Profitability isn’t required in tech

I cringe writing that title because we’re sticklers for cash efficiency and achieving cash break even. However, we looked at 100 tech companies at IPO and determined 75 of them were not profitable (75%) and 61 were not generating positive cash flow (65%). The data and additional observations are below.

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Ecommerce, Hardware, and Gaming did generate a profit. On median at the time of IPO, ecommerce generated operating profits of $4.1mm, gaming generated $10.6mm, and hardware generated $82.5mm. It makes sense that these sectors would have to generate a profit to go public because their customer may not recur the same way a software company customer does. Therefore every sale must be profitable whereas in SaaS where you may keep the customer indefinitely, it’s ok to generate a profit on the customer in 2 to 3 years.

SaaS and Subscription are especially unprofitable. Only 9 of the 53 SaaS companies shown were profitable at IPO (although 19 of them did generate positive free cash flow). On median these companies were burning -$19mm per year at IPO. Three of the four subscription businesses were unprofitable at IPO, although Spotify, the most recent offering, did generate significant free cash flow.

Companies that are unprofitable have 14 months of runway. On median, those companies that are not generating a profit have 1.3 years of cash on hand across the entire data set. They filed for IPO with plenty of time to complete the transaction.

In conclusion, while you don’t need to be profitable to exit/IPO, you do need to give yourself time to complete the transaction so make sure you have plenty of cash (at least 12 months). In our view, the same rule applies when you’re raising money: make sure you go into a capital raise with no less than 9 months of runway and hopefully much more. Additionally, unprofitable doesn’t mean uneconomic: you must generate an attractive return on the business over time so if you’re unprofitable today, your customer over the long run needs to be very profitable as they repeat.

Visit us at blossomstreetventures.com

Written by

co-founder at Blossom Street Ventures

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