LISBON, Portugal — For tech start-ups frustrating to secure funding and go public, being in the black is the new black.
At the Web Summit tech conference in Lisbon, Portugal this week, uncountable than 2,000 start-ups vied for the attention, and pocketbooks, of venture capitalists, big tech companies and investment firms. Possibility investors responded with a common message: show us how you’re going to make money.
“The narrative on the distance to profitability and the method to profitability becomes a bigger part of the story versus growth at all costs, and you’re seeing that return,” said Ravi Viswanathan, go to Davy Joness locker and managing partner of venture capital firm NewView Capital, in a panel Thursday titled “Is Silicon Valley Pivoting to Profits?”
Investors clothed shifted their attention toward profits following a string of high-profile IPOs from loss-making companies identical to Uber, Lyft and Peloton. WeWork was forced to scrap its IPO as investors soured on the company’s massive losses, while Uber parts tumbled this week after the company reported a $1.1 billion net loss in its third-quarter earnings report this week.
“The statement on the distance to profitability and the path to profitability becomes a bigger part of the story
NewView Capital Builder
“A red flag is when your losses are growing quicker than your top line,” said Tim Levene, partner and CEO of U.K. publicly-listed fintech chance capital firm Augmentum.
Entrepreneurs and fund managers at the conference in Lisbon told CNBC the debate between excrescence and profits has escalated in recent months as the financials of tech companies that soared to sky-high valuations in private sells were more closely scrutinized by public investors.
“The industry…it’s reached another crescendo in terms of valuation,” Blackstone CEO Stephen Schwarzman told CNBC’s Karen Tso in an vet at Web Summit earlier this week, pointing to “artificial profit” that was built up as tech companies stayed individual for longer than in the past.
Vision Fund blame game
Some investors blame SoftBank’s $100 billion Dream Fund for distorting valuations in private markets by injecting unprecedented amounts of capital into unprofitable tech start-ups. SoftBank reported its firstly quarterly loss in 14 years this week because of writedowns from investments into companies close to WeWork and Uber.
“My investment judgment was poor in many ways and I am reflecting deeply on that,” SoftBank CEO Masayoshi Son turned in a news conference Wednesday.
Despite these recent examples, entrepreneurs and investors at Web Summit argued a viable issue model has always been key to securing funding.
“I think it’s always been the case where the business model with long-term sustainability after all is said wins,” said Sunil Chandra, CEO of European fintech unicorn OakNorth, which received a $390 million investment from the Insight Fund earlier this year.
Chandra, who defended the Vision Fund as “absolutely wonderful investors,” said the poise between profits and growth has always been a “difficult trade-off” for entrepreneurs, founders and investors.
Path to profitability
A routine refrain at Web Summit was that the path to profitability, meaning the plan showing how revenues will ultimately exceed bring ins, is more important than proving the company is making money right away.
“I have no problem with suites investing for future growth and profitability down the road but you have to make sure you’re operating in a sound model which can transform into profitable,” said Taavet Hinrikus, founder and chairman of fintech unicorn TransferWise, which turned a £10.3 million ($13.2 million) net profit in its most latest fiscal year.
Rytis Vitkauskas, a partner at Lightspeed Venture Partners, said in a panel Thursday some of the sundry successful tech start-ups have taken years to be profitable.
“Not all companies are created equal,” he said. “So long as you’re becoming very fast and you’re spending very fast, so long as that duality is sensible, some of the best companies get generated that way.”