Don’t aim to be profitable in 18 months

Given the lower amount of fundraising the last 1.5 years, there’s been a lot of focus among startups to become profitable. But for early-stage startups seeking venture funding I think it is the wrong focus.

Being profitable is a good thing, but it is a bad objective for a startup during the first few years. And it is not a great argument when raising pre-seed, seed or Series A funding. Capital efficiency is important, but investments in product and team will almost always mean cash and accounting losses.

The problem is that being marginally profitable doesn’t mean that you are making quick progress towards building a meaningful and large company. That leads to profitability in itself not being very value-creating, unless it is combined with revenue growth (which is by far the main driver of value, especially at seed).

For a startup it is always good to have a plan that takes the company, with some cost cutting, to break-even.1 That should be possible for many software startups from the combination of fixed costs for the team and (high gross margin) revenue. But it requires revenue growth, as cost cuts alone are rarely enough before you have tens of millions of euros in revenue.

I think the focus on capital efficiency is good, but a venture-backed startup on a reasonable track should not focus on becoming profitable. It should focus on making sure it is on a path to be fundable by improving the product, selling to more customers, dominating new market segments or geographies and making sure it solves important problems for its customers.

  1. Often it is enough to get to below €100,000 in monthly cash burn if you have institutional venture funds as major investors and are still growing at a reasonable pace. ↩︎

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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