investors to do their homework on private companies, because (as described in TFA) many private companies selectively disclose metrics that paint them in a positive light. And there are no requirements or standardized metrics of disclosure. I think this is why regulators are concerned about the steep drop in "startups" going public. You have these huge companies with enormous valuations, and they arent subject to the disclosure and reporting requirements that regulators have designed for public companies... The most ridiculous recent example was Morgan Stanley marketing Uber to high net worth individuals. [0] Potential investors were not even allowed to see the financials! You just had to take Morgan Stanley's word for it that the valuation was "reasonable". [0] http://www.bloomberg.com/news/articles/2016-01-14/here-s-what-morgan-stanley-is-telling-its-wealthiest-clients-about-uber http://www.bloomberg.com/news/articles/2016-01-14/here-s-wha...
  - mdorazio 10y ago
    Well I think that makes a good place to put a hard rule if you're considering investing in a startup: don't hand over a single penny unless you can see their actual financials. Of course very few people are going to do this instead of just hopping on the startup bandwagon, but it's easy to not play the game.
- eonw 10y ago
  you know, i would have thought investors on that level were doing their homework too, but look at Theranos... raised a unicorn level valuation without ever really proving their product worked at all. Isnt Palantir in trouble too?
Androider 10y ago
A big company that is profitable is invariably found to have evolved from a small company that was profitable. A big company created from scratch is never profitable and cannot be patched up to become profitable. You have to start over with a profitable small company. With apologies to John Gall ;) I feel there's some truth to it.
- beambot 10y ago
  Amazon?
  - Androider 10y ago
    Amazon is one of the most frugal companies I know, penny-pinching is built into their DNA and one of the reasons IMO they're not a pleasant place to work. Amazon actively chooses to invest every cent they make into expansion (with great results) instead of hoarding profit. That's a huge difference to most companies mentioned in the article that essentially sell $10 bills on the street corner for $9: "Oh, another flyer for a free meal delivery service, why thank you VC-man for paying for my lunch once again. No, I will not ever pay for your service."
    - nickpsecurity 10y ago
      You hit the nail on the head. I've always thought ofvthem as a more diverse and digital Walmart. Bezos wasn't coasting on a nice stream of profit: he was building an empire.
    - adevine 10y ago
      But the point is that at the very beginning of their company, Amazon was most definitely NOT profitable. They took in a huge amount of investment money to be able to grow their business quickly - exactly what all these other companies are trying to do.
      - ksherlock 10y ago
        Amazon used to (circa 2000) report pro-forma (non GAAP) profit/losses.
seibelj 10y ago
Well, a focus on profitably is much better than a focus on becoming a unicorn (no matter how bad the terms)
slgeorge 10y ago
Ah! reminds me of the dot com bubble where everyone was profitable! ... uh by EBITDA [0]. A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings [1]. For every cycle, the line swings back and forward between "grow at all costs" and "profit, profit, profit", with the associated attempts to create "silk purses out of a sow's ear" by using bad definitions. Not that this fools VC's or investor high-net-worths, since they know (and create) many of these games themselves. Every business should know profit by product/shipping-unit, line of business/division and overall (gross/net). If we don't know them, we're not running a business, we're running an experiment. Though I much prefer the phase when the industry is talking about "profit" at some level, rather than just buying temporary growth and selling it as "innovation". [0] https://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation,_and_amortization https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe... [1] https://hbr.org/2009/11/how-ebidta-can-mislead/ https://hbr.org/2009/11/how-ebidta-can-mislead/
- mbesto 10y ago
  > A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings Just to be clear. EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. EBITDA is generally regarded as a very good metric to value a company (with a multiple of course). Any smart investor who gives a damn about their private company investment sniff shady EBITDA numbers out pretty quickly. The problem is, very few VCs actually go through this scrutiny or have incentives to provide a true indication of EBITDA. On the other hand, PE firms, who take a large stake in a business, typically do.
  - slgeorge 10y ago
    > EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. Heh, I find it a bit difficult to consider it a useful measure, when (as you point out) you have to immediately clarify how it's calculated. It's like me saying "I'm a world champion sprinter" and then mumbling "as measured by positions in races between my desk and the downstairs loo". There are contexts for specialist use, but overall I'd avoid it. The article was referring to more general business use - PR & investment - I guess another situation where profitability comes up is candidates discussing whether an organisation they might join is profitable. I would argue that if someone uses EBITDA then it indicates that you should be asking lot more hard questions. Not that it's even the worse, as the article points out - my broader point is that every era comes up with new pet terms and ways of manipulating them for PR.
nunobrito 10y ago
An an European startup I had a bright smile when reading this article. Always fun to see how out of touch can startup founders be too often led believing that VC money without balanced revenue/expenses is "normal". They'd certainly be quick to get some cold shower around here. Too often a startup already needs to be profitable in most cases and have some heavy references before even getting 500k of funding, if at all.
- brianwawok 10y ago
  Is this why we aren't getting Google's and Facebook's and Twitter's out of Europe though?
  - gunshigh 10y ago
    It might also be why the US had the dot com and unicorn bubble. And note that Twitter is not, and has never been, profitable.
    - meddlepal 10y ago
      I think I would take the bubbles over relative stagnation.
      - nunobrito 10y ago
        I would like to disagree with that thought because neither are good options, but regrettably agree. Would kind of prefer to see more bubbles because then at least you increase the odds of more companies/people to deliver innovation (in the true and non-cliché meaning of the word).
    - brianwawok 10y ago
      Twitter still seems a more interesting company than most startups I read about across the pond. I can't think of the last say UK based startup that drastically changed my life. I am sure they exist, but I can't think of one right now...
saosebastiao 10y ago
The fact that they opened the article with the example that they did is absolutely ridiculous, considering there are significantly better examples that didn't even receive their own complete sentence. Contribution Margin is a metric that all VCs should keep an eye on. It is a scalability metric: before CM positivity, you are lose money with every unit sold. After you are CM positive, growing sales will only ever help you. The only mistake the SpoonRocket management made (at least as far as referenced in the article) was trying to expand to new cities before they were CM positive. The absolutely moronic-bordering-on-Bernie-Madoff example was Instacart. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets. I certainly hope the Bloomberg writers actually clarified (and just made it sound like they were assuming) how Instacart is calculating Gross Margin, because delivery costs are typically only included on the inbound side, which is a cost that Instacart doesn't manage. Outbound delivery costs are very rarely included, and that is Instacart's whole fucking business. It would be like a grocery store claiming profitability as long as you exclude COGS. In other words, if Instacart is including their delivery costs in their GM calculation, they might have a sustainable business (they'll never be as profitable as their valuation assumes, but at least they could stick around after the VC dries up). If they aren't including delivery costs in their GM calculation, then Instacart is so laughably unprofitable that they don't have a snowball's chance in hell.
mathattack 10y ago
This goes under the name of "Unit Economics" and is reasonable for small startups to use. It's VERY hard for a potentially high growth startup to cover their overhead costs. (If they were already cash flow positive, most likely they wouldn't be talking much to VCs anyway) Companies go through stages: 1 - "Can we build something" 2 - "Will anyone pay for it?" 3 - "Can we turn a profit on each unit?" 4 - "Can we grow profitably and eventually cover our fixed costs?" Generally you want to know #3 before tossing bags and bags of money at a company, but it's ok for startups to ask for money without having it answered. It's also ok for companies to ask for money without having covered their fixed costs yet. To oversimplify... Let's say my fixed costs are $10mm. Let's say each delivery I make turns a profit of a dollar, and each customer uses me for 20 deliveries over the course of 4 years. (Lifetime value of $20, which I get $5 per year) Let's say that it costs me $10 to acquire a company. (Customer acquisition cost) Then in year 1 I'm $5 behind on each customer, but by year 4 I'm $10 ahead. If I'm reasonably confident of these #s, then it pays for me to get as much investment money as possible to invest in customer acquisition. From a current cash flow (and potntialy from GAAP [0] earnings too) perspective I am losing money, but this will maximize the long term value of the firm. [0] https://en.wikipedia.org/wiki/Generally_accepted_accounting_principles https://en.wikipedia.org/wiki/Generally_accepted_accounting_...
- erikb 10y ago
  > If they were already cash flow positive, most likely they wouldn't be talking much to VCs anyway Didn't you talk about high growth startups? Do be "high growth" their profit would need to be in the four digit percentage area or more. So just writing black numbers is that not enough. So yeah, even if they are profitable, they are probably still talking to VCs.
- blantonl 10y ago
  This goes under the name of "Unit Economics" and is reasonable for small startups to use. That's fine. But I think the meat of the article is that there are startups/businesses out there that are using so much smoke and mirrors with financial reporting that it has become a ridiculous process to read a "we are profitable!" press release. I get it - there is an arms race out there to get funding for the "next big thing" which will require hundreds of millions of dollars to get off the ground. But whatever happened to a sound business plan, an experienced team, and a sound business idea? And the "next big thing" is now so saturated by so many players that the arms race seems to be exponentially increased for any possible idea that might have some traction. It is a race to the bottom. Facebook and Google are such outliers that VC has resorted to throwing cash at the next 1,000 Mark Zuckerbergs, which only one or two probably exist in the next 10 years. Capital is chasing returns that are not sustainable.
outworlder 10y ago
> (...) Venture capitalists had begun to prioritize profit over growth. What about "startup == growth"?
Animats 10y ago
GAAP or go home. There are Generally Accepted Accounting Principles. Lots of startups whine that GAAP accounting doesn't represent their coolness, disruption, clicks, and general greatness. In hindsight, the GAAP numbers usually mean more than the vaporware numbers used for PR purposes. If you go public, you have to show GAAP numbers in your financial statements. While private, you can sell to "sophisticated investors". These are like "whales" in the gambling industry; it means they can afford to lose money, not that they have a clue. Most of the trouble comes not from companies that need a long period to do R&D or build up manufacturing capacity, like Space-X. It comes from companies that are losing money by buying market share, hoping that, in the end, they achieve a monopoly position and can make it back. Like Uber. Funny accounting anecdote of the past: remember AOL disks, given out in vast quantities for free? AOL treated those as a capital expense and depreciated them. AOL was losing money for most of a decade while showing numbers that indicated profitability.
- malchow 10y ago
  Wasn't AOL filing GAAP reports at that time, though?
  - Animats 10y ago
    Yes. And they got caught.[1] $300 million penalty in 2005. [1] https://www.sec.gov/news/press/2005-38.htm https://www.sec.gov/news/press/2005-38.htm
- tim333 10y ago
  GAAP can be deceptive. Take Amazon for example which hasn't reported much profits, probably less than $2bn over 20 years, but is now worth $331bn.
  - serge2k 10y ago
    Why does that make GAAP deceptive?
    - 10y ago
blantonl 10y ago
"Profitable profitable" - I, I just can't even understand why someone would say something like this. What's next? "We're negatively profitable right now but hope to swing to an evenly profitable state and then turn positively profitable profitable in Q2 2017" SMH...
- twic 10y ago
  Our profitability is currently in stealth mode.
briantakita 10y ago
One way for companies to game the system is to be late in paying their employees & contractors. If these expenses don't show up in the books, then the company can appear to be in a better financial situation.
- deleted 10y ago
  [deleted]
- djcapelis 10y ago
  Any company of a decent size is generally required to use accrual accounting where expenses are booked during the quarter they're incurred not during the quarter they're paid. Paying expenses late is a cash flow management strategy only, and cannot used to change quarterly revenue/expenses for most companies, just CoH. You're always allowed to have different books that you can write articles about and post in PR pieces or give to people, but your IRS books will almost always have to record expenses the quarter they are incurred, not the quarter they're paid unless you're really small and can use cash basis.
- pyromine 10y ago
  That's 100% not GAAP though, definitely would qualify as fraud.
- PeterisP 10y ago
  I believe that GAAP requires accounting for work expenses at the time when the work is performed - e.g. the salary due for last week of March must be counted in March, no matter if you issued a paycheck right at the end of week or haven't paid it yet for whatever reasons. Though, one way for companies to game the system in GAAP is to be late in paying their employees & contractors by having part of their renumeration be in stock options - people perceive it as compensation, but it can be excluded from GAAP since the value technically doesn't come from "within the company" but from reducing the value of other shareholders.
doug1001 10y ago
profit's an opinion, cash (flow) is king.
educar 10y ago
Did I read the article correctly that uber, lyft are not profitable yet? That's news to me as I thought they were very profitable given the amount of media attention and visibililty they gave got. Are companies like say slack and github profitable? They also get so much attention (atleast here on HN).
- fullshark 10y ago
  They are burning cash trying to get market share.
- tim333 10y ago
  Github interestingly used to be profitable "We bootstrapped the company on a few thousand dollars and became profitable the day we opened to the public and started charging for subscriptions." They seem to have ditched that for the VC funded, hire loads of people, swing for the fences model. http://tom.preston-werner.com/2011/03/29/ten-lessons-from-githubs-first-year.html http://tom.preston-werner.com/2011/03/29/ten-lessons-from-gi...
- dragonwriter 10y ago
  Media attention is often driven by raising and spending VC money, rather than running a profitable operation.
- jsprogrammer 10y ago
  Uber has sold $2.2 billion in equity in 2016 and $10.5 billion overall (I believe there is substantial debt as well). Do we know the total trip count? Uber would need to have made roughly $1.50 per person on the planet to have broken even.
- robbiemitchell 10y ago
  Correct, Uber is not yet profitable. A few months ago I was told by a former employee that average LTV in the US is $15. First-time ride credit is more than that ... plus all other expenses. I have a feeling this isn't about averages, though. Some people use every so often, some make it a way of life.

137 points by chang2301 10y ago

To be fair, so do "real" companies like Tesla, which like to use alternate accounting systems to report profitability while being unprofitable in accordance with GAAP. I like to think that investors who actually do their homework can see through the nonsense in both cases.

kordless 10y ago
Or maybe the investors are part of the problem.
- quaunaut 10y ago
  You can't really just drop a statement like that and walk off. No one knows what you're talking about.
  - kordless 10y ago
    Investors change the game theory in company's model. A company without VC doing the exact same thing as with VC will perform and act differently. Pretty much all we hear about in the news is that VC money is good for startups, founders, employees, the scene in general here and the tech economy. In reality, I doubt that's true long term. My rationale is that the WHOLE game is significantly altered when people who have stored trust get involved in a big way. Stored trust being capital, money or stored work. The game being the market we entrepreneurs look to game in moving forward. The effects of these consolidated investment cycles result in bubbles. The more stored trust involved, and the more systems put in place to bring more stored trust to bear on an idea, market, company, etc., the more disruption there will be on the changes in the cycles. Cycles are a thing with technology, probably due to the discovery phases of market bubbles. All theory, of course. I'd like to see it put to analysis though. Better?
- samsonradu 10y ago
  Probably as in the investors want to create a Ponzi-like scheme and make profit regardless of the future of the company? (which makes sense IMO)
  - maxxxxx 10y ago
    There are investors and then there are investors. Seems a lot of VC type investors are happy to go along with that nonsense as long as they can get out early and dump their stuff on another investor, often the retail investor.
philrapo 10y ago
It is much harder for investors to do their homework on private companies, because (as described in TFA) many private companies selectively disclose metrics that paint them in a positive light. And there are no requirements or standardized metrics of disclosure. I think this is why regulators are concerned about the steep drop in "startups" going public. You have these huge companies with enormous valuations, and they arent subject to the disclosure and reporting requirements that regulators have designed for public companies... The most ridiculous recent example was Morgan Stanley marketing Uber to high net worth individuals. [0] Potential investors were not even allowed to see the financials! You just had to take Morgan Stanley's word for it that the valuation was "reasonable". [0] http://www.bloomberg.com/news/articles/2016-01-14/here-s-what-morgan-stanley-is-telling-its-wealthiest-clients-about-uber http://www.bloomberg.com/news/articles/2016-01-14/here-s-wha...
- mdorazio 10y ago
  Well I think that makes a good place to put a hard rule if you're considering investing in a startup: don't hand over a single penny unless you can see their actual financials. Of course very few people are going to do this instead of just hopping on the startup bandwagon, but it's easy to not play the game.
eonw 10y ago
you know, i would have thought investors on that level were doing their homework too, but look at Theranos... raised a unicorn level valuation without ever really proving their product worked at all. Isnt Palantir in trouble too?

Androider 10y ago

A big company that is profitable is invariably found to have evolved from a small company that was profitable. A big company created from scratch is never profitable and cannot be patched up to become profitable. You have to start over with a profitable small company. With apologies to John Gall ;) I feel there's some truth to it.

beambot 10y ago
Amazon?
- Androider 10y ago
  Amazon is one of the most frugal companies I know, penny-pinching is built into their DNA and one of the reasons IMO they're not a pleasant place to work. Amazon actively chooses to invest every cent they make into expansion (with great results) instead of hoarding profit. That's a huge difference to most companies mentioned in the article that essentially sell $10 bills on the street corner for $9: "Oh, another flyer for a free meal delivery service, why thank you VC-man for paying for my lunch once again. No, I will not ever pay for your service."
  - nickpsecurity 10y ago
    You hit the nail on the head. I've always thought ofvthem as a more diverse and digital Walmart. Bezos wasn't coasting on a nice stream of profit: he was building an empire.
  - adevine 10y ago
    But the point is that at the very beginning of their company, Amazon was most definitely NOT profitable. They took in a huge amount of investment money to be able to grow their business quickly - exactly what all these other companies are trying to do.
    - ksherlock 10y ago
      Amazon used to (circa 2000) report pro-forma (non GAAP) profit/losses.

seibelj 10y ago

Well, a focus on profitably is much better than a focus on becoming a unicorn (no matter how bad the terms)

slgeorge 10y ago

Ah! reminds me of the dot com bubble where everyone was profitable! ... uh by EBITDA [0]. A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings [1]. For every cycle, the line swings back and forward between "grow at all costs" and "profit, profit, profit", with the associated attempts to create "silk purses out of a sow's ear" by using bad definitions. Not that this fools VC's or investor high-net-worths, since they know (and create) many of these games themselves. Every business should know profit by product/shipping-unit, line of business/division and overall (gross/net). If we don't know them, we're not running a business, we're running an experiment. Though I much prefer the phase when the industry is talking about "profit" at some level, rather than just buying temporary growth and selling it as "innovation". [0] https://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation,_and_amortization https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe... [1] https://hbr.org/2009/11/how-ebidta-can-mislead/ https://hbr.org/2009/11/how-ebidta-can-mislead/

mbesto 10y ago
> A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings Just to be clear. EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. EBITDA is generally regarded as a very good metric to value a company (with a multiple of course). Any smart investor who gives a damn about their private company investment sniff shady EBITDA numbers out pretty quickly. The problem is, very few VCs actually go through this scrutiny or have incentives to provide a true indication of EBITDA. On the other hand, PE firms, who take a large stake in a business, typically do.
- slgeorge 10y ago
  > EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. Heh, I find it a bit difficult to consider it a useful measure, when (as you point out) you have to immediately clarify how it's calculated. It's like me saying "I'm a world champion sprinter" and then mumbling "as measured by positions in races between my desk and the downstairs loo". There are contexts for specialist use, but overall I'd avoid it. The article was referring to more general business use - PR & investment - I guess another situation where profitability comes up is candidates discussing whether an organisation they might join is profitable. I would argue that if someone uses EBITDA then it indicates that you should be asking lot more hard questions. Not that it's even the worse, as the article points out - my broader point is that every era comes up with new pet terms and ways of manipulating them for PR.

nunobrito 10y ago

An an European startup I had a bright smile when reading this article. Always fun to see how out of touch can startup founders be too often led believing that VC money without balanced revenue/expenses is "normal". They'd certainly be quick to get some cold shower around here. Too often a startup already needs to be profitable in most cases and have some heavy references before even getting 500k of funding, if at all.

brianwawok 10y ago
Is this why we aren't getting Google's and Facebook's and Twitter's out of Europe though?
- gunshigh 10y ago
  It might also be why the US had the dot com and unicorn bubble. And note that Twitter is not, and has never been, profitable.
  - meddlepal 10y ago
    I think I would take the bubbles over relative stagnation.
    - nunobrito 10y ago
      I would like to disagree with that thought because neither are good options, but regrettably agree. Would kind of prefer to see more bubbles because then at least you increase the odds of more companies/people to deliver innovation (in the true and non-cliché meaning of the word).
  - brianwawok 10y ago
    Twitter still seems a more interesting company than most startups I read about across the pond. I can't think of the last say UK based startup that drastically changed my life. I am sure they exist, but I can't think of one right now...

saosebastiao 10y ago

The fact that they opened the article with the example that they did is absolutely ridiculous, considering there are significantly better examples that didn't even receive their own complete sentence. Contribution Margin is a metric that all VCs should keep an eye on. It is a scalability metric: before CM positivity, you are lose money with every unit sold. After you are CM positive, growing sales will only ever help you. The only mistake the SpoonRocket management made (at least as far as referenced in the article) was trying to expand to new cities before they were CM positive. The absolutely moronic-bordering-on-Bernie-Madoff example was Instacart. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets. I certainly hope the Bloomberg writers actually clarified (and just made it sound like they were assuming) how Instacart is calculating Gross Margin, because delivery costs are typically only included on the inbound side, which is a cost that Instacart doesn't manage. Outbound delivery costs are very rarely included, and that is Instacart's whole fucking business. It would be like a grocery store claiming profitability as long as you exclude COGS. In other words, if Instacart is including their delivery costs in their GM calculation, they might have a sustainable business (they'll never be as profitable as their valuation assumes, but at least they could stick around after the VC dries up). If they aren't including delivery costs in their GM calculation, then Instacart is so laughably unprofitable that they don't have a snowball's chance in hell.

mathattack 10y ago

This goes under the name of "Unit Economics" and is reasonable for small startups to use. It's VERY hard for a potentially high growth startup to cover their overhead costs. (If they were already cash flow positive, most likely they wouldn't be talking much to VCs anyway) Companies go through stages: 1 - "Can we build something" 2 - "Will anyone pay for it?" 3 - "Can we turn a profit on each unit?" 4 - "Can we grow profitably and eventually cover our fixed costs?" Generally you want to know #3 before tossing bags and bags of money at a company, but it's ok for startups to ask for money without having it answered. It's also ok for companies to ask for money without having covered their fixed costs yet. To oversimplify... Let's say my fixed costs are $10mm. Let's say each delivery I make turns a profit of a dollar, and each customer uses me for 20 deliveries over the course of 4 years. (Lifetime value of $20, which I get $5 per year) Let's say that it costs me $10 to acquire a company. (Customer acquisition cost) Then in year 1 I'm $5 behind on each customer, but by year 4 I'm $10 ahead. If I'm reasonably confident of these #s, then it pays for me to get as much investment money as possible to invest in customer acquisition. From a current cash flow (and potntialy from GAAP [0] earnings too) perspective I am losing money, but this will maximize the long term value of the firm. [0] https://en.wikipedia.org/wiki/Generally_accepted_accounting_principles https://en.wikipedia.org/wiki/Generally_accepted_accounting_...

erikb 10y ago
> If they were already cash flow positive, most likely they wouldn't be talking much to VCs anyway Didn't you talk about high growth startups? Do be "high growth" their profit would need to be in the four digit percentage area or more. So just writing black numbers is that not enough. So yeah, even if they are profitable, they are probably still talking to VCs.
blantonl 10y ago
This goes under the name of "Unit Economics" and is reasonable for small startups to use. That's fine. But I think the meat of the article is that there are startups/businesses out there that are using so much smoke and mirrors with financial reporting that it has become a ridiculous process to read a "we are profitable!" press release. I get it - there is an arms race out there to get funding for the "next big thing" which will require hundreds of millions of dollars to get off the ground. But whatever happened to a sound business plan, an experienced team, and a sound business idea? And the "next big thing" is now so saturated by so many players that the arms race seems to be exponentially increased for any possible idea that might have some traction. It is a race to the bottom. Facebook and Google are such outliers that VC has resorted to throwing cash at the next 1,000 Mark Zuckerbergs, which only one or two probably exist in the next 10 years. Capital is chasing returns that are not sustainable.

outworlder 10y ago

> (...) Venture capitalists had begun to prioritize profit over growth. What about "startup == growth"?

Animats 10y ago

GAAP or go home. There are Generally Accepted Accounting Principles. Lots of startups whine that GAAP accounting doesn't represent their coolness, disruption, clicks, and general greatness. In hindsight, the GAAP numbers usually mean more than the vaporware numbers used for PR purposes. If you go public, you have to show GAAP numbers in your financial statements. While private, you can sell to "sophisticated investors". These are like "whales" in the gambling industry; it means they can afford to lose money, not that they have a clue. Most of the trouble comes not from companies that need a long period to do R&D or build up manufacturing capacity, like Space-X. It comes from companies that are losing money by buying market share, hoping that, in the end, they achieve a monopoly position and can make it back. Like Uber. Funny accounting anecdote of the past: remember AOL disks, given out in vast quantities for free? AOL treated those as a capital expense and depreciated them. AOL was losing money for most of a decade while showing numbers that indicated profitability.

malchow 10y ago
Wasn't AOL filing GAAP reports at that time, though?
- Animats 10y ago
  Yes. And they got caught.[1] $300 million penalty in 2005. [1] https://www.sec.gov/news/press/2005-38.htm https://www.sec.gov/news/press/2005-38.htm
tim333 10y ago
GAAP can be deceptive. Take Amazon for example which hasn't reported much profits, probably less than $2bn over 20 years, but is now worth $331bn.
- serge2k 10y ago
  Why does that make GAAP deceptive?
  - 10y ago

blantonl 10y ago

"Profitable profitable" - I, I just can't even understand why someone would say something like this. What's next? "We're negatively profitable right now but hope to swing to an evenly profitable state and then turn positively profitable profitable in Q2 2017" SMH...

twic 10y ago
Our profitability is currently in stealth mode.

briantakita 10y ago

One way for companies to game the system is to be late in paying their employees & contractors. If these expenses don't show up in the books, then the company can appear to be in a better financial situation.

deleted 10y ago
[deleted]
djcapelis 10y ago
Any company of a decent size is generally required to use accrual accounting where expenses are booked during the quarter they're incurred not during the quarter they're paid. Paying expenses late is a cash flow management strategy only, and cannot used to change quarterly revenue/expenses for most companies, just CoH. You're always allowed to have different books that you can write articles about and post in PR pieces or give to people, but your IRS books will almost always have to record expenses the quarter they are incurred, not the quarter they're paid unless you're really small and can use cash basis.
pyromine 10y ago
That's 100% not GAAP though, definitely would qualify as fraud.
PeterisP 10y ago
I believe that GAAP requires accounting for work expenses at the time when the work is performed - e.g. the salary due for last week of March must be counted in March, no matter if you issued a paycheck right at the end of week or haven't paid it yet for whatever reasons. Though, one way for companies to game the system in GAAP is to be late in paying their employees & contractors by having part of their renumeration be in stock options - people perceive it as compensation, but it can be excluded from GAAP since the value technically doesn't come from "within the company" but from reducing the value of other shareholders.

doug1001 10y ago

profit's an opinion, cash (flow) is king.

educar 10y ago

Did I read the article correctly that uber, lyft are not profitable yet? That's news to me as I thought they were very profitable given the amount of media attention and visibililty they gave got. Are companies like say slack and github profitable? They also get so much attention (atleast here on HN).

fullshark 10y ago
They are burning cash trying to get market share.
tim333 10y ago
Github interestingly used to be profitable "We bootstrapped the company on a few thousand dollars and became profitable the day we opened to the public and started charging for subscriptions." They seem to have ditched that for the VC funded, hire loads of people, swing for the fences model. http://tom.preston-werner.com/2011/03/29/ten-lessons-from-githubs-first-year.html http://tom.preston-werner.com/2011/03/29/ten-lessons-from-gi...
dragonwriter 10y ago
Media attention is often driven by raising and spending VC money, rather than running a profitable operation.
jsprogrammer 10y ago
Uber has sold $2.2 billion in equity in 2016 and $10.5 billion overall (I believe there is substantial debt as well). Do we know the total trip count? Uber would need to have made roughly $1.50 per person on the planet to have broken even.
robbiemitchell 10y ago
Correct, Uber is not yet profitable. A few months ago I was told by a former employee that average LTV in the US is $15. First-time ride credit is more than that ... plus all other expenses. I have a feeling this isn't about averages, though. Some people use every so often, some make it a way of life.