"... and we are profitable!"

I wasn't there, but based on my partners' experiences, this seemed to be catch phrase at last week's YC Demo Day:

... and we are profitable!

Funny how things have turned around so quickly. After two reckless years of lean startups burning VC money to acquire tons of users and dismissing monetizing early as a poor men's game, the early-stage startups today are stressing profitability right out of the accelerator.

There are several problems, however, with this claim. The real profitability of a startup should be the profitability of its core business. The real problem of many lean startups in the past two years was that their core businesses were not profitable and were not seeing the day of profitability coming. An early stage startup with an unprofitable business model could easily cut the fixed cost (salaries, R&D, etc) and claim profitability for a while. On the other hand, what's the point of doing so if not enough money is being put into work to generate future growth?

And even "... and we are profitable" is a wrong KPI to measure the healthiness of a startup. Profitability is an accounting concept that doesn't not correspond 1:1 to the cash flows of its business. A startup could be profitable but still runs out of cash and dies if the working capital cycle is too long. And most successful startups at some point will still be losing money accounting-wise even though its cash flows are turning positive.

The real operational profitability should be judged on Operating Cash Flow (OCF). If OCF is turning positive and growing, you could be sure that real VCs will be more than happy to fund your startups even if you're still losing money accounting-wise. The new money will be used to do more investments and will hit the Investing Cash Flow (ICF) but as long as where it's spent feeds into OCF in the feature, this is a very healthy outflow.

If anything, this is actually the essence of startup! It's sad to see how far we as an industry had fallen to the point where this basic principle even needs explanation.

Maybe the lean startup fellows should start to shout "... and we are OCF positive!". But then again, I bet not all investors at YC Demo Day understand the difference.

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