Why you should consider profits

The COVID-19 pandemic literally brought the world to a standstill. Like any disruptive event, there have been winners and losers.

For example, airlines are set for their worst year on record with the International Air Transport Association claiming its 290 member airlines revenues would drop to $419bn on 2020, down 50% from 2019.

On the other hand, tech giants share prices have soared during the Covid-19 pandemic. Amazon, Apple, Facebook, and Google all posting revenues which surpassed Wall Street’s expectations. Of these, for the most recent quarter, Amazon reported a profit of $5.2bn, 40% higher than the same period last year.

Boosting Trade Wars

But putting aside COVID-19, organisations have always found themselves trying to stay ahead of the curve, anticipate trends, and deal with unexpected turn of events. The US-China trade war claimed its own share of business scalps. In 2019, the US government instituted a 25% tariff on many Chinese products which included e-bikes, e-motorcycles, e-scooters, and e-skateboards.

Boosted, one of the leaders in premium electric skateboards was most severely hit. Having moved all of its manufacturing operations to China prior to the announcement, it struggled to cope with the financial stress of an additional tariff.

And while there’s no denying the economic impact the tariff had on the company – it’s perhaps not the whole story.

At the end of 2018, Boosted closed a series B round of $60m, bringing the total funding amount close to $80m. Yet, just over a year later they had to close shop… which is a pretty amazing burn rate for a start-up.

According to YouTuber Sam Sheffer, at the time Boosted went out of business, it was working on several new products which included not just skateboards, but also scooters and e-bikes.

The challenge for many start-ups in this day and age, is that they aren’t profitable. They periodically have to raise new capital to keep going.

So, whenever a start-up raises capital, the question on everyone’s mind becomes:

What’s your exit strategy?

This was a question I’d often ask start-ups when I was an analyst at 451 research. Why is this an important question? Because investors of a VC fund make returns when a company exits, either in an IP or mergers and acquisition. If a profit is made off the exit, the fund also keeps a percentage of the profits – typically around 20% – in addition to the annual management fee.

This is why so many VC-backed start-ups aren’t profitable, because profit isn’t the goal. The exit is the goal.

It’s why many of the world’s most valuable start-ups have never been profitable, raising billions of dollars from investors while still losing money every year. For example, Snapchat IPO’d nearly two years ago, and in Q4 of 2019 it lost $241m on 560.8m in revenue. Uber lost over $8bn in 2019.

The list goes on and on. But maybe Wall Street and investors know best. After all, it took Facebook five years to first post a profit and it took Amazon seven years to post a modest profit.

However, the recent pandemic has shifted even this well-established pattern of all sights on the exit. According to the National Venture Capital Association, investment in start-ups have fallen in the United Stated, with only 2,215 investments made in the last quarter of 2019. As a result, it has been reported that 30 start-ups have eliminated over 8,000 jobs.

Source: Pitchbook and National Venture Capital Association

Profit or exit – why not both?

What options are there for start-ups who are finding themselves facing some tough times? It may not be impossible to change direction and become profitable. Hotel and flight broker Snaptravel did exactly that, and outlined a 10 step playbook in how they went from burning millions to profitability and back to growth in 60 days.

The steps involved removing distractions, every project should be stand-alone EBITDA positive, re-negotiating all costs, innovation, re-engaging with customers, and perhaps most importantly, maintaining a strong cash position.

As David Hansson, co-founder at Basecamp and creator of Ruby on Rails said on Twitter regarding Boosted,

“Imagine a Boosted that wasn’t trying to conquer the world of “mobility”, but simply sought to make a great, sustainable, and profitable business out of selling its very popular electric skateboards?”

@dhh

I think this one tweet sums up the Snaptravel playbook, and serves as good advice for a lot of start-ups.

What’s this got to do with security?

Taking all this information, it’s useful to turn it to the world of cybersecurity. The industry is no different from others, there are many start-ups, most of which will never likely turn a profit. And many of these will be busy expanding portfolio’s with little consideration on how it impacts the core business.

So, if you’re on the market to purchase a technology, or you’re undertaking supply chain due diligence – it’s worth looking at the numbers. Is the business profitable, or is the organisation burning through VC money at eye-watering speeds? What will you do if acquire a technology, and that start-up goes bankrupt, or gets acquired in a firesale?

While growth and innovation are great, and VC funding is a much needed resource for many organisations. It shouldn’t come at the expense of profit… because profit is what will give businesses the security it needs.


*** This is a Security Bloggers Network syndicated blog from Javvad Malik authored by j4vv4d. Read the original post at: http://feedproxy.google.com/~r/J4vv4d/~3/dBtmbNFAFmQ/