SAN FRANCISCO: For the last decade, young tech companies were fuelled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and startups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.
The nascent change is being driven by the stumbles of some high-profile “unicorns” just as they reached the stock market.
The lacklustre performances have raised questions about Silicon Valley’s startup formula of spending lots of money to grow at the expense of profits. (All of those companies lose money.) Public market investors, it seemed, just weren’t having it. “A lot of these highly valued companies have run into the buzz saw of Wall Street, where they’re questioning or reminding us that profitability matters,” said Patricia Nakache, a partner at Trinity Ventures, a Silicon Valley venture capital firm.
For startups and investors that were used to heady times and big spending, that means it may be time for a reset.
In 2015, unicorn startups sucked in billions of dollars in funding and soared to stratospheric valuations. In 2016, Jim Breyer, a venture capitalist who was an early Facebook investor, predicted “blood in the water” for the unicorns. But the money continued to flood into tech startups from overseas investors, private equity firms, corporations and Soft-Bank’s behemoth Vision Fund. By the end of 2018, startups in the United States had raised a record $131billion in venture funding, surpassing the amount collected during the late 1990s dot-com boom, according to Pitchbook and the National Venture Capital Association. At a startup conference around 10,000 founders, investors and “innovators” watched interviews with slightly more famous founders, investors and “innovators” from a dark, cavernous room. Onstage, entrepreneurs lamented the unforgiving stock market and challenging investment environment.
Bird, the scooter startup, announced $275 million in fresh funding. But its chief executive, Travis VanderZanden, said he had been able to raise that money only because his unprofitable company had taken steps this year to shore up its losses. The shift toward making a profit wasn’t easy, Travis VanderZanden said. “I’m an ex-growth guy, and sometimes it’s painful for me,” he said. But spending fast to grow fast was just no longer feasible, he added. It is now difficult for “a growth-at-all-costs company burning hundreds of millions of dollars with negative unit economics” to get funding. “This is going to be a healthy reset for the tech industry.”
Source: Small Biz-Economic Times