What Does ‘Profit’ Mean? Apparently, Anything You Want

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’.

What “Profit” Is Supposed to Mean

In accounting, profit has a fairly fixed meaning. Net profit is what’s left after every cost has been subtracted from revenue: the cost of making the product, salaries, rent, marketing, interest and taxes. Public companies have to report it under standard accounting rules, so investors can compare one business with another.

Private startups don’t face the same requirements. They can choose which numbers to share with investors, and how to describe them. That freedom is where the trouble starts. A company can be “profitable” on a single product, in a single city, or before certain costs, while the business as a whole loses money every month.

Gross margin is a good example. It only subtracts the direct cost of delivering a product. A delivery startup might make money on each order once the driver and the goods are paid for, but still lose heavily once engineers, office space and customer acquisition are counted. Both numbers are real. Only one of them tells you whether the company can survive without more funding.

When the Numbers Get Checked

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.

Why Stock Compensation Matters

Leaving out stock grants is one of the most common adjustments, and it’s easy to see why it’s tempting. Paying people in equity doesn’t use up cash today, so a startup can argue it’s not a “real” cost.

But it is a cost to the company’s owners. Every share handed to an employee dilutes existing shareholders, and startups often use equity precisely because they can’t afford to pay competitive salaries in cash. A company that only looks profitable once its biggest form of pay is excluded hasn’t shown it can stand on its own.

What Happened Next

The reckoning TechPortfolio predicted in 2016 arrived, though not all at once. The best-known example is WeWork. When the coworking company filed its IPO paperwork in 2019, the documents revealed larger-than-expected losses and potential conflicts of interest with co-founder and then-CEO Adam Neumann, CNN reported. The IPO was pulled and Neumann was ousted. WeWork went public about two years later at a valuation of roughly $9 billion, far below the private peak of around $47 billion, and filed for Chapter 11 bankruptcy in November 2023.

WeWork wasn’t alone. CB Insights’ analysis of venture-backed startups that shut down since 2023 found that the two most heavily funded failures, healthcare AI company Olive and digital freight broker Convoy, had each raised nearly $1 billion and hit valuations of about $4 billion before both shut down in October 2023.

The term “unicorpse” also stuck around. In a 2024 interview with Fortune, Aileen Lee, the investor who coined “unicorn” in 2013, predicted that the unicorn herd would shrink by more than 30% over the next few years. Fortune noted that counting unicorns is hard partly because startups still rarely disclose their valuations, let alone more detailed numbers about their financial health.

What It Means for Founders and Investors

For founders, the lesson is to report numbers you’d be comfortable seeing audited. Adjusted figures can be useful for explaining a business, but they should sit beside the plain numbers, not replace them. Investors who discover later that “profitable” meant something narrow tend to stop trusting everything else, too.

For investors, the simplest test is Sean Behr’s: is there more money in the bank than there was last quarter? If the answer depends on which costs you leave out, you’re not looking at a profitable company yet.