The one metric early stage startups should ignore

Too often founders of early stage companies build a three year revenue plan which gets the company to profitability. These are companies that are barely generating revenue yet somehow decided to focus on profitability. While in theory, getting to profitability is an important milestone for a company, it typically comes at a much later stage in the company’s life. For early stage companies it’s all about growth. Profitability just doesn’t matter at that point.

When VCs invest in an early stage startup, it is not because of the immediate cash it will generate but because they  believe it has potential to be really big one day. That’s the only way VCs make money. Therefore, for early stage companies it’s all about growing fast and trying to deliver that dream. This doesn’t mean that managing burn doesn’t matter. In fact, it is one of the most important things a CEO has to do. But getting to profitability early on is just irrelevant.

In fact, there are two main scenarios for an early stage startup and in both cases the company will not become profitable: If things go sideways and the company doesn’t perform as expected, it will just burn through its cash over time. On the other hand, if the company performs well it will want seize the opportunity and spend more to keep growing even more aggressively before other competitors emerge. In both cases there is just no point in reaching profitability.

The main goal of an early stage startup is to use its funding to get to an accretive milestone which will allow it to raise the next round of funding at a higher valuation. This is how startups increase their value, not by generating cash. This is the only thing you should be focusing on.

 

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