But while many startups are still trying to suck up as much VC funding as possible for speedy growth while the going is good (speculations about a bubble abound), there is a growing conversation about a different model.
“You need to think beyond your short term mega-round with a mega valuation.”
This is not about bootstrapping businesses exactly. It’s people arguing that the way to conquer the world is to build a solid foundation of a profitable business first rather than “Blitzscale” — to use a Silicon Valley term — using endless venture capital cash.
“If you want to grow beyond a quick exit and reach a decent size, as a regional or global champion, you have to be independent financially,” says Lionel Baraban, the cofounder and chief executive of French payments terminals maker Famoco.
Karim Kaddoura, cofounder and co-CEO of car rental app Virtuo, agrees: “As an entrepreneur, you need to think beyond your short term mega-round with a mega valuation,” he says.
“I don’t think that’s showing a lack of ambition. I think it’s about turning your attention back to the fundamentals and being wise about making sure they are sound.”
The profitability — or often lack of it — at technology companies is increasingly being scrutinised by investors globally after losses spoiled WeWork’s plans for initial public offering last year and weighed on Casper’s run-up to the stock market this month in the US.
Prominent US venture capitalist Fred Wilson recently wrote a widely-shared blog post called: “The Great Public Market Reckoning” where he argued that the narrative that had driven startup hype and valuations for the last decade was now “falling apart”. VC-funded excess, which encouraged fast growth above all else, should be ditched for a focus on profit margins.
A few months ago Travis VanderZanden, chief executive of the scooter startup Bird, a classic example of the growth-before-profits company, said that he was now focused on profits first. “The challenge is to try to stay disciplined,” he said.
In Europe, the conversation about profitability isn’t just a side effect of the WeWork aftermath, although it has accelerated as a result.
Startups on the continent have long had less access to capital than their US rivals, especially at the later stages of development, forcing them to be more disciplined. Blitzscalling was not an option for most.
One big difference today though is that now this profits-first approach is becoming more fashionable and indeed more desirable for investors worried about becoming the next case-study in overexuberant tech investing.
David Sainteff, a partner in Paris and Berlin-based seed and growth investor Global Founders Capital, tells Sifted that for him real profits are more important than ever in his investments.
“Anxiety about IPOs, exits and bigger rounds in Europe mean founders have been focused on showing solid economics as early as possible,” he says. “There’s a cultural aspect to it… I think it’s never too early to think about profitability.”
Lucile Cornet, principal at investment firm Eight Roads Ventures in London, says that for her, profits are even more important for European companies because the path to exit is not as easy compared to the US.
“It’s especially true in Europe that we want to see a path to profitability,” she says.
“Exits are the billion-dollar question in Europe, and holding periods are longer for VCs. Profitability makes us more relaxed in that context. It means startups are sustainable.”
Making profits may be trendy at the moment, but there are long-running questions about whether being too profit-focused could mean slower growth for Europe’s upstarts, or whether the region could miss out on some longer-term, riskier bets as a result.
Many technology giants in the US have built their entire models on growth-first loss-making approaches and have been wildly successful.
“Profitability can’t be the single model in Europe.”
There is also concern that with some sectors, such as quantum computing and biotech, profits cannot be an immediate focus. Bets need to be made on innovation that may not pay off or turn into a business opportunity for years.
“Profitability can’t be the single model in Europe, or the region would miss out on entire industries that are strategic,” says Julie Ranty, managing director at Viva Technology, the organiser of the Viva Tech conference whose broader mission is to bridge the gap between startups and corporates in France and Europe.
Still, at least for now the mood music is clear for founders out there. Startups who are focused on profitability as a springboard to global growth are right on-trend.