You’re allowed to be unprofitable

I cringe writing that title because we’re sticklers for cash efficiency and achieving cash break even. However, we looked at 111 tech companies at IPO: 82 of them were not profitable (74%) and 71 were not generating positive cash flow (64%). 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 $28.5mm, 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 purchase the product frequently; every sale must therefore be profitable whereas in SaaS, it’s ok to generate a profit on the customer in 2 to 3 years because they purchase annually on a contract.

SaaS and Subscription are especially unprofitable. Only 11 of the 57 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.

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. Email sammy at sammy@blossomstreetventures.com if you’re looking for Series A/B funding or just want to connect

Written by

co-founder at Blossom Street Ventures

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