This morning, over a morning coffee meeting, a thought struck me. What if profits don’t really exist in startups?
Let’s say you have an idea. The idea is to create value for the market.
So then let’s say we put X money to start the project (the seed round). That money is used to pay the cost to create some value, which results in revenue. The difference between revenue and cost is profit. That profit is reinvested to pay the cost to create more value resulting in more profit, to be reinvested, and so on, and so forth. So your profit defines how quickly you are able to scale your TAM (“Total Addressable Market”)
As milestones are hit, additional rounds of capital are raised to accelerate that scaling process.
All that goes until an exit, at which point the venture is integrated into a larger machine, and the investor gets Y.
So if a company is scaled efficiently, it never delivers profit to shareholders. So then the process is the purchase price of the venture minus the initial investment (Y-X). But it’s not quite profit the way I’ve been thinking about it.
I am sorry. I realize that this may be a trivial concept that I am wrestling with, but it really is blowing my mind. Especially if you consider that once a venture is sold, unless it is in a monopolistic position, the margin goes down to, I suspect, some asymptomatic value, at which point it does not make sense to increase competition and the system is in equilibrium. Since the market generally seems to grow at (as I recall) an average of 10%, perhaps that’s the asymptomatic margin that all ventures go towards…
Then, if we layer on top of that inflation, this further changes for me the conceptual idea of profit.
Apologies for rambling. Thank you for listening.