Forget registered users and app downloads. The new startup vanity metric is profitability.
Silicon Valley’s new vanity metric is profitability
One word, many definitions.
Photo by Mary Turner/Getty Images
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.
Ask a tech entrepreneur these days about the company’s financial performance, and there’s a good chance they’ll talk about their “path to profitability” before growth. With good reason.
For years, many VCs and entrepreneurs have valued revenue growth — even if it meant negative gross profit margins — over everything else. But then the stock market cooled, some public tech company values were cut and startup fundraising became a lot more difficult. Startups, it turns out, can’t just spend, spend, spend forever.
The problem, though, is that entrepreneurs often pick a definition of profitability that suits them. When I press CEOs on what they mean when they say “profitable,” I get a wide range of answers.
There’s positive Ebitda, and positive adjusted Ebitda. There’s cash-flow positive and gross-margin positive. Rarely will you find that “profitable” means “net income according to GAAP.” Or, more simply, the version of “profitable” that we learned in grade school — “I have money left over after I’ve paid for all my expenses.”
So the next time a founder says they plan to hit profitability “sometime next year,” take it with a few heaps of salt. Then ask some questions.
This article originally appeared on Recode.net.
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