Attention startups: investors’ patience is wearing thin.
Patience for companies who say they can build a market using venture capital-backed discounts and freebies is vanishing, according to dealmakers and founders surveyed by the Wall Street Journal. Tech startups have to be ready to show their financial backers how they plan to become profitable without attracting customers through subsidized discounts.
The shift may be a reaction to the stumbles of loss-making Uber Technologies Inc. and Lyft Inc., which compete by discounting the cost of their rides, and the crash-and-burn of We Co., the office-sharing company that canceled going public because of concerns about its profitability. All three enterprises became top industry leaders with venture capital subsidizing their costs.
“The path to profitability becomes a bigger part of the story versus growth at all costs,” Ravi Viswanathan, founder and managing partner of venture capital firm NewView Capital, told a tech conference in Portugal in November.
Qi Lei, principal at Alliance Ventures, a strategic venture capital fund operated by the alliance of Renault, Nissan Motor and Mitsubishi Motors, predicted the startups that will benefit the most will be “those who have already secured clients, because they are the one that have a clear profit model.”
Even so, some venture capitalists may still be willing to subsidize a startup’s quest for fast growth because of what two professors have called “the big market delusion,” the idea that a particular market is so large that once a company can grab a large enough foothold profits are bound to follow.
Bradford Cornell of the University of California, Los Angeles, and Aswath Damodaran of New York University, said this idea was behind the Internet boom-and-bust of the 1990s-early 2000s.
“The path to profitability becomes a bigger part of the story versus growth at all costs.”
In 1999, there were 295 initial public offerings of Internet stocks, with most of the companies having small revenues, unformed business models and large losses.
“But all of these shortcomings were overwhelmed by the perception of the size of the eCommerce market,” the researchers wrote in a report. Of course, by 2003 most of the companies that had gone public during the boom had vanished, and those that survived, like Amazon Inc., had lost 90% of their value.
In November Uber reported a $1.2 billion hit to its bottom line for the third quarter but did predict profitability by the end of 2021. Lyft’s net loss was $463.5 million for the quarter, and it also predicted profits by late 2021.