“Revenue is for vanity, profit is for sanity, cash is king” should be an important concept for venture investors. Early-stage startups are inherently risky and it’s crucial for venture investors to focus on the most reliable metrics, which are often related to cash flow and liquidity.

Many startups prioritise rapid growth and user acquisition, often at the expense of profitability. This can lead to a situation where a company is generating revenue, but is not on a path to becoming self-sustaining. Focusing solely on revenue can create a false sense of success. While revenue growth is a positive sign, it doesn’t guarantee sustainability of a business model. Venture investors are increasingly emphasising profitability metrics as it signals the potential for long-term viability of the business model.

“Cash is king” underscores the importance of cash flow for startups. Having cash on hand is essential for covering operating expenses, responding to unforeseen challenges and seizing growth opportunities. In an uncertain funding environment cash can not only provide a safety net for unprofitable startups but also a valuable asset for inorganic growth.

Profit and cash flow are tangible metrics. They represent real money coming into the business and are less susceptible to manipulation or inflated reporting. A focus on profitability and cash flow is a sign that the company is building a foundation for sustainable success.

As the startup ecosystem matures investors are looking for startups that can demonstrate a clear path to profitability. The shift in investor expectations is influenced by lessons learned from past high-profile startup failures. This is particularly important for venture investors as it underscores the need to prioritise financial stability, sustainability, and the ability to manage cash flow effectively.

Periods of market correction or economic downturns can be challenging for businesses. Those with strong cash reserves and profitability are better equipped to weather such storms and may even find opportunities to acquire distressed assets.

Partner Letter #34

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