What Does ‘Profit’ Mean? Apparently, Anything You Want
Startups are redefining the term ‘profitability’ to appeal to investors

Fear of the ‘unicorpse’ is mounting and, as it does, VCs are demanding better numbers from founders, reports Business Insider. With increased pressure to perform, startups are scrambling to demonstrate financial viability…even if that means redefining the word ‘profit’.

Based on data from the Wall Street Journal, The Verge reports that 15 of 50 IPOs showed sales figures that were far lower after going public, than what was initially reported to the SEC. Furthermore, “a total of $760 million simply vanished once these firms were subjected to more skeptical accounting.”

How is profit being redefined?

According to Bloomberg, using gross versus net margins and revenues, excluding equity grants and taxes, and including figures such as employee stock compensation are tactics being used to paint a rosier picture for investors.  

Sean Behr, founder and CEO of Zirx, told Bloomberg, “No matter how many ways you say you’re kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn’t work.”

As VC skepticism continues to grow and valuations are tempered, ambiguity surrounding what is and isn’t ‘profitable’ will diminish. Startups will be required to present clear term sheets and profitability statements, and the metrics behind them could become standardized. When that happens, startups that can’t demonstrate profitability will join the unicorpses.   

 

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