I just saw these insights in an IG post from Ecommurz about The Startup Bubble; there are some interesting questions in there:
Are good product-market fit not enough to penetrate conventional markets, so that burning money is always a must? Or will pursuit for profitability turn back values brought by technologies, and essentially convert these tech startups into digitized versions of their conventional counterparts?
Question from IG post Ecommurz
I’ve never understood why people think there are 2 ‘types’ of economic engines for new ventures (focus on valuation or focus on profit).
At the end of the ’90s, people were thinking there was a new economy. Economists published books about a new economic model amidst the internet bubble.
In the past few years, the same happened again, especially in upcoming economies.
Maybe the lessons don’t spread fast enough or people ignore things or we’re addicted to the boom and bust cycle.
Logically, valuation should follow profitability (which is why traditionally, valuations are based on profit or EBIT).
The ‘valuation model’ which apparently people believe exists, leads to average Joe or some big institutions covering up for the failure to make a profit.
Investors keep pumping money just to IPO. The IPO makes them rich and it transfers the losses to other people through the stock exchange.
Maybe a simplistic view, but if we use that as the driver of our decisions to invest or not, we’d create fewer booms and busts. Speculation is not a good thing for the economy or for people.
Startups should focus on making profits. Those profits are reinvested.
If we see a very healthy profit engine, investments could be used to accelerate the profit generation, NOT to keep searching for profit for a decade.
For bigger startups, this growing pressure only ends with profitability or exit. With the financial and stock performances, new or incumbent, showing that the market can be a thorny path, options may be limited to growing revenues by raising fees or cutting costs by shrinking the organization.
Statement from IG Ecommurz
I think we need to give the new startup generation a completely different playbook. Help them to build a solid foundation for their company. Create a strong economic engine that’s based on profitability. A flower grows with sunshine and water. You can add a little fertilizer (investment) to make it grow. This is why we in Ekipa Agile Consultancy Indonesia start the Venture Grower service to help Startups scale up with a solid foundation.
And as investors, we should look at sustainability, at building companies that add true value and impact to humanity and our planet. As long as everything is just about ROI, and making a quick buck, we will end up with the damage we will see in the upcoming months.
